After days of heated debate with your co-founder, you finally settle on the perfect name for your startup. You go to check if the .com is available and, lo and behold, the domain is taken and being parked at Go Daddy. To add insult to injury, Go Daddy won’t even tell you who the seller is unless you fork over $75 for one of their “certified representatives” to fetch the information for you.

Sound familiar?

Every day, entrepreneurs with new ideas are discovering that the domains they’d like to build business on have already been registered, most likely by a domain speculator. Since nearly every business these days needs an internet presence, good domains are very valuable properties. Just like physical properties, domains are not fungible. Sex.com is tremendously more valuable ($13 million dollars more valuable, in fact) than xes.com, despite having the same letters. While domains only cost $5 – $10 to register, savvy professional domainers regularly flip them for five to seven figures. Domainers who got in early on the game and scored valuable short dictionary word domains (color.com, disco.com) can flip for millions.

As a broke startup founder, you probably can’t afford to purchase a domain for more than a few thousand dollars. Even if you’re funded, you’d be wise to play the domain acquisition game right in order not to waste cash. This has lead to the proliferation of intentional misspellings (Flickr, Tumblr) and creative use of international top level domains (Frid.ge, GeneralAssemb.ly). Unfortunately, competition for domains has also led many startups to choose wacky and unwieldy names that make their companies hard to remember.  Before you make this mistake for your startup, get familiar with practices you may be able to use to acquire domains with terms acceptable to you. To get you the scoop on what’s worked for the industry, we talked to a number of experienced domain buyers, sellers, and brokers about how they handled their deals. Here’s the advice we distilled:

Understand the Value of Your Domain

Domain appraisal is a tricky business. Quantitative methods are based on SEO characteristics and historic sale prices while qualitative ones consider upcoming business and product trends. Kevin Ohashi, an entrepreneur and long time domainer, develops algorithms for appraisal competitions. His best algorithims hover around 44% accuracy, while the best ones in competition reach only about 68% accuracy. The long tail is very hard to predict.

Given this, the best way to think about your desired domain is the business impact of the brand value and whether you could possibly work with alternatives. With all the startup competition in the consumer web space, companies with short, easily memorable names like Path or Color have an advantage in standing out amidst the noise. That said, if you’re inventive enough to create your own brandable identity like Yahoo or Zynga, this path could be ideal since you’d own the keyword, but you’ll face challenges early on in trying to get your average consumers to remember just who the hell you are. Finally, if a number of brandable names could work for you, this can improve your negotiating power. If you desperately need a specific domain, you may be out of luck when it comes to price flexibility.

If you need a domain name in order to test a product and aren’t sure yet whether that product will be successful, consider whether social media might be a reasonable alternative to a brand name domain.  Rob Holmes, a cybersecurity expert turned domain broker, has been working with domains since the mid 90s and has represented many high profile clients in his career. In the past, when SEO was king, his clients would regularly pay six figures or more to acquire domains. These days, social media can deliver a superior ROI and many of them have discovered that their $50,000 budget is often better spent on a Facebook and Twitter campaign than on domain acquisition. These days, the domains Rob buys for his clients sell for substantially lower prices.

One final tip: do not be tempted to lowball a domain seller. Domains, like physical property, are valuable. Domainers get emails nearly every day offering joke amounts of money for a valuable domain. Give a reasonable first offer or you’ll risk undermining your own credibility.

Consider Alternative Deals such as Leasing and Buying With Equity

The original owner of Mint.com was Hite Capital, an east cost hedge fund. When raising their Series A round, the startup negotiated an equity deal with the fund to acquire the domain for stock as an alternative to paying six figures cash up front. The hedge fund reportedly received between 1-2% equity, which totaled “a couple million dollars” when Mint sold to Intuit for $170 million.

Equity deals happen surprisingly often with startups, especially because they give the entrepreneur the option for a low upfront cash outlay while preserving seller upside in the increasingly heated acquisition market. One domain broker we spoke to had brokered alternative deals for some of the hottest startups in the Valley. Each deal is individually negotiated, a process which can take months, but one of the more common financing agreements he’s structured involve the startup paying some portion of a fair price up front (usually 1/3 or 1/2) and getting three years to build out their business. At the end of three years, the domain owner can opt to get 0.1-1% of the company’s equity or buy back the domain for $1 if the business fails.

Another interesting deal structure he’s brokered is the 99-year lease model. In this arrangement, the value of a domain is paid out to the owner in what is effectively a lifetime annuity (ex: $4000 a year). Should the business fail, the seller simply gets the domain back and retains all accrued earnings from the lease.

For this article, we ran a survey of founders to see how open you guys are about these alternative models. While 73% of you said you’d much prefer to buy outright, 76% of you said you would consider a leasing arrangement if an outright buy wasn’t an option. 58% said you would consider renting monthly at an average max rate of $220 a month or $2460 a year.

Should you be interested in such deals, we highly recommend speaking to an experienced domain broker. If you’re a venture-backed startup, email us for introductions.

Profile Your Seller

The domain investor crowd is quite diverse. You’ve got everyone from your stay-at-home mom looking to make a few extra bucks on the side to hugely profitable domain investment firms that manage over 500 million domains. In between are professional full-time domain speculators who manage anywhere from a few thousand to a few hundred thousand domains.

The first thing domain brokers do after collecting client requirements is dig up information on the seller. To conduct a strategic negotiation, you need to understand what type of seller you’re dealing with, how savvy they are, and what sort of return they’re looking for. About 10-15% of domains have a legitimate business built on top of them, so you’ll have to compensate the owner for having to rebrand their company after you buy their domain.

One unique way to research a seller, recommended to us by an experienced broker, is to make an offer on another domain in their portfolio, not the actual one you’re looking to buy. This allows you to gauge the range in which a seller is hoping to sell a certain type of domain. When you can’t agree on a price, ask to see what other domains they have in their portfolio.

If you’re hoping a seller will be open to leasing or selling for equity, be mindful that one characteristic that unifies domain sellers is that they like things simple. Most aren’t willing to deviate outside of the standard practice of selling outright, especially since alternative deals can mean months of negotiation between parties. Large companies like Oversee have the resources to monetize their domain portfolios and generally consider leasing to be leaving money on the table. To monetize unsold inventory, Oversee builds out quality content and makes money through SEO and advertisements. This process generally requires a high degree of industry knowledge, solid SEO skills, and website development expertise. Additionally, content development takes about 6-9 months to start generating revenue. Given this, individual domainers without content development capability might be your best targets for a leasing deal.

The sentiment may be changing, though. Nick Hoffmann, COO of Auzzy, a domain marketplace, has considered implementing a lease-to-buy model for his company. Adam Strong, an experienced domain investor and broker, has brokered several leasing deals for entrepreneurs. Even Oversee might be interested in working with you if you sell them the Mint.com story.

Founder’s Block would like to thank the many contributors to this story, including:

Kevin Ohashi, Entrepreneur
Adam Strong, Domain Investor & Broker
Nick Hoffmann, COO of Auzzy
Rob Holmes, CEO of IP Cybercrime
And several others who preferred to remain anonymous

No related posts.

Knowing the audience for your startup is crucial. Great feedback from the wrong audience can take you in the complete wrong direction.

Although I originally targeted Easy Unsubscriber as a productivity tool for tech savvy users, I quickly found that it was much more popular with the older, less tech savvy crowd. Indicator #1 was that over 60% of my visitors use Internet Explorer. Indicator #2 was these are the users who actually call you when you put your phone number on the website.

Originally, I was planning for Oauth for email addresses, browser extensions, etc., etc… It turns out, the people who like my website not only dislike oAuth and Browser extensions, they usually don’t know how to use them. Although I agree it is safer to use oAuth than an email address and password, why build it if my users don’t know how to use it?

Not only do they not like to use it, the people I talked to think it’s much less secure to “Connect to Facebook” where someone can hack into their account and spam their friends. I don’t want to argue that connecting to Facebook is more dangerous than using your email/password combo, but what I do know is that IT IS MORE DANGEROUS in my target market’s mind.

Every time I show my homepage to someone in the tech world, they argue that a user entering their password is a huge barrier to user acquisition. For my market, it’s not. 40% of people that visit my website give us their password and use Easy Unsubscriber.

If I listened to suggestions and opinions at Hacker News instead of listening to my target market, I would have went wildly in the wrong direction.

Not all feedback is created equal. Make sure you categorize feedback based on demographics so that you don’t get great feedback from the wrong source.

Bob Cavezza is a cofounder at EasyUnsubscriber.com and loves helping users unsubscribe from emails.

Other posts you may enjoy:

1. A Weekend Experiment with the Lean Startup – Part 1
2. The Next Big Thing
3. Want To Get Gamification Right? Build a Community First

We’ve all heard the story:

You’ve got a great idea for the next billion dollar company and maybe even some respectable domain expertise to back it up, but you need a prototype built in order to gain traction and attract investors and you have no idea how to code it yourself.

Your options are:
1)      Find a CTO
2)      Learn to code yourself
3)      Hire developers to build your prototype

Here are the well-known challenges with each:

1) Find a CTO
Welcome to the club. Everyone is looking to find a CTO. The supply is scarce and the demand is high, so you’d need to be quite impressive or quite connected to make this happen. Good luck.

2) Learn to code yourself
There’s been a trend of non-technical founders learning to sling code, which is totally awesome. The only catch is that if you’re building anything remotely complex, this will take a very long time and lead to hours of frustration. If you have a day job, say goodbye to your nights and weekends.

3) Hire freelance developers
This costs money that you’re probably averse to spending, otherwise you would have already hired someone to get your prototype built during the months you’ve spent either searching for a CTO or trying to become your own technical co-founder.  Also, your idea will probably change substantively in your early days, so why get something built if you might just throw it away?

So when does it make sense to outsource your development?

We can agree that finding a CTO is ideal and that learning to code never hurt anyone, but these are not always viable options for you. When should you just break down and hire a consultant already?

1) When you can afford it, because money is fungible but time is not

If you’re lucky enough to have a flexible budget, I recommend you start searching for outsourced development options alongside your search for a CTO. The time it takes to find a good CTO is totally unpredictable, but you can find a reputable development firm fairly quickly by asking your friends for recommendations or googling for firms and evaluating their portfolios and references. This way, you’re getting technical advice and feedback early on, which can help you shape your requirements for a future CTO. Developers also like to hang out with other developers, so you’re opening up your search network by building relationships with freelancers. Finally, if you’re operating in a competitive space, any delay in your launch may hurt your chances of being the first-mover in a market.

2) When you’ve done enough customer research to know that your idea is worth building

A simple example is if you’ve created a basic landing page to pitch your core value proposition and managed to collect a large number of interested users. You’re reasonably sure at this point that your idea has potential, but most investors won’t fund you unless you have a prototype out there with REAL users, not just prospective ones. Another example is if you’ve consistently received a feature request from clients and thus have a customer base that is willing to pay for a solution.

3) When you have a very strong vision for the product experience

You don’t need to be a UX expert to spec out your ideas (although it definitely helps). A quick search on Google will point you to a number of tools you can use for rapid prototyping or charting of user flow. You’ll work most efficiently with freelancers if you can be clear and concise about your features and functionality. If you can, aim to spec out all your use cases along with all the screens and transitions you want in your prototype.

Common mistakes to avoid

Since starting Xanadu, a mobile design and development consultancy, my co-founder and I regularly get project inquiries from startups and have heard all their horror stories from previous outsourcing experiences. We see plenty of common mistakes that startups make that savvier clients don’t. Here’s what you should avoid:

1) Poor understanding of the development lifecycle (and thus development costs)

Building a great product typically consists of three major phases: requirements gathering, development, and testing/polishing. Requirements usually take up 10-15% of total project time, but testing and polishing can take 20 – 70% of your developer’s time. Unexpected issues almost always come up with development, especially if you’re trying something new, so be sure you set your expectations and your budget accordingly.

2) Fixating on low hourly rates rather than total costs

Top-notch developers in NYC go for anywhere between $100 – $300 / hour, possibly more if you’re creating a high-profile branded product. Decent offshore developers and local ones with less experience go for $20 – $100. You can definitely find good developers at cheaper rates, but the challenge is you usually need to do a lot of research or just happen to know the right people to get a good deal. Chances are, you’ll spend many hours vetting developers in order to filter out the ones that suck. Worst case, you’ll hire one and spend a lot of money before you realize they’re not a good fit. Experienced and proven developers work faster, produce more maintainable code, and design more scalable architectures than inexperienced ones do, leading to lower total costs in the long run. They’re also going to be better at offloading technical knowledge to your future CTO.

3) Expecting to get a reasonable quote with vague information

We get requests for ballpark estimates all the time. The requester will say something like “We’re looking to build a consumer-facing iPhone app that uses location-based search. How much will that cost us?” Well, without any information, it could cost anything from a few thousand to a few hundred thousand. While it’s reasonable to want to do broad-based cost research or to protect your idea from theft, realize that any quotes you receive without fully sharing your technical spec need to be taken with a huge chunk of salt. Remember, development costs are hard to estimate even when you have all the information!

4) Not differentiating between a Minimum Viable Product vs. a Minimum Desirable Product

The purpose of a minimum viable product is to allow you to test basic assumptions you have about your customers and your business models. It can be tough to figure out the exact features you need to include, but a common pattern we’ve seen is that people tend to focus on the “minimum” and not on the “viable”. Sure, some ideas are simple enough to build an MVP for in a weekend hackathon. Others, such as games or productivity tools, require a more fleshed out user experience and thus more time for prototyping. Be very clear to yourself on what features are required to adequately test your assumptions. Otherwise, you’ll find that you keep adding features to the project, which can quickly drive up development costs.

5) Picking generalists over specialists

While a great developer can code in anything, most only have the time to develop expertise with a few specific languages, frameworks, or tools. With a CTO, you might want someone who’s technically flexible so he can handle all the pivots your startup is likely to go through.  With a freelancer, you should be looking for someone who’s built something similar to what you want. There’s a good chance for code overlap with one of their previous projects and they should hopefully be well versed in common pitfalls unique to your situation.

Other posts you may enjoy:

1. Making the Transition From a Business Founder to a Technical Founder
2. A Weekend Experiment with The Lean Startup – Part 2: “We did more of a jumpstep than a pivot”
3. The Lean Adwords Way

Written for the AppSumo Lean Startup Challenge. Vote for us HERE!

If launching a startup is like jumping off a cliff and building a plane on the way down, then lean startup principles are the kiddie parachutes you deploy to buy yourself time before you hit the ground. While they’re no guarantee that you’ll land safely, they do minimize your chances of a spectacular crash and burn.

To the uninitiated, the lean startup movement advocates maximizing learning and minimizing cash burn during your search for a sustainable and scalable business model. If that seems like a mouthful, here’s a summary: put your stuff out there as fast as possible, see how it does, and keep iterating until you succeed. Do both qualitative and quantitative research to figure out whether you’re building a product people actually want and whether it’s possible to acquire customers in a cost-effective way. This usually entails taking a hard but honest look at the assumptions you may have about your product, target users, monetization models, competitive landscape, and distribution channels.

Seems like a lot to do right? You may be wondering if this would cost you a fortune in time, energy, or money. Luckily, plenty of free and cheap methods exist for you to validate an early prototype of your idea. Here are some of the recent techniques my co-founders and I have used to vet Founder’s Block, Bloomsie, and a number of other startup ideas we’ve had:

Important note: although being ludicrously cheap was a fun exercise for the sake of this article, “lean startup” does not equal “cheap-ass startup”. Good talent and information is worth paying up for. When seeking validation, consider both the effectiveness of the method you’re employing and the opportunity cost of your time.

FREEBIE #1: Pitch EVERYBODY

Pitching people casually is one of the quickest ways to sanity-check your idea. It’s also free and something you’re probably already doing anyway, but maybe not methodically enough to maximize your learning. Here are some tips to do it better:

1. Literally Pitch EVERYBODY – While you should certainly pitch target users and people in your startup community, make conscious efforts to branch out, especially if you’re running a consumer-facing startup with broad appeal. Sometimes your target customer isn’t who you think it will be. My co-founder and I have pitched teenagers, elderly women, med students, hedge fund traders, and many unsuspecting passersby. We also wanted to make sure we could communicate jargon-free with the “normals”.
2. Rotate your taglines – Some people resonate with ideas and others with painpoints. Some like novelty and others appreciate comparisons with the familiar. Prepare a few different taglines and track which ones work best with which sort of people. We paid attention to the pitches that produced the strongest emotional reactions and refined those.
3. Identify your best customers – You’re going to need consistent and reliable customer feedback throughout the lifecycle of your product, so why not develop relationships with your users right away? Ask anyone who reacts positively to your pitch to sign up for your beta. Grab their contact info and be consistent in following up. We tapped the most excited customers for referrals and customer development interviews.
4. Figure out your real competition – While many of your critics might enjoy pointing out how close you are to being crushed by Facebook, your competition is often not another hot startup, but rather some old-school method of doing things that users are unwilling to let go of. Old habits are hard to change. Better to figure out the barriers now before ending up losing to Outlook or, god forbid, a notepad.

How do you evaluate the qualitative feedback you get from broad pitching? This is a bit of a niche view, but I’m inclined to conclude that the more extreme responses you get, the more likely you’re on to something. There will always be people who will never buy into your idea. You’ll know who they are immediately because they’ll look at you blankly or snicker as you explain your product. On the other hand, there will be people who are absolutely psyched when they hear what you’re working on. Look for emotion. Apathy is your enemy.

FREEBIE #2 – Quantify User Behavior w/ Free Tools and Accessible Communities

Startups fail because they can’t acquire enough committed users. Usually this happens because they’ve made a product nobody really wants. Mitigate this risk by doing the following:

General Behavioral Study

You need to understand what people are doing independently of your product to understand whether there are real desires and frustrations you can address and what ingrained preferences exist for current solutions. Cindy Alvarez’s blog on customer development has been my go-to resource for structuring the right questions when interviewing potential customers. Key point: don’t ask leading questions, especially about what customers want (they never know). Instead, understand their goals and how they’re achieving them today.

When we did this, we built a survey with SurveyGizmo, the most feature-rich free survey tool I could find (especially if you qualify for their student account), and then had people complete it both in-person and online. To minimize selection bias, we went out of our way to match survey respondents with the general U.S. Demographic. While we did this for free by researching representative communities we could tap into, you can  pay to target certain demographics with services like AskYourTargetMarket.com. You can also tweet or post the survey on your friends’ Facebook walls, both of which led to very high completion rates for us, but be sure to complement these responses with ones from outside your normal social circles if appropriate.

Product Positioning Study

Once you have a product idea to test, there are plenty of easy and quick ways to solicit feedback. The most popular is to create landing pages with just enough compelling info to entice a user to leave his or her contact information. Doing this tests the value of various distribution channels as well as the effectiveness of your positioning. We built and tested various iterations of our landing pages with Google Analytics (free) and a lifetime KissMetrics account (which we luckily got for free), but other startups have used affordable tools like LaunchRock, Unbounce, Wufoo, and Optimizely for the same purpose.

Plenty of tactical advice has already been written about how to set up and test landing pages, so I’ll point you to two by Vinicius Vacanti on how his company Yipit handled this: The Shortcut We Took to Build Yipit in  Three Days, and How To Get Your First 1000 Users.

For ideas on how to drive traffic to either your online surveys or your product landing pages, see Freebies #3 and #4.

FREEBIE #3 – Get Credits to Try Out Google and Facebook Advertising

While Google and Facebook ads are often the first advertising channels that new entrepreneurs try, they’re rarely the most effective ones. Picking the right keywords can be challenging for the uninitiated and niche Facebook targeting can get expensive. Luckily, you can experiment for free by getting promotional codes. Some hosting services offer $50-$100 in advertising credits if you register your domain name with them, but in case yours doesn’t, try the following tactics:

Google Adwords

Sign up for an account with Google Adwords, but don’t start any campaigns. At some point, Google will start sending you periodic emails with promo codes to get you to come back to the service. We managed to convince Google to honor a $100 credit that had technically expired by the time we went to redeem it.

Facebook Ads

Search the internet for Facebook Ads promo codes. They often send them out to popular internet marketing blogs. We landed $75 worth of free advertising this way. If you can’t find one, start a very small campaign and then stop it. In our case, Facebook sent a horde of customer service people after us who wouldn’t stop calling us until we gave in to a survey about our experiences. This is a prime opportunity for you, the entrepreneur, to finagle some free credits.

FREEBIE #4 – Discover the Best Channels for Pimping Your Product

In our case, cost of customer acquisition via Google or Facebook ads turned out to be way too expensive to use as our main marketing channel. What other distribution channels can you try? If you have a strong community you know well and can target, that’s probably best. You also can attempt viral marketing with contentious blog posts or entertaining demo videos, but we’ve had better luck getting sustainable conversions from the following three sources:

Amazon’s Mechanical Turk

Mechanical Turk is a crowdsourcing platform for getting small tasks done that require human intelligence.  With the service, we got people to complete fairly detailed product opinion surveys for 2-15 cents which, while not free, was the cheapest acquisition model we tested in terms of price and time invested. We ran several tests where we collected demographic information, summarized our product, and then asked whether the respondent would use it. We asked for rationale justifying their answer and an email address if they were interested in testing our product. We got anywhere from 50-80% “yes” responses and paid about $0.80 for each email – that’s an email, not a click – we received.

That said, be mindful that soliciting contact information on Mechanical Turk is technically against the terms of service, so be sure to only collect the information on a voluntary basis and outside the site’s own survey system.

Twitter + Twidium

While your own followers are a good place to start gauging interest, one of the more effective ways to get attention on Twitter is by following people who’ve tweeted about similar products or the problem space you’re tackling. Twidium’s the best tool we’ve used for mass-following, and they offer a week-long free trial of their product for you to gauge whether this tactic will work for you. Twitter imposes ratio limits of # followed / # followers, but if your tagline is on point and you consistently target the right people, you’ll typically get enough followbacks to keep following new people.

A point on measuring ROI on Twitter: Twitter traffic can be hard to track, especially as most of it comes from third-party twitter clients that are listed generically as “direct traffic”. Ways to combat this include using the Google URL Builder in conjunction with, bit.ly, a URL shortener, to tag URLs used in Twitter campaigns.

Hacker News

Although we haven’t submitted any of our startup ideas to Hacker News, the community has been very good to us Founder’s Block writers. Since launch, we’ve gotten over 18% of our traffic directly from Hacker News. Compare that with 6.40% from Twitter, 5.01% from Techmeme, and 4.56% from organic Google search results. Success on Hacker News depends partially on karma but mostly on whether your blog topics are in line with the interests du jour. Hint: these days, lean startup articles tend to do very well.

FREEBIE #5 – Get Matched With Early Adopters

There are plenty of other free ways to get feedback on your startup idea. Some ones I’ve come across in the past few months include AlphaList, BetaCandy, and of course Bob’s LeanThingy, all of which try to connect startups with early adopters. Any other suggestions?

Other posts you may enjoy:

1. A Weekend Experiment with the Lean Startup – Part 1
2. A Weekend Experiment with The Lean Startup – Part 2: “We did more of a jumpstep than a pivot”
3. Don’t Leap when You Can Pivot

Jason Evanish is Right.  There’s not enough ass kicking in Boston.

I want to change that.

Jason suggested that we all need to be more critical of one another’s startups.  While I think this is true, we also all need to motivate and help one another as much as possible.  Boston startups need honest criticism.  Boston startups need positive motivation.  And Boston startups need to actively help one another.  This is the type of environment that helps peer groups such as Tech Stars and YCombinator Succeed.  I want to create this type of peer group environment for Boston startups.

The Solution

Small, frequent, intimate founder gatherings.

Victoria Song provides a great service with her startup dinners; however, I think we need more.  Monthly dinners don’t fill the void and there aren’t enough spots available.

When I lived in New Jersey, there was a short lived mastermind meetup.  We would get together each week and discuss progress and problems.  Each member would offer advice, intros, and general help to help solve problems.  It was a great environment.

I want to bring this meetup to Boston…

Introducing The Boston Startup Ass Kicking Meetup

The Vision

Weekly gatherings.  Familar faces.  Helpful problem solving.  Frequent helpful intros.

I want each founder to scramble finishing a demo or getting a new customer before each meetup (just like YCombinator).  As Jason said in his post, we want to know what each founder has “shipped lately?” and “What’s holding [their] startup back?”.

If starting a company was easy, we’d all be millionaires.  Let’s help each other get to that point.  Let’s ask the tough questions.  Let’s help solve one another’s problems.  Let’s kick some ass!

Bob Cavezza is an entrepreneur, is busy getting the kinks out of EasyUnsubscriber.com and testing assumptions for Advermin.com.  He’s the Co-curator of the Boston Startup Digest and apparently coordinates Boston Startup Ass Kicking.

Other posts you may enjoy:

1. Randomness and Why I am No Longer a Fan of Coworking Spaces
2. Business Networking Groups, Entrepreneur Organizations, and Resources in Silicon Alley

No related posts.

Lean Startups and Customer Development is about eliminating waste.

Mostly this happens when you talk to customers and other shareholders to see if your idea is viable.  The earlier you learn that your idea is not viable, the less time you will waste on the idea.

Eliminating waste is a key tenant in lean startup methodology.  I’ve recently noticed a trend that adds waste to lean startups, and that is The Leap.

The term pivot has taken a life of its own over the past few months, but leap hasn’t been highly publicized, and may have happened in more instances than the pivot.

A pivot is when you change course based on something you learn.  A leap is the equivalent of taking a mid-term exam, crumpling up your testing sheet, tossing it in the garbage, and enrolling in a different course.

You may have learned a few things about your customers, but if you leap to a completely different idea, completely different market, and completely different type of company, you are not using what you have learned.  You are not acting on lean startup methodology.  You are creating waste.

The next time you scrap a business idea.  Consider what you learned during customer development.  Maybe there’s a tweak or change you can make based on what you learned.  Maybe you can take what you learned, and email it to an entrepreneur in the same market.  Just whatever you do, don’t take the things you learned, and turn them into waste.  That benefits no one.

Other posts you may enjoy:

1. A Weekend Experiment with The Lean Startup – Part 2: “We did more of a jumpstep than a pivot”
2. How to Become a Lean Startup Ninja for a Mere 42 Bucks
3. A Weekend Experiment with the Lean Startup – Part 1

We all fall into bad routines from time to time.

I started to feel content recently, and it sucks.  I’m in bed before midnight, awake at 9.  You know, completely slacking.  I’m not doing the things necessary to run a startup.

I’m not sure where these habits came from, but I need to stop them – today.

I was on the treadmill yesterday, and at the point where I usually get winded and stop, I powered through.  I ran an extra mile and a half yesterday and I felt awesome!

What was the difference?  What happened yesterday?

I told myself…

Listen you whimp.  You’ve been taking the easy way out for the past few weeks.  You say, “Okay, this is good enough.”  You know what, THAT’S NOT GOOD ENOUGH.  I need to push the limits.  I need to strive for more than “good enough”.

From now on, each time I think I accomplish my goals in an evening, I add another goal to the list before the final goal is completed.  It helps me push further to get more done before the “I’m Finished” feeling sets in.

That’s what I powered through on the treadmill yesterday.  That’s what I’ll be powering through in my home office in the weeks ahead.

Other posts you may enjoy:

1. Randomness and Why I am No Longer a Fan of Coworking Spaces
2. It’s Not the Recession, You Just Suck.

The guys at ChubbyBrain have graciously allowed Founder’s Block to repost this analysis, originally published Jan 11th, of the top 20 reasons why startups fail.

We’ve previously highlighted the top startup failure post-mortems (32 in total) written by a group of startup entrepreneurs gracious enough to share their lessons learned from failure. Many of you read those post-mortems and asked, what are the most common reasons why these startups failed? After a thorough analysis of those 32 start-up post-mortems, we compiled this list of the top 20 causes of startup failure.

20 – The Great Recession

Many companies that failed started during the recent financial crisis (and continues to suffer through), and some startups highlighted the larger market negativity as a reason for their ultimate demise.  The negativity either impacted investment funding (venture capital fell off a cliff in 2009) or the customers they were targeted as was the case for Untitled Partners who were building a platform for fractional art ownership.  In their post-mortem, on this topic, they wrote:

Our analysis was supported by articles in the Wall Street Journal and the NYT, as well as the Mei Moses art index, which suggested the art market was countercyclical and had a low correlation to the S&P. What we didn’t account for was the magnitude of the current correction and the effect that it would have on discretionary luxury spending even within a population that financially could still afford our product. We were obviously wrong about Untitled Partners’ ability to grow through the subsequent downturn.

#19 – Lack of Full-Time Commitment

Startups are hard.  There even harder when you’re pulled in a couple of different directions aka a day job.  This came through in several post-mortems.  If you’re working another full-time job with nobody fully invested, you are running the risk of burning out, acting with less urgency and just not having enough hours in the day to get what you need done.  Also, with another job, there is the risk that a team acts with less urgency given they have sources of income.  The team over at Overto felt the lack of at least one full-time resource was the primary reason for their failure writing:

We thought we’d able to run internet service after hours. To some point that was true. As far as nothing bad was happening with the servers and the application it was all fine. We were working on new features when we had enough free time. Problems started when we faced some issues with our infrastructure. We weren’t able to resolve issues on the fly and had several downtimes. You can guess how it influenced user experience. That also backfired on service development since we had to focus on current problems instead of adding new functionalities. Lack of person working full-time and being able to deal with maintenance and bug fixing was the most important reason of failure.

#18 – Location, Location, Location

Location was an issue in two different ways.  The first being that there has to be congruence between your startup’s concept and location.  By way of crude example, if your building innovative trading software for Wall Street, be where you customers are and where you can best network.  Location also played a role in failure for remote teams.  The key being that if your team is working remotely, make sure you find effective communication methods; else lack of teamwork and planning could lead to failure.  Location issues were given as a reason for failure 6% of the time.  In their startup post-mortem, Nouncer discussed their decision to be in NY as one that hurt their company stating:

In my case, New York didn’t lack money, community, able workers, or smart people with good advice. It lacked the audience my product needed to succeed – the early adopters web hackers looking for the next cool toy to play with. I can count on one hand the number of people I’ve met in New York meetups and events that fit this description. In San Francisco one can find hacking events on a daily basis, as well as many unconference events where people get their hands dirty playing with code. This is a very specific audience dictated by my decision not to build a consumer product.

#17 – Unable to Raise Funding

While this may be a cousin of reason #20 (starting the company at the wrong time), there was a group of founders who candidly expressed that their inability to attract investors was the reason for their ultimate demise.  If there is no money out there for your idea, reassess whether there is a market for it, and reassess your approach.

#16 – Got Outcompeted

Despite the platitudes that startups shouldn’t pay attention to the competition, the reality is that once an idea gets hot or gets market validation, there may be many entrants in a space.  And while obsessing over the competition is not healthy, ignoring them was also a recipe for failure in 10% of the startup failures.  Marc Hedlund of Wesabe talked about this in his post-mortem stating:

Between the worse data aggregation method and the much higher amount of work Wesabe made you do, it was far easier to have a good experience on Mint, and that good experience came far more quickly. Everything I’ve mentioned — not being dependent on a single source provider, preserving users’ privacy, helping users actually make positive change in their financial lives — all of those things are great, rational reasons to pursue what we pursued. But none of them matter if the product is harder to use, since most people simply won’t care enough or get enough benefit from long-term features if a shorter-term alternative is available.

#15 – Burned Out

Work life balance is not something that startup founders often get and so the risk of burning out is high.  The ability to cut your losses where necessary and re-direct your efforts when you see a dead end was deemed important to succeeding and avoiding burnout as was having a solid, diverse and driven team so that responsibilities can be shared.  Burning out was given as a reason for failure in 12+% of the startup failures.  The post-mortem of Diffle talks about the impacts of burn out after one’s startup fails which was quite telling in that burn out doesn’t end when the startup is over.  It lingers for a while as this post-mortem reveals:

I didn’t realize it at the time, but I was flying when I closed down Diffle – running on pure adrenalin. Part of this was from working with the YC startup, and part was just that entrepreneurship tends to put you into this highly-focused, tunnel-vision state that feels just slighly unreal.

That all crashed down about a month later, which happened to be about a week and a half after I started the job hunt. I ended up getting rejected by FriendFeed, and then told the other companies that I wasn’t quite ready to go back into the employee world and needed a few months to figure out what I really wanted to do next.

For anyone faced with winding down a company, I’d highlyrecommend taking a while off before making any big decisions, and not just the two and a half weeks that I’d initially tried. You’re not thinking straight when your startup dies – your perspective may be a bit different in a few months, as might your preferences for what you want to do next.

#14 – Lost Focus – Distracted by Shiny Objects

Getting sidetracked with all the ‘could-bes’ was cited numerous times as a contributor to failure.  It is important to get one thing out on the market and focus on one product else you risk ending up with too many almost finished products that are not valuable to customers or you.  In the post-mortem of Kiko, Mahesh Piddshetti writes:

Most entrepreneurs have lots of ideas. Often times, many of them may be really good. I don’t know about you, but my favorite part about startups is talking about new products and new business ideas. If you’re a creative person, it’s very easy to get side-tracked on side ideas when you really should be working on your main one. This is bad. Bad, bad, bad. We did this a lot with Kiko, and it caused many delays in getting the product out the door.

#13 – Disharmony with Investors/Co-Founders

Discord with a cofounder was one of the most fatal issues for a company.  Bricabox cofounder advises, “When a co-founder walks out of a company — as was the case for me — you’ve already been dealt a heavy blow. Don’t exacerbate the issue by needing to figure out how to deal with large equity deadweight on your hands (investors won’t like that the #2 stakeholder is absent, even estranged, from your company). So, the best way of dealing with this issue is to take a long, long vesting period for all major sweat equity founders.”

But acrimony isn’t limited to the founding team, and when things go bad with an investor, it can get ugly pretty quickly as evidenced in the case of ArsDigital.  Investors and founders did not see eye to eye on what was best for the company, and eventually investors began to run the company per this account of failure.  The post-mortem of ArsDigita takes the cake for candor and illustrating in graphic detail what goes on when investors and startup management have a falling out from the startup’s perspective.  Phillip Greenspun writes:

For roughly one year Peter Bloom (General Atlantic), Chip Hazard (Greylock), and Allen Shaheen (CEO) exercised absolute power over ArsDigita Corporation. During this year they

1. spent $20 million to get back to the same revenue that I had when I was CEO
2. declined Microsoft’s offer (summer 2000) to be the first enterprise software company with a .NET product (a Microsoft employee came back from a follow-up meeting with Allen and said “He reminds me of a lot of CEOs of companies that we’ve worked with… that have gone bankrupt.”)
3. deprecated the old feature-complete product (ACS 3.4) before finishing the new product (ACS 4.x); note that this is a well-known way to kill a company among people with software products experience; Informix self-destructed because people couldn’t figure out whether to run the old proven version 7 or the new fancy version 9 so they converted to Oracle instead)
4. created a vastly higher cost structure; I had 80 people mostly on base salaries under $100,000 and was bringing in revenue at the rate of $20 million annually. The ArsDigita of Greylock, General Atlantic, and Allen had nearly 200 with lots of new executive positions at $200,000 or over, programmers at base salaries of $125,000, etc. Contributing to the high cost structure was the new culture of working 9-5 Monday through Friday. Allen, Greylock, and General Atlantic wouldn’t be in the building on weekends and neither would the employees bother to come in.
5. surrendered market leadership and thought leadership

#12 – Didn’t Leverage Connections

We often hear about startup entrepreneurs lamenting their lack of connections so we were surprised to see that one of the top reasons for failure was entrepreneurs who said they did not not properly utilize their own network.  Whether it was for advice or introductions, almost 16% of the startup post-mortems stated that the team did not use their connections well enough, which led to failure. So what does this teach us?  If you have a network (and everyone does), be judicious in using it, but be sure to use it.

#11 – Pricing Issues

Pricing is one part science, 10 parts art.  And a dark art according to a large number of startups which failed and who attributed product pricing that was too high or too low to make money.  For example one entrepreneur said, “It took a lot of key chains bought at 50 cents and sold for $1.25 just to pay the phone bill.”   The founder of EventVue said that their deadly strategic mistake was that they “went after enterprise sales model with a non-recurring, small price.”

#10 – A “User Un-Friendly” Product

Not sure there is any revelation here, but bad things happen when you ignore a user’s wants and needs whether done consciously or accidentally.

#9 – Didn’t Pivot

One of the most overused startup words of 2010 was Pivot, but pivoting away from a bad product, a bad hire, a bad decision, etc quickly enough was cited as a reason for failure often.  Dwelling or being married to a bad idea is not a good way to allocate resources.  It’s not just ideas – if you make a bad-hiring decision, take corrective action (euphemism for let them go) sooner than later.  As soon as you see that your product is not getting a response in the market, think about what product changes might be necessary.  Letting inertia and stubbornness limit your growth and ability to change your business model was cited as cause for failure almost 1/5 of the time.

#8 – Lacked Passion and Domain Expertise

There are many good ideas out there in the world, but our startup post-mortem founders found that a lack of passion for a domain and a lack of knowledge of a domain were key reasons for failure no matter how good an idea is.  The co-founder of Untitled Partners stated, “I underestimated the importance of a relationship between our corporate and personal identities. “About 18.8% of the time, the post-mortems cited lack of passion as a cause of failure.  In their post-mortem, NewsTilt candidly spoke about their lack of interest in the domain they selected writing:

I think it’s fair to say we didn’t really care about journalism. We started by building a commenting product which came from my desire for the perfect commenting system for my blog [17]. This turned into designing the best damn commenting system ever, which led to figuring out an ideal customer: newspapers. While there, we figured they were never going to buy, and we figured out a product that people were dying to use if it existed.

But we didn’t really care about journalism, and weren’t even avid news readers. If the first thing we did every day was go to news.bbc.co.uk, we should have been making this product. But even when we had NewsTilt, it wasn’t my go-to place to be entertained, that was still Hacker News and Reddit. And how could we build a product that we were only interested in from a business perspective.

This compounded when we didn’t really know anything about the industry, or what readers wanted.

#7 – Released Product at the Wrong Time

If you release your product too early, users may write it off as not good enough and getting them back may be difficult if their first impression of you was negative.  And if you release your product  too late, you may have missed your window of opportunity. “This requires balance, if it is a critical user-based website where users need to depend on it like Ebay or Mint.com, an outage could mean catastrophe.  But if it a website like Twitter, an outage is a joke.  Know your website, don’t take forever to get it to the market.  But, if it’s critical then make sure its sound.” As Reid Hoffman said: “If you’re not somewhat embarrassed by your 1.0 product launch, then you’ve released too late“.  This was cited as cause for failure more than 20% of the time.

#6 – Didn’t Have a Viable Business Model

Sure Twitter gets away with not having a business model, but they’re not the norm.  Perhaps we’re old school, but if there is not a plan to bring in more revenue than expenses, that’s a problem.  Failed founders seem to agree that a business model is important.  Unfortunately, in 1 of 4 failure post-mortems, the lack of a business model was cited as a reason for failure.

#5 – Ran Out of Cash

Money and time are finite and need to be allocated judiciously.  The question of how should you spend your money was a frequent conundrum and reason for failure cited by failed startups.  The decision on whether to spend significantly upfront to get the product off the group or develop gradually over time is a tough act to balance.  The team at YouCastr cited money problems as the reason for failure but went on to highlight other reasons for shutting down vs. trying to raise more money writing:

The single biggest reason we are closing down (a common one) is running out of cash. Despite putting the company in an EXTREMELY lean position, generating revenue, and holding out as long as we could, we didn’t have the cash to keep going. The next few reasons shed more light as to why we chose to shut down instead of finding more cash.

#4 – Poor Marketing

Knowing your target audience and knowing how to get their attention and convert them to leads and ultimately customers is one of the most important skills of a successful business. Yet, in almost 30% of failures, ineffective marketing was a primary cause of failure.  Oftentimes, the inability to market was a function of founders who liked to code or build product but who didn’t relish the idea of promoting the product.  The folks at Devver highlighted the need to find someone who enjoys creating and finding distribution channels and developing business relationship for the company as a key need that startups should ensure they fill.

#3 – Had The Wrong Team

A diverse team with different skill sets was often cited as being critical to the success of a starti[ company.  Failure post-mortems often lamented that “I wish we had a CTO from the start, or wished that the startup had “a founder that loved the business aspect of things”.  In some cases, the founding team wished they had more checks and balances.  As Nouncers founder stated, “This brings me back to the underlying problem I didn’t have a partner to balance me out and provide sanity checks for business and technology decisions made.”  Wesabe founder also stated that he was the sole and quite stubborn decision maker for much of the enterprises life, and therefore he can blame no one but himself for the failures of Wesabe.   Team deficiencies were given as a reason for startup failure almost 1/3 of the time.

#2 – Built a Solution Without A Problem (i.e. No “Market Need”)

Choosing to tackle problems that are interesting to solve rather than those that serve a market need was often cited as a reason for failure.  Sure, you can build an app and see if it will stick, but knowing there is a market need upfront is a good thing.  “Companies should tackle market problems not technical problems” according to the BricaBox founder.  One of the main reasons BricaBox failed was because it was solving a technical problem.  The founder states that, “While it’s good to scratch itches, it’s best to scratch those you share with the greater market. If you want to solve a technical problem, get a group together and do it as open source.”

#1 – Didn’t Value Customer Feedback

Ignoring your users is a tried and true way to fail.  Yes that sounds obvious but this was the #1 reason given for failure amongst the 32 startup failure post-mortems we analyzed.  Tunnel vision and not gathering user feedback are fatal flaws for most startups.  For instance, ecrowds, a web content management system company, said that “ We spent way too much time building it for ourselves and not getting feedback from prospects — it’s easy to get tunnel vision. I’d recommend not going more than two or three months from the initial start to getting in the hands of prospects that are truly objective.”

So brave startups, you now know the top 20 reasons startups fail based on the experiences, generosity and candor of 32 of your fallen brethren.  We hope this checklist will come in handy on your startup journey and that you’ll share it with other startup cofounders who may benefit from some of its key messages.

Recommended Reading:

1) Top 10 Reasons Startups Fail (Squidoo)

2) The 18 Mistakes That Kill Startups (Paul Graham, Oct 2006)

3) Top 10 Reasons Why Startups Fail (VC Circle)

Special thanks to Chandni Shah, a Carnegie Mellon graduate, for her fantastic work poring through these post-mortems to compile this analysis and assist with this write-up.

ChubbyBrain is building data-driven tools for entrepreneurs. It’s first algorithm is the Funding Recommendation Engine (FRE). Using inputs provided by a startup seeking funding, the FRE suggests investors (VCs, angels, government grant programs, etc) based on the investors’ actual investment history. The FRE currently mines the investment portfolios of 8000+ investors who’ve made at least one private company investment in the last 2 years to develop its recommendations.

Other posts you may enjoy:

1. 25 Best Startup Failure Post-Mortems
2. An Analysis on Seed Funding in 2010 (Part 2 of 2)

For any consumer-facing company, attention is money. Acquiring new customers requires that you grab their interest long enough to convince them that your product  is deserving of their time and cash. Doing this effectively is expensive and elusive. Failure in both startups and storied corporations is rooted in the inability to attract new users and keep existing ones happy.

Enter gamification, the strategy du jour for increasing customer engagement and stickiness. For those unfamiliar with this buzz word, gamification is the application of gameplay mechanics to traditionally non-game activities like professional networking or local business patronage. Popular mechanics include progress bars, leaderboards, achievements, and virtual goods. With the success of startups like Foursquare, which applies gamification techniques to location-based services, companies new and old have been scrambling to gamify their products and services. Some investors won’t even entertain funding a consumer-facing startup unless game mechanics are incorporated in their business plan.

As with any new paradigm, gamification is frequently misunderstood and misapplied. A plethora of competing tools have cropped up recently that allow consumers to “check-in” to virtually anything, from TV shows to sporting events to news articles.  With all the fragmentation and competition, companies have to do more than slap on basic mechanics like badges and leaderboards in order to earn user interest and loyalty. If you want to apply game mechanics effectively, keep these tips in mind:

1) Think Community First, Game Mechanics Second

According to Keith Smith, CEO of BigDoor, a site or product needs to have an engaged user base for a gamification layer to be successful. After all, mechanics like leaderboards and badges only matter to users if they can show off their achievements to a relevant audience. Virtual goods increase in perceived value if they can be displayed or shared within a community. Being able to engage in activities with friends makes those events more enjoyable, increasing user retention and evangelism.

Building a community boils down to getting people into the same room and talking to each other. If you don’t already have a community, try tapping into the social graphs of Facebook, Twitter, Gmail, etc. Third-party login systems can be effective ways to kickstart a community. If you run a popular website and have many fly-by users, try using tools provided by gamification platforms like BigDoor, One True Fan, Badgeville, or Meebo to activate your passive audience. No matter what method you choose, always keep in mind: how can I make my product more social?

2) Design the Right Rewards for Your Users

People play games for all sorts of reasons. Some want an intellectual challenge or an immersive fantasy experience. Others have a “killer” mentality and want to defeat their friends in public battle. Games like Farmville appeal to yet another type: the casual gamer who prefers social, collaborative actions. Similarly, for game mechanics to work, you have to design them to fit your users’ personalities and motivations.

As you build a community, pay attention to how the overall experience of your product satisfies different types of users. Keith recommends categorizing users as Consumers, Contributors, Evangelists, and Players. Of the four, Players are the most important, as they comprise the 1-5% of users who love your product,  will pay for premium functionality, and do everything that the other three types do. Designing private perks and public rewards for Players incentivizes engagement, evangelism, and stickiness.

A great example of a well-design reward is the Hashable Top 100 party thrown in New York City last year. Hashable is a game-changing professional networking site that has successfully cultivated a strong following among movers and shakers in the NYC startup scene. By introducing a local leaderboard and throwing an exclusive party for the users on it, Hashable appealed to the innate desire of community members to connect with other influencers and be acknowledged for their networking prowess.

3) Bring in the Experts

While plenty of resources exist for learning about gamification, you may be better off hiring an expert to develop your game mechanics. Hashable hired Chris Carella, an experience game designer, to tweak their game elements and reward systems. DevHub, a startup that successfully turned website-building into a game, worked closely with BigDoor to execute their gamification vision.

When evaluating potential partners, look beyond their technology platform. You want to bring on a gamification partner that either has deep domain expertise or can integrate you with a rich ecosystem of users, vendors, content providers, and advertisers.

Recommended Resources
1)      The Gamification of Everything by Margaret Wallace (Gaming Business Review)
2)      How To Use Game Mechanics To Power Your Business by Shane Snow (Mashable)
3)      The Gamification Encyclopedia
4)      Books on Gamification

Other posts you may enjoy:

1. Going Viral on Mobile: Lessons from Social Gaming
2. 2 Parallels Between Poker and Startups
3. How to Handle the Startup Dip