This last part talks about the challenges we faced in Zoecity that really affected our ability to execute.

Collaboration

Believe it or not, the biggest issue we faced as a team, with half our staff in the US and the other half in Malaysia, is collaboration. It wasn’t communication. It wasn’t country culture. It wasn’t a misalignment of interest. It was collaboration.

Offshore startup development, when done right, can be extremely beneficial. For Malaysia, we achieved a cost savings between 70 – 80%. But what we found particularly challenging was that it was inherently very difficult to collaborate on new product concepts and design.

When we first built our engineering team in Malaysia, they were structured to implement the specifications and design requirements from the US team. The Seattle team would work with me to build the spec and the mockups. The KL team would implement them. There was a clear delineation of responsibilities. We initially had some communication issues during the first few months. But it was more so because we had a new team and we had to “learn” from each other. This is not uncommon like a new team of soccer players coming together for the first time. You have to put in time to learn each other’s “signals” and develop the right team dynamics. After a few months we eventually “greased” out the kinks.

In late 2008, Zoecity made a strategic shift in our product direction. We decided to move out of social networking. Facebook had opened up their platform for websites to connect to their users. We realized we could never effectively compete against them. So we “reshuffle our deck” in the midst of the worst economic crisis in the last 80 years. We laid off a number of really great people in order to make our budget work. Because of this, the working dynamics between the Malaysia and US team changed irrevocably.

One of the least acknowledged strengths of technology startup culture is the ability for a small team to come together and brainstorm ideas, design and implementation. Creating a great product is very much an iterative process. If you follow the Agile methodology you will be very comfortable with this concept. You start with a simple idea and the whole team participates to evolve the idea. This process of evolution involves both official and unofficial channels of collaboration.

Official channels are scheduled group meetings, presentations and brainstorming sessions. Unofficial channels are when you go out to lunch and chat in a relaxed environment. It is about dropping by someone’s table to kick an idea and see if it has legs. It is about getting unofficial, read-between-the-lines, back-channel feedback that often go off-the-record. The evolution of an idea to a great product often requires both official and unofficial channels of collaboration.

As we were building the new Sharein.com product, we encountered a great deal of challenges in getting both teams to collaborate effectively. Here is an example. At the beginning, I held an official presentation to outline my vision. I then threw this to my developers and we would set out on a course of action. During this period, I would think more about the concept, start having informal conversations with my team in Seattle and we would across lunch and multiple informal, unscheduled brainstorming sessions evolve the concept at least 10 times before we came to a decision. During this process we followed many trains of thoughts to their conclusion, eliminated many alternatives and developed a system of trade-offs to achieve the desired result.

Once I felt the idea was mature, I’d announce the final concept to the whole team. Unfortunately, often times, our Malaysia team, on seeing the final spec for the first time, could not comprehend or understand why we designed the spec in a particular manner. They had effectively missed out on the evolution of the concept, and on understanding the trade-offs we made. They may see the “letter” of the design but they never gained the “spirit” of the design. And in a cut-throat technology startup world, this cost us tremendously in terms of company morale.

It took me a while to eventually realize the gravity of this new team dynamic. We addressed this issue for the most part by having my product manager/designer and I fly over to Malaysia for many months and collaborating the idea with our key technical architects all under one roof. Once we got the idea to evolve into a mature concept we flew back to Seattle and development was smooth sailing because everyone participated in the evolution and everyone understood the “spirit” of the design.

Hiring

Of all the issues we ran into when we first built our team, hiring was the most critical. It was very difficult to find the right people. By and large, a lot of it were macro challenges that Malaysia itself faced.

The first was an over-emphasis on certifications. You can find the latest and greatest Microsoft and Java certified developers here and indeed the entire consulting industry is built around certification. You need someone qualified to build something in “X”? Find someone who is “certified” in it. There is this delusion that certification in a computer language or vendor technology (Microsoft etc) equates to mastery of the art of programming itself. Hence instead of focusing on the artist, the industry focuses on the art supplies to determine quality.

As a result, local universities here churn out thousands of new graduates each year who can spell Microsoft but understand nothing about proper software engineering.

So when you first start building your team, the most important hire should be your lead architect. Spare no expense to find the absolute best person for this role. The cliches of hiring the best of the best is as true in Malaysia as it is in the US. As they say, A players hire A players, B players hire C players etc. The Ruby community in Kuala Lumpur is fairly small. Everyone knows everyone’s reputation and ability. If you hire the best, this person will lead you to the rest. 

Company Culture

Once we completed the hiring of our key staff, the next step was to create a great startup culture. Culture creation is not easy.

Silicon Valley is a great place for technology startups in no small part due to its culture of entrepreneurship and innovation. There is this drive to create something new, crazy, innovative and globally game changing. You work long hours at below-market rates for stock options, a chance to participate in the financial payout of the company’s success. Everyone does their best for the company because they are incentivized and correctly aligned. How do you emulate this culture outside of Silicon Valley? Turns out, not so easy.

In order for stock options to work, your employees must first have a vision of what stock options can do for them. There must be a healthy acquisition or IPO pipeline in the market. Without an “exit”, you will never exercise your options. If you don’t have a chance to exercise your options, you’re not incentivized.

Malaysia unfortunately does not have a good technology IPO pipeline. Nor does it have the equivalent of a successful tech-based exchange like the Nasdaq. Malaysia tried but there simply wasn’t enough liquidity, or institutional demand. As a result, most people in Malaysia are not familiar with stock options or equity participation. When we first explained stock options to our employees, many of them either didn’t care or didn’t understand enough to care. In other words, it wasn’t even a consideration. 

Stock options, in its simplest form, is a vehicle for empl0yees to participate in the ownership of a company. If the company’s stock price went up, your stock options have value and it makes you a co-owner of the company. You have a strong incentive to make sure the company succeeds, with a strong alignment of interest between the employer and the employee. Being co-owners of a company creates an impacting culture of productivity simply because employees stop being employees, they start becoming owners. And owners CARE about their company. 

I think we were successful to a certain degree in creating this culture. Some cared enough but not everyone did. Certainly if Zoecity was mature enough within an imminent exit (IPO or acquisition) this might have worked greater. I think what Malaysia needs today is at least one success story of a technology startup that made it globally. This would then give developers here an identifiable vision of what startup success looks like and how to participate in its reward.

Next blog post: the issues that really impacted our execution.

In this article series I’ll talk about the things we did right, the things we did wrong, and also the things we’re still struggling with. I’ll break it down to multiple blog posts so as not to make this article too long.

So let’s start with a high level picture first.

Contrary to popular belief, most issues typically associated with offshore development are easily resolved. 

Language and culture is not a major barrier. English is widely spoken throughout the world. The impacting power of English in mainstream culture through the export of American movies, music and TV, and the advancement of US-based computer and Internet technologies have created a global culture. Even in Kuala Lumpur, engineers here for the most part understand the nuances of American culture and language. As I’m writing this blog post, I’m sitting in my friend’s living room and her daughter is watching cartoons – American cartoons – courtesy of American cable networks – bringing an American context to this future generation.

Time zone is not a significant barrier either. Seattle and Kuala Lumpur has a 15-hour time difference. Seattle at 6pm is Malaysia 9am the next morning. The beauty of engineering “types” is they love waking up late (i.e. noon) and working late into the night. I myself thrive when the sun sets. And so our young “single” engineers in Seattle loved the idea of starting work late in the evening and working through the night. We also begin the week on Sunday evening and end the week on Thursday night. So Fridays and Saturdays are off and the engineers loved it!

Communication infrastructure is also good. The power of the Internet (and broadband) has truly made this world flat. E-mail is instantaneous. Instant messaging made it real-time. Skype made it real-time in voice and video. And it all came with the price of $0. It’s amazing how easy and affordable remote development has become today.

Here are the big picture items we think we managed well:

Alignment of Interest

My early career out of school was in consulting services. I did well and learned two very important things.

A consultant is incentivized to get a project completed to spec. He is not incentivized to make it usable. In other words, your project is only as good as how you spec your design. A consultant’s goal is to build what you tell him to build. Because he does not participate in the success/reward of the project, a consultant does not care whether the product succeeds. There is a major misalignment in the long-term objectives of the project.

A consultant is incentivized to “complete” a project, not maintain it. So a lot of design decisions are made without regard to the actual maintainability of the code, the scalability of the product, or the ability of the product to change across time. You are hired to complete a project. Then you leave and the full-timers take over. What you then get is a product that is designed for milestone completion and sign-off, not growth and usability.

When we launched Zoecity Malaysia, the first thing we did was to address the issue of misalignment. We decided that we needed full control of our engineering staff. It meant building a fully owned subsidiary. We decided not to outsource our operations to a local consulting company. We maintained full quality control from being able to hire the right people (and not limited to consultants on the bench). We avoided the typical bait-and-switch where the RFP was done by the senior consultant but the actual work was thrown to the junior entry-level folks. 

Trust

However, to have a fully own subsidiary, the task of staffing up was significantly more difficult. It took us more time (6 months) and it also meant I had to trust the buildup of the staff to someone local. I could not be on the ground 6 months away from Seattle. Malaysia is fortunate that it has quite a number of locals who studied in the US and worked for large US corporations. My first hire was a close friend whom I had known for more than 15 years, whom I trusted on two levels.

One, I trusted that she would not backstab me. In neighboring China, ethics is a huge issue. Many US companies there learned too late that business is cut-throat. Your employees upon gaining knowledge and understanding will not hesitate for a second to copy (or steal) your product outright and become your competitor the next morning. My General Manager on the other hand has my interest at heart.

Second, I trusted that she could do the job and do it very well. Here’s where exposure to US culture, education and work experience is very important. My General Manager qualified exceptionally on all fronts and I have been extremely blessed to have her manage our Kuala Lumpur office. The success of our Kuala Lumpur team would not be what it is today without Jin Shien. 

Once the alignment of interest and trust was resolved, we then focused on creating a lean and effective operation. I’ll talk about this in the next blog post.

I learned a lot. I learned how to read term sheets. I learned how startups were structured and what funding vehicles were used. I learned all the things you can do to legally protect your interest. But I did not learn to properly evaluate Web 2.0 startup companies. That only came with experience, after I joined ZoeCity, a Seattle startup as its CEO in November of 2007. 

The one thing good of learning from other fellow investors is that you gain insights from them in areas you are weak in. The finance guys in my investor group would give us an interesting take of the financial projections. The attorneys would evaluate the IP. The engineers (myself including) would evaluate the technology. And collectively we’d make a better decision than if any one of us came in individually to evaluate the opportunity.

The bad thing however, is that you also gain biases from the other investors. Particularly, folks who came from other backgrounds. Evaluating a hardware company is inherently very different from a software company. A traditional enterprise software company is very different from a Web 2.0 company. And forget about bio-tech or clean-tech because those are completely different beasts altogether. At the end of the day, subtle nuances of each industry requires an experience player from that industry to provide the necessary insight.

When I first started, I studied business plans. In a typical fund raising process, you start with a simple executive summary. If you like it then you view the presentation. And if you still like the company, you study its business plan. This seemed practical and logical. But for Web 2.0 companies, I’ve learned that it is for the most part, a fairly futile exercise.  

Web 2.0 startups are mainly market risk companies. You’re not building a cure for cancer. Your success is not dependent on the successful invention of your product. It is dependent on the acceptance of a market, if there is a market. Facebook did not succeed because it could connect you to your friends online. It succeeded because you and all your friends decided to use it as your primary connecting point.

Hence in a Web 2.0 startup, 18 – 36 month market projections are a waste of time, an exercise in science fiction, of picking numbers to justify a future $10M valuation. The market take-rate? Unknown. The month-over-month growth rate? Unknown. The retention rate? Unknown. Pricing strategy? Unknown. Everything is an assumption. Comps rarely work because most Web 2.0 startups are building products where a market does not yet exist. Hence market validation is the first thing a Web 2.0 startup should work on.

Should a Web 2.0 startup fund raise for 18 months’ burn rate? Why not 12 or 24 or 36? What a startup does need is to anticipate how many iterations it will require to get market validation on its product’s value proposition. If you’re burning $20K/month and you need to iterate 3 times to prove your product and each iteration roughly takes 3 months then all you need is:

$20K x 3 months x 3 iterations = 9 months @ $180K

Now this is obviously very simplistic. It doesn’t take into account the buffer time required for you to do the next round of fund raising. But it does give you a good idea about the only thing you need in your business plan; What are your market assumptions and how do you validate them? Once you get them then re-evaluate the value proposition. If there’s light at the end of the tunnel, then another round of funding is required to take you to that level. And you’ll have enough decent market data to back your assumptions for a more realistic 18 – 36 month growth projection. 

Investors, be absolutely prepared for change. The company may totally change its target market and its product many times. Assumptions are created and validated or invalidated. Product feedback and market feedback enables a startup to go from one premise to another to another. PayPal started as transaction encryption technology for PalmPilots. Google started as search service outsourcing company. This is another reason why very detailed 30 page business plans are more of a distraction for startup entrepreneurs. If you can’t whiteboard your first 9 months of existence your plan is way too complicated.

Which takes us to the next question; What is an early-stage Web 2.0 startup’s valuation? Forget about DCF (Discounted Cash Flow), TAM (Total Available Market) or SAM (Served Available Market). If its a market you are about to create, how can you project? Monthly uniques? Some folks start with this. At the end of the day, it really is just a random number. But it has to be one that’s big enough to ensure the founders have enough incentive to work for free or dirt cheap. But not so high the investors will feel ripped off. Your guess is as good as mine. Each situation will be unique in its context.

Just be fair.

I believe all good CEOs inevitably get this. To believe in your own Kool-Aid so much that you convince others to fund your vision. I am by nature very bad at hiding my perception of truth. I say perception because nobody really knows what the “truth” is. Everyone has a perception based on their culture, experience and context i.e. the blind men and the elephant. So I believe in my company’s vision. The super-duper-widget-o-matic I’m building will change the world and end poverty as we know it. I mustbelieve in it. That’s the only way I can successfully sell to my customers, employees, investors and partners. They might not believe 100% in my idea but they will believe 100% in me. 

So here’s the downside. This very nature of reality distortion is also my worst enemy. It creates blinders to other “truths”. It creates a bias that my “baby is the most beautiful” and anyone who says otherwise is dumb. It is a blindside in my forward vision. It is a weakness that I cannot ignore. Markets change. Competitors move. Customers validate. Partners affirm. All of which can radically change the value proposition of my business. And if I don’t “see” it, then I betray all those who believe in it.

Sometimes it does take time for a market to validate the value of your product. Google built a search engine at a time the entire industry had given up on “search”. Tivo took years to educate customers on the concept of a DVR. What about Twitter? Try explaining the value proposition of that business. If you were Larry or Sergey (founders of Google) and you listened to what everyone had to say (the VCs and partners) you’d have given up on “search” if you didn’t have a slightly unhealthy dose of your own Kool-Aid. 

So where do you draw the line?

How do you keep your overdose of Kool-Aid obsession and overcome your blindside at the same time?

I personally believe it is impossible. I cannot believe and unbelieve in something at the same time. This is especially true for technology entrepreneurs. Most startups fail. This is an undeniable fact. From day one, the odds are heavily stacked against you. Try creating a new product/service that doesn’t exist for a market that may not exist. Then try convincing investors to give their hard earned money to you, partners to take a chance in an unproven you, and employees to work below market rate for you. Then take all these variable and execute on the vision. And if you are like most startups, you are dependent on hitting a series of milestones to raise more funds at each milestone. There is at least a dozen serial points of failure in your path to success. Any sane person will say the probability of success is… not good. That is where drinking your own Kool-Aid keeps you and your stakeholders going day by day, one step at a time.

Now I said it is impossible to keep both my overdose and overcome my blindside at the same time.That’s if I do it all by myself. To achieve it I realized I needed to break it up. I must find a group of individuals (two or three at most) that I completely trust to do two things. One, I trust them to tell me the truth no matter how hurtful it may be. Second, I trust them to do what’s best for my company, even if it means telling me I’m the point of failure. Then I must trust this board of accountability so much that I’m willing to listen and act on the anti-Kool-Aid. This precarious balance of Kool-Aid versus pragmatism is the only way to make sure I face my music.

One more thing. And I learned this recently. This group of individuals must love you enough to spend the time to listen to you and you need to be upfront with them on their investment of time with you as well. That’s why having a group of individuals help. If one is too busy, then you go to the other. You need to tell this person, “I need to run something by you and I need 2 hours of your dedicated time. If you are busy, that’s absolutely fine. You won’t hurt my feelings. I just need to know.” Or “Can you have a look at this when you have a chance and let me know what you think? If you don’t have the time to really walk through the whole thing, no worries. Just let me know”. What you don’t want is someone who is time constrained to spend 3 minutes scanning through your product/proposal and give you advice without really understanding the matter.

So what do you do after you’ve drank your Kool-Aid? Build a Board of Accountability. For startups, this is often a board member (Board of Directors). This person can also be part of an official Board of Advisors. Sometimes this person can just be a friend whom you trust and respect. And it doesn’t apply just to startups. Want to loose weight? Be a better father? Be a better husband? Who are the people in your life whom you trust and respect who will tell you what needs to be told? Find them and overcome the Kool-Aids in your life.

Article originally posted at colinwong.com.

I recently made the decision to separate my business articles from my personal blog articles in colinwong.com. So starting today, business articles are going to be hosted here on prosperati.com. The rest of personal nature will stay at colinwong.com. It’s been sometime coming. I had a hard time creating a consistent brand and focus and so like all things, you have to simplify, semper fi.

It’s amazing how much you can do with getting an Internet presence these days. With GoDaddy, it cost me $10 to purchase a new domain name and $5 to maintain it every month. The WordPress CMS system is free. This custom theme I bought from themeforest.net cost me only $30. And I remembered just enough HTML and PHP to put this together in 1 day. Simply amazing.

Startup cost:
$10 – domain name purchase
$30 – custom WordPress theme
$40 total

Monthly cost:
$5 – hosting services

Some caveat of course, I had enough knowledge to set up WordPress on the server machine, set up the mail configuration, whip up a quick logo with Photoshop and obviously customize the theme files. But if you added 8 hours worth of work @ $50/hour, that still adds an additional $400 only to get a professional looking site.

And let’s say you want to be snazzier. Add a forum or sell some products/services with a shopping cart. You can add another $400 and conceivable get a fully functional e-commerce capable website going for under $1000! There are so many free open-source add-ons as well as direct integration from other providers (shopping cart for example) that makes it such a snap to have a full-fledge website.

There’s just absolutely no excuse for any business to not have a website these days.