Startup Economy

Startup vs. Big Company - Politics

chris.lee@startupeconomy.com — Tue, 10 Nov 2009 14:34:00 +0000

(used with a sing. or pl. verb) The often internally conflicting interrelationships among people in a society.

so says Dictionary.com (http://dictionary.reference.com/browse/politics)

Many of us in startups talk about flat organization, no hierarchy, no politics quite often. We tend to believe that bureaucratic organizational structure in big companies is the enemy of all, and that startups are nimble and move faster to adapt to changes to customer demand and market conditions.

I recently engaged in a discussion with some friends and talked about the office politics. There were entrereneurs, consultants, bankers, and even VCs. Not surprisingly, we agreed that there's politics when there are more than 3 people in the same room.

In the startup environment, politics is not necessarily a bad thing. When 3 people always agree, they are not probing the problem enough. On the other hand, the whole resolving internally conflicting interrelationships is difficult. As with many other things, there are pros and cons. What's your story?

Future VC Crisis

chris.lee@startupeconomy.com — Fri, 15 May 2009 14:22:00 +0000

I usually don't pretend to predict the future outcome of industry. I'm often very wrong about the future like many people out there, but what the heck! There will be a VC crisis... at least in the small segment of those affected by the current trends and from pure perspective of financials .

It is no secret that the cost of startup decreased dramatically. Paul Graham agrees here, and Prof (via NY Times) has an article here to reinforce the case in point. Wait, didn't I argue for rise of startup cost in the past? Not so fast here. Here's the difference:

The cost of starting up a company (e.g. ideation, prototype, incorporation, deployments) definitely decreased dramtically. To that point, NYT has a good argument for why that is so here.
What I meant to say in my previous blog post was the cost of total capital requirements to create the value at the time of exit went through the roof.

Let me come back to the first bullet about the cost of starting up a company. It is no accident that I talk to quite a few venture investors and entrepreneurs for a number of reasons. We quite often chat about the recession and the impact of economic crisis on deal flow, investments, etc. The investors love the current times, because

revisiting valuation in this recession gives them a good leverage to make attractive investments
they are busier than ever looking at all kinds of companies
cloud computing and virtualization (in the software sector) turned out to present attractive value propositions to customers looking to reduce cost and survive the economy. ehhhh?

The VC Crisis
Without further due, here's my prediction about VC crisis. There will be winners in cloud computing. At the same time, it will be cheaper than ever for web entrepreneurs to start up a business, thanks to the innovation created by the cloud computing companies (invested by VCs). That, in turn, will make it difficult for many early-stage VCs to convince web companies to take money at an early stage. Then, early-stage VCs move downstream to later stage investment where the economics of exit multiples, etc. just doesn't work out well for almost all web investments. Instead of $10M in, $100M out economics, it will be more like $40M in $400M out. By the way, the number of companies that can justify the new economics...... there are even fewer companies to realize that kind of exit, thus more losers.

Summary (I could've Twittered this)
After investing in the sugardaddy cloud/virtualization companies, these companies drive down the cost for other startups, then the startups don't take early-stage money, then there goes the VC crisis. Sounds like now is a suicidal time for VCs.

Ouch...

chris.lee@startupeconomy.com — Tue, 21 Apr 2009 11:16:00 +0000

John Sculley: Don't Be Afraid to Make Tough Decisions

John Sculley says it was one of the hardest things he'd ever had to do as a CEO: stripping his friend and sponsor, Steve Jobs, of any operating role in the company Jobs had co-founded. Sculley spoke to Inc. in 1987 about what became a very public crisis at Apple Computer, explaining why working with entrepreneurs -- especially those who crave control -- can be trying. "The hardest part of dealing with entrepreneurs is getting them to recognize their own weaknesses. Sometimes they will say they are weak in certain areas, and then try to jury-rig an organizational concept to compensate for those weaknesses. But they really don't mean it -- they don't believe it."

Courtesy of inc.

Disengaging from Social Media

chris.lee@startupeconomy.com — Mon, 20 Apr 2009 13:29:00 +0000

I've been trying out various social media tools to engage with other online audience personally and professionally. I got into the social media ecosystem that I'm getting to the point where the incremental value of utilizing another social media tools (at least in the contact management sector) is close to zero.

The best tools so far has been Twitter, LinkedIn, and Facebook, and it should be no surprise.

I tried to make sense out of more extreme professional contact management tool by using Plaxo. Today, I declare the permanent "uninstallation" of Plaxo... forever.

I get too many spams and don't really get much value out of Plaxo. My contacts (including me) don't really update the contact information up-to-date. There's not really a reason to visit the Plaxo website. The desktop tool just flashed and uses up my CPU for no reason other than the software doing nothing.

Bye, bye, Plaxo. Although I never got to know you, you've already made yourself a fame by getting acquired by Comcast.

Rubbish Land

chris.lee@startupeconomy.com — Tue, 17 Mar 2009 16:09:00 +0000

Image by Giant Ginkgo via Flickr

Americans and people in relatively well-developed countries take clean water and infrastructure for granted. When I was in Chicago, one of my favorite annual event was the "greenization" of Chicago River. It's actually quite amazing what Chicago has done with its water system, including:

Reversal of flow to prevent Lake Michigan drainage
Beaches nearby downtown
Fish hotels underneath the Michigan Ave. bridge
Water Purification

During the early 20th century, the water was too contaminated for consumption, but the city has done a tremendous job at purifying it and making the riverside enjoyable for tourists and citizens. It's gotten to the point where a bit of color contamination on the St. Patrick's Day is acceptable.

In this country where people take clean water for granted, there are still a ton of startup activities geared towards water purification. Making this blessed country even more blessed is........ blissful.

On the other side of planet, more specifically Manila, rivers are covered in trash. Not sure if any technological advances will be able to clean up the river, but this is just too stunning. The picture below, first shown at The World Water Forum, makes me wonder, "What the heck are we doing working on incremental environmental changes when the same resources can be deployed to make a much bigger impact?"

(Source: http://www.thesun.co.uk/sol/homepage/news/article2323032.ece)

Overheard in Silicon Valley

chris.lee@startupeconomy.com — Tue, 10 Mar 2009 19:48:00 +0000

If my previous post was an indication of summarizing my daily lessons learned in the Valley, yes, I slacked off. I was busy learning about many things, and I would like to share some lessons learned with my readers. Mostly just brain dump of various things, but I'll try to bucket them into different categories.

Economy

It's tough out there (quite frankly, everywhere these days), but productivity is WAY up stemming from low burn rate and increased work hours.
Growth is still the king. Monetization can happen when the economy recovers
(somewhat of a contradiction to the above) "Product, product, product. Growth later, please"
Not that many companies feeling the pains in a tangible way. They just want to stay low until somebody else brave (or dumb) enough makes a big move.

Startup/Company Gossips

Silicon Valley needs the next Google (awesome product with real revenue stream [not just a proven revenue model]) real soon
Semiconductor industry is about to enter the most difficult times in its history
SV always talks about SV, Boston talks about Boston vs. SV
"Recycling" high valuation deals is somewhat of a trend
Angels are busier than ever
Facebook's talent hemorrhage is a big contrast to its predecessors like Google, Yahoo, etc.
Entrepreneurs here live on dreams, elsewhere driven by reality
Lots of excitement around Palm Pre. Most of the design features actually got "stolen" from another company
While operational experience is highly respected, venture business is really about accessibility to deals
New York's rise to stardom in entrepreneurship is noticeable from the other side of coast. With top-notch innovations and investors to enable the whole ecosystem
Boston's main competitive advantage is largely top academic institutions
Google fired some flamingos on the dinosaur sculpture, so that the employees can spend the time more productively

Other Stuff

Too many good restaurants contributing to accelerated weight gain. No wonder the weather is so good all year round. I needed to burn some calories all the time
Intuition is highly respected. Analytics, less so.

Too much to list all them out, but I'm sure I'll use some of the lessons learned in the future posts.

Silicon Valley Trip - Day 1

chris.lee@startupeconomy.com — Wed, 04 Mar 2009 16:44:00 +0000

Here in Mountain View, sitting at a quiet cafe, I'm sipping on a delicious cup of latte.

I met a few startups and investors yesterday. Nothing was really new.

Due to the economic downturn and surge of available time, Silicon Valley sees more companies and innovations
Entrepreneurs are laser-focused on doing what they're supposed to be doing: improving product and engaging more customers. This applies to both well and under-capitalized companies. Many are cautiously hoping for revenue generating opportunities.
Weather is scattered shower, sunny, and cool. I was wearing a t-shirt, and people kept asking me, "Aren't you cold?" Nope, my skin thickened quite a bit with lipids and adipose tissues.
Building products is cheaper than ever.

I want to say something more explicit about the last bullet. I've been hearing the mass exodus from Google, and how the company turned into a monster like Microsoft praying on innovators in the Silicon Valley. All that aside, entrepreneurs were integrating Google Docs, Calendar, Tasks, Maps, and many other products by using the free API.

Google's main and only revenue source may be from its wildly successful ads operation. At the end of day, the company's turning all that revenue into enabling many other technology innovations among startups.

Without further due, "Google, you the man!"

Yet Another East vs. West Coast Startup Economy

chris.lee@startupeconomy.com — Fri, 27 Feb 2009 18:26:00 +0000

"You know, it was interesting to see that Boston entrepreneurs are...umm..... older.... mostly in 30s and 40s. Many guys in Silicon Valley are younger".

No offense to the people in their prime 30s and above (including myself), hearing this from a venture investor from the west coast was somewhat demoralizing, though not surprised at all.

Some say Boston is still going strong, and others say it lost the edge already. I don't necessarily believe that Boston lost the edge, but c'mon, Silicon Valley owns a vast majority of big, successful latest high tech startups.

Rewinding a bit to

my conversation with a local recruiter in Boston....... "I sort of miss the good ol' enterprise software companies. I see so many mobile/internet companies, and they started to dominate the whole startup scene in Boston".

Another quote from a VC.... "We like backing serial entrepreneurs who's been there, done that". Yes, we heard this many times before.

Yet another talk with an entrepreneur.... "Yes, we are still hiring. But, it's extremely difficult to hire the right person to fill this role. If you know someone from Yahoo, Google, DoubleClick, or MySpace, please let me know". Really? Not someone from our very best EMC, Lycos, or AthenaHealth?

Hmmmmm.... what's going on here?

Here's my hypothesis. Since the dot com 1.0 revolution, Silicon Valley pretty much sucked in a lot of young talents into its ecosystem. Young, fledgling entrepreneurs dreaming of making a big time career at a cool company like Yahoo and Google flocked to the west coast. Why not? People complain about cold 60 degrees weather, many awesome restaurants, get to see legendary entrepreneurs on the street, etc.

While B2B software is still critical and remains to be a profitable business (when done right), the dropping cost of starting a company applied mostly to those developing application layers, thanks to cloud computing, Web 2.0, and iPhone. Many of these entrepreneurs are from New England. They used to work in a high-flying companies in MA and started companies to change the world.... in a largely irrelevant sector to their root. Then, venture investors figure that they are not really "the serial entrepreneurs" they are looking for. No money, companies die.

By the way, the young, fledgling entrepreneurs from some of the greatest educational institutions in MA can't find a good job, because the companies are telling them that they need to learn from the successful companies like Yahoo, Google, Microsoft, and Facebook before proving themselves to be valuable in the mobile/internet/media startups. They listen, buy an one-way ticket, and never come back. Then, they follow their dream where they build relationship, know people, and start rooting personal lives in the west coast.

Entrepreneurs in MA get older and not nearly enough young entrepreneurs fill the talent pipeline. The younger generation fades away.

The vicious cycle goes on and on.......

Stay in MA is a great program to mitigate the problem of mass talent exodus out of MA, but there needs to be more aggressive programs and effort within the whole startup ecosystem to take the risk of hiring and training less-skilled entrepreneurs and let the young entrepreneurs start their dreams here.

Marc Andreessen is full of it

chris.lee@startupeconomy.com — Wed, 25 Feb 2009 20:32:00 +0000

Okay. Probably not, but he definitely spat out the revenue generating potential of Facebook, because he had to right at that moment. Here's the transcript from his interview with Charlie Rose. BTW, very inspiring interview overall. Highly recommended spending the time to watch the whole interview.

MARC ANDREESSEN: The fallback position is to just take normal advertising.  And if
Facebook just turned on the spigot for normal advertising today, it would
be doing over $1 billion in revenue.  So it’s much more a matter of long-
term strategy.  The company has got (INAUDIBLE) cash...

CHARLIE ROSE:  So if they wanted to make a lot of money instantly, it
could. 

MARC ANDREESSEN:  Yes.  Oh, very easily.  It could sell out the home
page, and it would start making just a gigantic amount of money.  Yes, so
there’s just tremendous potential in it, and it’s just a question of
exactly how they choose to exploit it.

Monetizing on social media is something that many startups are trying to tackle and will require some real innovaitons to make this happen. Yes, Google figured it out with their search engine platform. Facebook, with 175 million active users with half of them using Facebook daily, is a huge business. It's just amazing that Facebook turned into this monstrous internet giant in less than 5 years.

Revisiting my critism of the Facebook's advertising platform, the company really has not figure out the underlying platform to serve the needs of marketers.

Selling out the hompage? Are you kidding me? Since when marketers are willing to give Facebook billions of dollars when they know that non-targeted online advetising is a waste of money?

Will people click through and convert to sales?

Oh yeah, by the way, when was the last time you went through the Facebook homepage?

Marc is a legend, and I respect him very much. I just wish he just never said anything about the non-potential of Facebook on national TV. What's wrong with simply saying, "We are in the process of figuring out the magic" (which he did) or even a humble, "We don't know"?

Distorted motivation of startups

chris.lee@startupeconomy.com — Tue, 24 Feb 2009 16:33:00 +0000

I'm absolutely torn between choices and motivation of startups. I touched on the futile attempts to raise venture capital, and I'm a firm believer in fixing broken systems and making life richer, regardless of how money is raised.

Over the last several weeks, I met many friends doing all kinds of different things with their lives... mostly people sitting on the other sides of table: entrepreneur and investors.

The stunning contrast among their motivation was nothing less than stimulating, and I want to share the discussion with my readers.

Friend A - early-stage VC:
I've been bouncing some business ideas and wanted to get his feedback on products, features, and potential business opportunity out of a mere idea. He's a venture investor at a very respectable firm with vast knowledge of industry, technoloyg, and market. I thought he would be the right person to give some agnostic feedback based on what he knows about startups. About 15 minutes into the "pitch", his attention was already somewhere else, and he asked, "Do you think this is a $100M business opprotunity?" and it was an obvious no. My original intention is to fix some broken system based on my own experience from b-school. With very limited capital out of my pocket, I was going to solve it. If it happens that I can build loyal users WAY beyond my original target, I *might* consider runnning it as a business. Then, he said, "Why are you wasting time going after no market opportunity?"
Summary: Small dreams are futile attempts.

Friend B - Non-VC-backed-entrepreneur:
He started his business doing someting very fundamental. He takes a purchase order from website, manufactures and delivers the product. For every single order he processes, there's a gross margin and money to be made. The challenge is to scale the business to be profitable. The target market size? Not too big to be honest, but he can make a pretty good living out of this if it takes off. He went on to make predictions about the whole Web 2.0 implosion, and how forgetting fundamental business concept (a.k.a. revenue - cost = profit) will prove detrimental to many seemingly successful tech startups. His motivation: make profits and run businesses like business. Hype doesn't generate profits. Points taken!
Summary: Small dreams are NOT futile attempts. There's something grandiose about small businesses.

Friend C - VC-backed entrepreneur:
He runs a pretty well-known startup in the gaming industry. The first time I met him, he had a very, very long lecture on how raising venture capital is wasting his time while he could've worked on something very productive. He's going after a very big market opportunity with significant capital that already went into his business. He's still going for the >$100M market opportunity... the only problem is ... he's not making much money at all. For almost every transaction/deal he makes, he's still sinking money.... for more than 7 years now. What a contrast with Friend B!
Summary: Big dreams are way to go.... only takes much more money to be profitable.

I'm not saying any of them is right or wrong. It's just that the motivation of startups varies very much. We in the ventue capital ecosystem tend to think that small dreams are futile, because it's a homerun business after all.

Think Facebook, Twitter of the world VS. Craigslist and Wikipedia. Maybe a bad example, think Facebook vs. MIT Truck, what's wrong with MIT Truck? I don't see much.

Why am I penalized for being "green"?

chris.lee@startupeconomy.com — Wed, 18 Feb 2009 16:39:00 +0000

Image via Wikipedia

I'm by no means an expert in green stuff or clean tech, but the energy industry just has this strange behavior of penalizing green consumers.

"Green" spans from organic foods, consumer products (i.e. 7th Generation), wind energy, solar energy. I can understand the premium on the organic foods and consumer products. Many of these products are sold at Whole Foods where the shopping experience is better than other local grocery shops. Also, organic foods are supposed to be healthier for me anyways, so I pay premium to get the luxury of experience and health.

I've been trying to embrace green energy as a consumer for a while, but I just can't justify the price hike. Seriously, I'm all about being green. I sort all recyclables, trash appropriately. NSTAR (MA utility company) often sends me an email saying how good it must feel good to be green and how I'm improving the global warming and what not. Oh, Glory America, a country driven by the fear of world coming to an end. What NStar is doing is to induce fear and guilt to convince consumers to adopt green energy. But, but, where's the economic benefits? Not even that, why are you penalizing me with the additional ~10% increase in utility bill?

Where's the "premium"? Would my light bulbs be fluorescent? Am I being just too capitalistic and not environment-friendly?

Online Advertising is Largely Broken

chris.lee@startupeconomy.com — Tue, 03 Feb 2009 17:53:00 +0000

Chris Anderson's recent article "The Economics of Giving It Away" stirred the blogosphere and those of us in the startup world. Some prominent bloggers talked about it here (AVC), here (peHub), and here (OnStartups). I might as well say something about it.

The industry research forecast predicted a stunning growth in online advertising spending, only to chop the forecast when the economy doesn't seem so rosy.

Since Google proved the viability of contextual advertisement business model based on the search keywords, many companies all of a sudden started believing that the advertisement was and would be a viable business model. Internet audience take free content as granted, providers think free content is the way to go because advertisers are willing to pay for the service..... as long as the right advertisement gets displayed at the right moment for the right audience.

"The standard business model for Web companies that don't actually have a business model is advertising. A popular service will have lots of users, and a few ads on the side will pay the bills. Two problems have emerged with that model: the price of online ads and click-through rates. Facebook is an amazingly popular service, but it also an amazingly ineffective advertising platform. Even if you could figure out what the right ad to serve next to a high-school girl's party pictures might be, she and her friends probably won't click on it. No wonder Facebook applications get less than $1 per 1,000 views (compared to around $20 on big media Web sites)."

Let me take this sliver of the WSJ article and relate it to my own experience to justify the $1 CPM in Facebook is probably the most it can charge.

Whatever the Facebook Grader tells me about my Facebook grade (basically, what they are telling me is that my friends are unimportant, uninfluential, and doesn't add value to my social media presence compared to other obsessed users), I like using Facebook. I love it, and my friends there are all important.

My Twitter, Facebook, Google Reader, Ping.fm, Bit.ly, and several other social tools are interlinked, yet I prefer to go directly to Facebook to reply to messages received inside Facebook. Long story short, I contribute to the Facebook traffic.

BAM! This is the advertisement I see today on my Facebook.

Am I ever going to click the ad? No.
Am I offended by this? Yes, sort of.
Has Jessica Simpson or IQ ever entered my consciousness? No.

What a waste of web property! If I were an advertiser, I'd be saying, "Facebook, you are wasting my money".

I'm sorry, but online advertising is largely broken and it needs to be fixed.

BTW, I'd never take this IQ Challenge out of fear that I fall below 111 even if I can tell tuna apart from chicken and know that buffalo wings actually don't come from baffaloes.

Danger of Self-Confidence Bias

chris.lee@startupeconomy.com — Fri, 30 Jan 2009 15:14:00 +0000

Thanks to TechCrunch for publishing an article to amplify my post about biased decisions.

I stumbled upon the post "The Economy According to Mint", and I really do hope that Aaaron Patzer doesnt' really see the economy through the lens of Mint.com data.

First of all, another thanks to Mint for publishing data, not just vague qualitative assessment of the economy but real numbers. Now, here are the reasons that the "Guest Author" should've spent the time doing something more productive.

Inclusive data sources leading to self-confidence bias

1. Let's see.... (http://www.quantcast.com/mint.com)

The traffic through Mint.com just doesn't represent statistically significant set of overall population. They are well-educated, leaning towards male, ages 18+, mid-to-higher income, and no kids. The monthly visitors are around 280K in December with a majority of them being "non-regular, passers-by". (By the way, I am superposing another layer of obscurity by using Quantcast to make assumptions about the real Mint.com users.)

Just to make this clear, the state of economy represented by Mint.com usage is just that. The economy doesn't look as bad for the Mint users. Great for the company... maybe... but doesn't give any data outside its tiny world.

2. I personally am a Mint user, and I like it. I don't particularly love Mint, because it's go some technical glitches in connecting with a number of my other accounts. For example, I have a loan and savings account that several emails to customers service and numerous searches could not resolve. In the end, Mint has a very wrong view of my personal saving/spending/asset/liabilities trend.

I'm not trying to bash against Mint. They have a great product in process towards something significantly meaningful. I believe that they are on the right track towards something. Mint will probably face a moment sooner or later to make critical business decisions based on internally generated data like this. I smell self-confidence bias creeping into the office of Mint. The team at Mint.com, please surprise me!

How to Make Unbiased Decisions in Startups

chris.lee@startupeconomy.com — Thu, 29 Jan 2009 19:32:00 +0000

A recent article in MIT Sloan Management Review "Decision 2.0: The Power of Collective Intelligence" presents a great decision framework.

In a world of startups, especially those backed by VCs, there should be a striking balance between agents' (entrepreneurs) decision making based on emotions and intuition and principals' (investors) ability to take the emotion out of the equation to exert "unbiased" advice to the company. On a second thought, emotion and biases almost ALWAYS exist in any decision making processes.

As related to a startup, the whole premise of venture financing is "Here's the money. grow your business. It's okay to make mistakes, but make as few as possible and move on quickly if there are flaws". So, why am I saying this?

STARTUPS MUST MAKE DECISIONS WITH PRUDENCE AND HAVE UNBIASED DECISION MAKING PROCESS IN THEIR DNA. Here are some of the pitfalls, as mentioned in the article, as related to venture business.

Self-serving bias (seeks to confirm assuptions): Startups often deal with a very few or no information because of the nature of the business. Entrepreneurs usually make assumptions about markets, customers, financials, HR, etc. and searches for data to confirm this. If the assumption is wrong, they are just pushing themselves further away from the "right" answer. Ever had a situation where a cool product feature is exactly what you wanted and everyone else you Googled to confirm the assumption?
Social interference (influenced by others): Yes, VCs follow the trend and invest in the wave of things. Entrepreneurs need to balance this out in a way that's contrarian to the society. When everyone thought search was a mature business with multiple dominant players in the late 1990s, Google made its way through, by being a contrarian.... sort of.
Availability bias (satisfied with an easy solution): This is a hard problem. We entrepreneurs think anything is pretty much possible. This one is really tricky because there might be some things that are worth time and effort of doing despite the complexity. On the other hand, there are quick and easy stuff that can get done easily. I don't know what to say about this much beyond than that.
Self-confidence bias (believes prematurely to have found the solution): I actually think this helps startups. Assuming that this kind of decision get reiterated many times in a short time period (like agile development process), it could be a tremendous help. Entrepreneurs, by nature and definition, are full of self-confidence. Just make sure that you know this may not be THE solution.
Anchoring (explores in the vicinity of an anchor): Building personal relationship and leveraging people's knowledge in your network is often used by startups. Remember, the relationship you've built may be self-selecting. You like them. They like you. Both influence each other.... in a cyclical way. Knowledge and influence cycle through the same system infinitely without seeing the outside world. Explore more. Be ready to talk with random people to hear second thought.
Belief perseverance (keeps believing despite contrary evidence): Being a contrarian and out-of-wack essentially are the same thing, depending on the outcome. Please, please, don't keep believing if a majority of people who (might) care about your product say "no". I've seen a plenty of people who keep on saying that they are right and will change the world and future will make the judgment call. If you (or people you know) fall into this category, please, please say that in the future. We got better things to do now.

This is just a partial list of decision making "frameworks" from the article. Good read, overall, so I encourage all of you to do the same exercise I just did.

Lastly, be unbiased and fair. Don't let the biased blind get in your way.

Asking the right questions - Using Negative to Draw on Customer Insights

chris.lee@startupeconomy.com — Tue, 27 Jan 2009 22:09:00 +0000

Let's just face it. When it comes to innovations and improving products/services, customers just do not give much valuable feedback. Wait, maybe it's an extreme position. So, let me just rephrase it: "Customers do not usually give tips on product improvements. They typically complain about a bunch of things, and companies make incremental changes to satisfy the customer needs".

When sending out a survey to gauge customer satisfaction, interest, and what not, it usually goes like this....

"What feature did you like the most about our product?"
"How much are you willing to pay for our product?"
"How satisfied are you?"
"What can we do to improve our service?"

Nothing wrong with the above questions, except..... these questions just don't provoke the innermost thoughts.

Instead, try using negative tone to give a twist, like...

"Why would you not use our product?"
"How didn't we serve your needs?"

It all gets down to people psychology where the respondents to the exact same questions with different tone can uncover a lot of interesting information. No, I'm not a psychologist, but I did a fair amount of this kind of interviews recently and wish somebody had told me this in the past.

Try this, and tell me some interesting stories.

Why get along with business people?

chris.lee@startupeconomy.com — Thu, 15 Jan 2009 16:44:00 +0000

A typical topic that comes up in the startup economy is the need for business people. (Disclaimer: yes, I am a engineer-turned-MBA) For many small businesses, including technology startups, this is the general mentality. Yet, the consequence of building a non-business-minded startup can be enormous (in a terrible way).

Case: Two computer science PhD candidates are supervised by a professor at a world-renowned university. One day, they run into a "a-ha" moment and sees a glimpse of potential commercialization opportunity. They go full force into product development to turn technology into a usable product. It's a web business, and the mantra is, "people will follow good products". They are busy coding away. An eager MBA students steps into their garage office and give a spill on sales/marketing/finance. The co-founders say they are busy, because they are building something, and the business dude will be needed later. They politely say no to the MBA student but asks if they know any investors. Yes, cash speaks in any situations.

This is just another story of very early-stage startups. Nothing unusual about this.

Few years later: The company didn't get any money from investors. It just wasn't a VC deal, and the company's market size was just too small. It sounded and smelt like a science project than a real high-growth startup. The good news: they survived! The company increased headcount, CFBE happened, and now it's profitable. Rather than what the original business plan called for, the company generated much of the revenue from consulting. Life seems good enough, but the founders feel like there's gotta be something else to be done to grow the business. Then, they pull out the business cards that they got from the MBA student years ago to talk some strategy/marketing/finance. The MBA comes in and wastes time trying to fix things that already work pretty well.

Why am I saying all this? It's too late for them to bring in a business person. The company had already grown into a specific culture with missions that are quite difficult to change when things are profitable. The market perception of company is just that - a bunch of smart consultants. Regardless of how smart the people are, the "jazziness" of business should have begun right at the inception of company.

Takeaways:

"Business stuff" needs to be done at every stage of company. It can start as a simple blog (marketing/communication).
If you find yourself entrenched in unfavorable market perception as a small science project company, it's just too hard to change that. Stick with it, or leave.

Lastly, do you like the Lamborghini in this post? Wanna own one? Surprise: it's a replica made up with decent car parts. Remember: this is something that your business people might be able create for your company.

VC Fundraising: CEO's role

chris.lee@startupeconomy.com — Mon, 05 Jan 2009 14:13:00 +0000

I recently ran into a whole list of questions around how VCs view on CEO's role in fundraising. First of all, raising VC money without having a dedicated CEO is a real challenge in and of itself. For now, staying away from that question, here are my thoughts that all entrepreneurs in this situation should consider to evaluate the merits and tradeoffs.

If VC still wants to invest......

valuation will be driven down due to the additional risks of hiring the top leadership
option pool needs to be carefully assessed to have something attractive enough for the incoming CEO
VCs want to keep the founders around. This is something that investors insist regardless of CEO's peresence.
VC will make recommendations (sometimes forces the company) to fill the CEO position. While this may be a big win for startup, hiring someone who fits into the culture, team dynamics, etc. can be a drag.
Attractiveness of the overall investment opportunity (this has to do with valuation also) deteriorates. Remember... VCs invest in A team with B idea. A team usually means quality, but it also means having the whole team in place.
The incoming CEO may have a different view of the business than the founders... for better or worse.
VC's investment thesis is very different now. It probably looks something like.. "great idea with major risks in execution. might pull the plug sooner".

VC will not want to invest, because......

hiring a good CEO to execute within the existing culture and idea is too difficult. It often means trying to make a hire and burn cash at the same time. In the end, the company has a smaller case reserve for the CEO to execute.
in this economy, finding a real talent to drop into startup is challenging.
it's hard to justify the economic benefits of putting their own money in to find someone that the company needs.

Either way, raising an institutional VC round with a CEO is generally a well-accepted practice. Find and convince a solid business person with vision, sales skills, and leadership to buy into your company. Have him/her be part of your team, then go out to raise money. You will save lots of time taking this step than finding a high-risk taking investor to go through the turbulent ride of CEO hiring.

RIAA, you made my day.... sort of

chris.lee@startupeconomy.com — Fri, 19 Dec 2008 16:04:00 +0000

Image via WikipediaI've blogged several times about the disease in the music industry and criticized RIAA's going after digital pirates as a way to scare off potentially the biggest music fans in the new age of digital music.

If you haven't had a chance to read my thoughts on the music industry, here they are

Cure for RIAA Disease
Thoughts on Music Industry (Part 1)
Thoughts on Music Industry (Part 2)
Thoughts on Music Industry (Part 3)

Today, RIAA decided to abandon their latest strategy, so called massive lawsuits against internet users. As you can see from my vocal criticism against hesitance towards innovations and sticking to the good ol' days, this news really made my day ... sort of. While I wish internet users can be freed from ISPs as well, this is just huge. This really changes everything.

After all, the massive lawsuit strategy wasn't working. Music industry realizes that there should be other solutions to the problems. The major labels began to ramp up the digital business operations to feverishly figure out and capture the right opportunities. And, it's a greatest time to be a music-related startup these days.

One final thought about a strategy that music industry can learn from other mundane industry.... razor blades.

When Gillette introduced (I could be wrong here) Mach 3 Razor, the biggest competition it ran against was itself: another Gillette products dominating the market. Consumers had little incentive to make the switch. To make a long story short, Gillette made the consumers to make the switch by a)taking the old stuff out of the market, b) blanket the distribution channel with Mach 3, c) pumping lots of money (I mean A LOT) into marketing the greatest innovations of Mach 3.

So, what does this have to do with the music industry? I don't know if this would work or not, but just blanket the whole market with legitimate distribution channels. I was once a Napster user. I abandoned the habit of illegal downloads when the opportunity cost of searching and owning new music/movie became too high. It was just easier for me to spend the extra bucks. Yes, supply will increase and price will drop. Music companies will get hit, but this may just be a temporary phenomenon. The whole culture of purchasing behavior needs to be fundamentally changed, and that's why it's so painful to see the industry suffering. If it takes hours and hours to just find a song you like, wouldn't you rather shell out 99 cents? Write me a note if you can't absolutely find 99 cents to be a good citizen. I'll help you out.

2009 VC Fundraising Strategy

chris.lee@startupeconomy.com — Thu, 18 Dec 2008 15:25:00 +0000

NVCA recently published a survey (here's a copy for you) predicting the venture capital investment climate for the upcoming year 2009. As already observed in the market, the survey result should really be no surprise but just another nail in the head. Overall, not the best news for startups. The good news is that there will still be venture investments for those who are best positioned and capture the right opportunities.

Situtations in both sides of the table.

Investor

shift focus on existing portfolio companies by allocating more follow-on reserve; thus, less money for new companies
reduce risks in early/seed stage capital allocation
set a higher bar in funneling investment opportunities
advertisement-based business model is no longer a viable option for most companies in internet/mobile
holds more negoting leverage on valuation. buy cheap and sell high is more attractive
many LPs deviate from allocating capital into VC/PE asset classes; thus, fundraising is more difficult
not betting on big exit opportunities in 2009
overvalued investments from the last two years need to be readjusted (or do something about it)
new deal pipeline will decrease

Entrepreneur (seeking early/seed funding)

we know the grim economic conditions and are working on pennies
ask for smaller capital to be conservative and prove that business is sustainable
will go out and raise the big round when the market improves towards end of 2009
friends and families seem to be better option than institutional investors
advertisement is still a viable option
cost of runnning a business is getting cheaper, and we'll survive

Where are the connects/disconnects here? Not much but there are some. Here are some tips for startups to become more attractive to VCs

PPT with ideas to change the world is for your blogs. You need product, user, customers. In a down economy, investors are more receptive to revenue generation than a grandiose vision
Hit every milestone. Exceed your own expectation. A company that got funded in 2007 ain't the same animal you are dealing with now.
Friends and families (and fools) are good options, and you should consider raising incremental investments from them. The real caveat... if you are dealing with the "wrong" type of friends and families, you end up having a full-time fundraising job.
Start building rapport with (highly likely) VC investor now. Wow them with the progress you are making. They might have more time "networking" with entrepreneurs now that the new deal is slowing down.
Innovate on business model.
Remember debt is another option.

This is, by no means, a complete list of to-do's. Seriously, it's no brainer.. but requries very hard work. Enjoy the holidays, and get back to work in full force for the great 2009.

Do capital efficient businesses exist anymore?

chris.lee@startupeconomy.com — Thu, 11 Dec 2008 17:04:00 +0000

We keep hearing from both investors and entrepreneurs that building a capital efficient business is the key to survival in this economy. We heard that plenty of times, but do capital efficient businesses exist? I would submit that capital efficiency exists only in relative terms, if exists at all.

I put some number around what I call "capital efficiency index" that measures the value created by a firm divided by the total capital going into the business. As used in VC methods used in some academic literature, the time horizon is chopped at the time of venture exit.

So what exactly is a capital efficient business? There are many dimensions to measuring it, including,

low burn rate, better resource utilization
high revenue with small Capex
self-sustainable business model
repeatable source of revenue with same platform
etc.

In summary, high value is created with as little capital as possible. Simple enough.

There are reasons to believe that capital efficiency is easier now and should be done. Cost of hardware keeps going down the curve, some technologies get commoditized, SaaS makes it cheaper and easier to consume traditionally expensive technology products, etc.

After putting some numbers around, capital efficient businesses don't seem to exist at all. At least, macroeconomic factors and craze created by the market may be the only way to make a capital efficient business.

Look at the following chart. Listed are some of the most successful ventures in the "old" and "new" age. To be fair to the value associated with the companies, let's stick with consumer services companies.

What the chart is essentially saying is that much more capital is required to create the same "value multiple" in the new age of startups in the internet space. A single digit value multiple is everywhere in the new age group. The old age group took much less capital and created much more value. Yes, they are at different phase of life, but the absolute size of investments went up significantly even when the companies are much younger.

It seems that the potential size of successful startup is proportional to the $$ going into the company. Let me know if anyone has a business plan to match eBay's value multiple, I'd rather put my money into triple digit value multiple company than Facebook's meager 31.

How to pitch angels?

chris.lee@startupeconomy.com — Wed, 10 Dec 2008 16:07:00 +0000

While there is plenty of literature (including my buddies' blog Startable), how to pitch angel investor still remains as a mystery to many entrepreneurs seeking..... "angel round".

When an entrepreneur goes to conference and unknowingly runs into an angel investor (because angels don't really have a name badge), the conversation would go like this.

E: Entrepreneur
A: Angel

E: Hello.
A: Hello. What do you do?
E: Well, I'm working on a neat concept in the online video space to help companies monetize on contents.
A: That's a hard problem to solve. How do you do that?
E: Well, my partners and I developed this software to (blah blah)
A: Wow, that's amazing. By the way, I gotta meet someone in 2 minutes, but if we can meet some other time to discuss more in detail, here's my card. Call me.
E: Sure.

This is overly exaggerated conversation. I would assume that the next meeting will be about how the technology works, how many customers they have, etc.... but not much about team building, business model, exit strategy, capital plan, etc.

Why am I saying this? Pitching an angel is just that different. It's the art of pitching an idea vs. pitching a company. Enlighten with how brilliant and innovative the idea while knowing all the VC diligence stuff in back of your mind. The idea behind a small team of founders is what angels really want to understand and possibly add value by bringing some advice. An ideal angel investing should be like paying an expensive ticket to take a close look at the company and potentially work with the founders to materialize the company's mission. If entreprenerus follow the strategy of pitching a company.... say, "I have a company disrupting music industry, and our target market size is $500M, and we hope to dominate the market and return 5x of your investment in 5 years." Sounds like an attractive opportunity, but overly capitalistic and unrealistic.

Keep in mind that all that business stuff is required at some point, and all entrepreneurs should be able to talk about it later... just not at the angel investing phase.

Who exactly are angel investors?

chris.lee@startupeconomy.com — Wed, 10 Dec 2008 15:40:00 +0000

Let's get some nomenclature out of the way. As I mentioned in my other posts, there are different capital gaps that investors would like to fill. For example,

(this is a very rough estimate)

Later-stage VC: usually participates in Series B/C/D after having seen the market traction and significant customer ramp-up. They typically invest >$10M to support the growth.
Early-stage VC: usually particiapates in Series A (and sometimes seed round on rare cases) to prove out the business model and test out the customer traction. Many entrepreneurs approach them with several slides thinking that they will take the risk of productizing a concept and end up hearing, "you are too early for early-stage investors like us".
Angel groups: So who comes earlier than early-stage investors? Angel groups and seed investors. This group usually participates in $250k-$3M rounds. Because of the overlap between early-stage VCs, the criteria for investment would be similar to early-stage VCs. However, the investment size skews towards the lower end and the team is not complete at this point.
Angel/Seed investors: It's important to realize that different between angel groups and angel investors. Angel group consists of a group of certified angel investors who altogether take a look at companies while the decision gets made at the individual level. An angel investor, on the other hand, typically works alone and probably don't attend monthly screening meetings organized by the angel group. S/he may or may not ask for participation in management. The investment size would be smaller (<$100k/investor). Many of them are successful entrepreneurs (or climbed up the corporate ladder successfully). While their business card may not say that they are part of an angel group, they are genuinely interested in seeing innovations. Given the right idea and personality "click" with entrepreneurs, they want to invest in startups.

So, how do you pitch angels? Stay tuned.....

Phases of Recession

chris.lee@startupeconomy.com — Tue, 09 Dec 2008 15:20:00 +0000

With a sleuth of layoffs coming from all angles, why don't we take a step back and see where we are in the phases of recession. At macroscopic level, the cycle looks like a tidal wave, and the recession is a long process of declining economy.

I'm speaking strictly from the perspectives of startup economy, regardless of geography.

Phase I (tipping point): The implosion of subprime crisis crept into Wall Street during the summer of 2007. We thought the economy was booming as consumer spending increases, and even the no-job-no-money-joe next door was buying a luxurious condo. Good times. VCs were seeing a very good deal flow and internet entrepreneurs were just going upbeat about entering the online advertising market where billions of more dollars will be spent. Times are good, and we don't know if Fannie and Freddie will go belly up... yet.

Phase II (not my problem): Subprime crisis had already happened, and we can't buy our dream condo. So what? We know that we never deserved all that luxury by leveraging the balance sheet through the roof? Time to get realistic here, but everything is going to be okay. Unlike the dot com collapse earlier in this decade, it's not my problem. VCs are still out raising the historically largest fund, and entrepreneurs still go out raising enough capital to get through the next milestone.

Phase III (OMG, the financial sector is in deep trouble. I'm still okay though): Late summer of 2008, Merrill and Lehman went belly up, and the federal government intervenes with a huge pot of taxpayers' money. It just needed to be done to save us from the worst situation, because times are REALLY getting touch. We in the startup economy finally realize that the problem is big but still don't see the huge incentives to be hungry. People are having problems, but not in our office. We are still hitting all that milestones. Maybe we'll lose WaMu as a customer, but still not my problem.

Phase IV (TIME OF UNCERTAINTY): This is the time we are in. Sequoia Capital "leaked" the good ol' graveyard deck. Sequoia, probably the most respected VC firm in the entire history of venture capital, starts to have the ripple effect. Now, it looks like we are in some real deep trouble. It doesn't matter if our sales are still on target or have had raised $100M in the past month. Sequoia told us to tighten our budget, hit profitability, and survive at the end of the tunnel, and I'll do exactly that. But I don't know how. Maybe Obama will solve all our problems when he takes the office with a big economic stimulus plan. Until then, I'll sit and wait. I have enough cash to take us through another two months.

I also noticed a lot of uncertainties while attending conferences recently. Many VCs are saying that they are closing deals now, and there will be more. There will be very attractive investment opportunities because they will get lower valuation and better returns. Don't we all know that the uncertain outcome of their investments makes them worried as well? Do they really feel better about those lower valuations? What about entrepreneurs? Startups these days know that the power shifted to people with money. But, are they reallly willing to get squeezed in valuation? How many times we've heard that running a startup is cheaper than ever while successful startups took hundres of millions of dollars? Maybe, bootstrap is a way to go. I don't know. What I know is that this time of uncertainty causes the startup economy to hide in the cave until we see some sun light.

Phase V (hiatus of innovation): Times are getting worse. By the way, this is the most important phase that I want to double emphasize in this post. Customers stop buying and ask for more for less. I'm runnning out money. Nobody's telling me that I'm in trouble anymore, because I feel the pain in person. I need to survive.

Let's take a step back.... to the good ol' days when we were in school. When was the best time to be doing the homework with all your attention and capabilities concentrated on one darn deliverable? Perhaps... at the last minute? Yes, you are "hungry" and feel the urgency. Whether it was voluntrary or not, you were really doing something amazing with all those natural born skills. Then, you turn in your homework and take a deep breath. You don't remember how you did it... but you did it.

This is exactly what will happen to most startups. Economy, as we all know it, is cyclical. Times may get tough. But keep in mind that we need to be mentally and physically ready to take on these challenges. We'll get more innovative and creative when it comes to survival. If we can do this beforehand (say... now), it's even better.

Why don't we all "fake" to be in Phase V and innovate like there's no tomorrow?

Thoughts on Music Industry (Part 3) - Stepping aside from spotlight

chris.lee@startupeconomy.com — Mon, 08 Dec 2008 18:52:00 +0000

As I was listening to Eran Egozy at the MIT VC Conference last week, I was struck with a theme of music as a complementary services as opposed to the sole purpose of enjoyment.

I'm not trying to argue that listening to music by itself gives me a tremendous pleasure. This is exactly the reason that music has been around for centuries (perhaps since the beginning of human beings if you count "thumps" to be music). Music labes, artists, and songwriters are used to standing in the middle of spotlights. I've gotten to know several celebrities in my personal life, and all of them tell me that it just feels to good to be in the spotlight with all that attention.

With the proliferation of digital piracy and free music widely available, I'm going to try to argue why the traditional music industry should also consider stepping aside from the music industry. In summary, music is a mere means to improving other products and services in this innovation economy.

Let's look at the gaming industry in this context. Rock Band is undoubtedly one of the wildest success stories. People (not just gamers) just love holding that plastic thingy and rock 'n roll to the hundreds of titles available. Now, who's getting all the spotlight and who's making money? The creator of Rock Band (Harmonix Music Systems) is getting all the glory. People really don't really care whether a certain song is available or not as long as they can just bang their heads with the plastic guitar (and drum). But then.. who's making money? Some songwriters and labels that licensed those songs to Harmonix probably made some big bucks (though not huge money).

This is somewhat analogous the love and hate relationship between VC and entrepreneurs. Often, entrepreneurs are in the center stage getting all the spotlight while VCs take credits for putting their money into the right people's pocket. That's precisely the reason why VCs "back" companies, not "brings life" to them. At the end of day, both of them are successful.

Back to the music industry, the stakeholders need to understand that nobody has a panacea for all the problems. Instead, we need to understand how one product/service is complementary to other stuff like movies, devices, websites, etc. It's somewhat hard to digest the fact that you are all of a sudden bystander not central to the success of others while you are a "must have" complementary product/service.

As we know in today's world, a traditional business model of selling music doesn't work. However, music is a must-have service to numerous products. With this paradigm shift, a change of attitude needs to change.

Step aside from the spotlight.... and enjoy riding success with others.

New Name, Same Focus

chris.lee@startupeconomy.com — Mon, 08 Dec 2008 15:13:00 +0000

Having started out as a mere "public notepad" talking about startups, technology innovations, venture capital, and difficult problems we all face in our lives, I finally decided that it was the right time to give this blog a more appropriate name.

I felt that this is also the right timing to start thinking about the current economy a little bit differently. With the traditional industrial economy clearly in declining mode, something needs to be done to reinvent ourselves. It's the startup economy that's going to take us through the tough times and also continue to innovate during the good times.

With everyone's wallet getting tighter these days, I also decided to give myself an extremely fulfilling holiday present, http://www.startupeconomy.com.

Again, new name, but same focus and rambling on the startup economy.