What’s the third option for a company exit?

playbookFor many years I’ve been tutoring founders on ways to exit their startups. And each time I explained that there are three ways: going public, being acquired, or paying off your investors I felt a little silly offering the third alternative, as I’ve never heard of anyone doing that!

But the article Benching your VC: The employee buyout playbook by Yaacov Coehn co-founder and CEO of Harmon.ie is worth reading, even if your company is not currently in a position to be acquired.

The article is a case study in a management buyout of a venture capital-funded startup. Here’s the essence of the story in the first paragraph:

Grow or sell? It’s the ultimate dilemma for startups. This dilemma can become even more acute when you’re the CEO of a VC-funded startup. You want to develop your product, while driving sales and marketing, so that the business can reach its full potential, but your VC’s fund has reached maturity and they want you to sell your company to a larger firm. What do you do when your values as a business leader come into conflict with your investors?

Not only have three of my startups been acquired, but I worked on acquiring three companies when I was working for the Thomson Corporation (now Thomson Reuters). So I’ve seen both sides of this dilemma. Fortunately for me, our investors were tremendously supportive in all instances; we didn’t have to battle with our boards over deciding to sell the company. Although the VCs were far more aggressive in setting the asking price!

Yaacov Cohen takes you through his experience step by step as he negotiates a management buyout of his company. The obvious question in this situation is, “Where do  you get the funding?” In this case, the capital came from three sources: management’s pension funds, friends and family, and a bank loan – which represented 75% of the purchase price.

I’m not going to reiterate Cohen’s story, but it’s worth recapping the happy ending to what was a difficult multi-month process:

No matter how you slice it, an MBO will drastically change a company and how it does business. Among our employees, we see a new sense of shared ownership and shared responsibilities. No longer “just” employees, the staff is motivated to go many extra miles to get things done, because they have a stake in the results beyond their paycheck. We were able to attract new talent to the company. We were able to attract new talent to the company including a VP of AI and an experienced GM for our North American business. We also leveraged the MBO to attract industry leaders to our newly appointed board of directors, so even as an employee-owned company, we are receiving top-notch guidance from an independent board.

Even the customers have been affected for the better:

Our customers have been impressed, too. Because the people they are working with are now owners, customers feel they are getting better service and results from their relationship with the company.

One of the sayings I use in my mentoring is “He or she who has most options wins.” Yaacov Cohen’s story proves that the third option for a company looking for an exit – buying out the investors – is not simply theoretical, it can and has been done successfully.

 

Why colleges and universities are great markets

 

Starship-Close-Up.jpgI almost always advise my mentees to start their ventures by tightly focusing on a specific market niche, dominating that niche, and then and only then, expanding to other market segments. I often cite Facebook’s go-to-market strategy as the best and most successful examples of this.

As most people know, Facebook was born in Mark Zuckerberg’s Harvard dorm room. What they may not know is how Facebook expanded after taking off like the proverbial bat out of hell (what, bats don’t like hell? Too hot?). I believe that Mark learned from the example of Friendster, the first social network, which died of indigestion – its infrastructure could not meet the demands of its many users, who eventually became frustrated and went elsewhere. Facebook first expanded to other Ivy League schools, then to top schools outside the Ivies, like Stanford. It was enabled to do this by insisting on .edu mailing addresses for site registration. It grew its infrastructure as it grew its market in higher education. Thus while there were occasional outages and other issues, they never rose to the level that caused Facebook to lose users. After proving out its technology with its handpicked schools Facebook then opened up its registration to anyone with a .edu address. It followed up by opening up to high school students. Only then did Facebook finally open up to the U.S. at large, though still insisting on a valid email address to register.

I spent about seven years in the higher education market, first with Addison-Wesley Publishing Company, then with Course Technology and when Course was acquired by Thomson (now Thomson Reuters) a three-year stint with Thomson. We sold products both for classroom use and for use the the IT departments.

What makes the higher education market attractive to startups and why should you consider it as your initial market?

The students

Estimates vary, but there are roughly 14 million students in higher education at about 4,000 institutions. So it’s a great target market for consumer products and services like Facebook, Instagram, SnapChat et al. But be aware that those 14 million students are highly segmented, amongst top tier privates, like Stanford; top tier state schools like Berkeley; other privates, large state colleges and universities, like the New York state system; and two-year colleges and vocational schools. It may make sense for you to target one of these segments, depending on your customer value proposition.

The great thing about students is that they don’t come with many burned in habits. So they are far more open to new products. They also are much less risk averse than their elders, so they are more willing to give new products a try. However, they have been lead to expect everything for free, or if not free, very cheap, like Spotify. The marketing channels to students are well established: whatever social networks are hot. Yesterday it was Facebook; today it is Instagram and WhatsApp. Keep you eye on what’s on its way for tomorrow.

Because you can easily target students by their institution, major or other demographics, students make for great pilot and proof of concept tests.

So what’s the downside? Other than expecting everything for free, students can be very fickle and are driven by a herd instinct and FOMO (Fear of Missing Out). However, if you are smart you can take advantage of all three characteristics with a simple and well-designed freemium business model.

Finally, you get roughly a 25% customer turnover every year as seniors graduate and a new class of freshpersons (?) enter. This constantly refreshing market is ideal for launching new and different products and services.

The institutions

Colleges and universities have tended to be late adopters of technology for classroom education and for administrative use. (I also worked at MIT as Director of Information Services back in the 1980s.) Obviously there are some exceptions, like MIT with its Project Athena. But until recently there tended to be a NIH (Not Invented Here) syndrome at top institutions. But countervailing the late adopter issue is the fact that colleges and universities are far more collaborative than businesses. While it’s true that institutions do compete for students within their segments, they are far more open to sharing than similar size corporations. And it is far easier to determine who the decision makers are, especially at public colleges and universities, than in private industry. At Course Technology we managed to market student editions of productivity software like the Lotus 1-2-3 spreadsheet, while selling the full professional versions to the IT departments.

There are a large number of academic associations and organizations like Educause, which focuses on elevating the impact of IT on higher education.  Partnering with these associations can facilitate marketing to the institutions, as we did with NACSCORP now  part of Indico Books.

Case study

For an excellent and up to date case study of marketing new products to universities see the TechCrunch article by Darrell EtheringtonStarship Technologies raises $40M, crosses 100K deliveries and plans to expand to 100 new universities. Starship invented the category of rolling autonomous sidewalk delivery robots, and to date, the company has made more than 100,000 commercial deliveries on behalf of customers. It just raised an additional $40 million to expand from its first university deployment to 100 university campuses over the next two years based on the strength of that pilot.

The thought process of Starship Technologies CEO Lex Bayer is well worth studying:

“When I came on board, I was testing a whole bunch of different go-to-market strategies,” explained Starship Technologies CEO Lex Bayer. “We were testing grocery delivery, university campuses, corporate campuses, industrial campuses, and we’ve actually seen tremendous traction on most of these environments. Our grocery business north of London, in Milton Keynes, is going exceptionally well […] But one of the experiments was to try university campuses. And I think as a company that’s a startup still, we have to always focus and have sequencing in terms of how we grow. And the university campus has just been pulling our business forward — not only our students pulling it, meaning there are more orders than the restaurant or the robots can keep up with and we had to add restaurants and add hours. And so we’ve seen signal from the students, but we’ve also seen signal from universities reaching out to us, and from the food service providers.”

Bayer explains very clearly why students are a great market for new technology:

“I think starting with the younger generation is always great for [adopting new products],” Bayer said. “Because so much of the way they see the world is the way the world can be; they’re not encumbered by all of the past and the way things were done before. And so when you present them with a better solution, they just use it and they say, ‘Oh, this is how things should be normally. This is the way things should be moving forward.’

Focus is the name of the game in startups as resources are very tight. And focus includes your customer set, if you try to be all things to all people you are likely to end up being nothing to anyone. For certain products and services the higher education market is a great place to focus first.

 

 

From eyeballs to clicks to ? Monetizing the Web

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I used what is now called the Internet several decades ago, back when it was the Arpanet and MIT was one of the few nodes in the country. I was even subscribed to a newsgroup whose title I forget, but whose topic was “Will the Internet ever be commercialized?”

I’m a big fan of the history of technology and I follow Christopher Mims, who writes about tech for The Wall Street Journal. His article Tumblr and the End of the Eyeballs-Are-Everything Era, sub-titled With an adult-content problem and only the vaguest idea how to make money, Tumblr was easy prey for trends bigger than itself is a short primer on how founders attempted to monetize their net ventures. The initial attempt was the advertising banner, and counting eyeballs was the compulsive activity of every founder. As Mr. Mims writes, every founder had the same idea on how to make money:

On the business side, it operated under the assumption that it could make money off its users the same way people had since the invention of the banner ad: Build a big enough audience, and “monetization” will take care of itself.

This is a variation of the [false] idea of “Build it and they will come.” Evidently Tumblr’s design was  “inherently ill-suited to advertising”, according to Katrin Tiidenberg, a social-media researcher at Tallinn University in Estonia who has studied Tumblr for years. And there was a worse problem:

Its impenetrability was a challenge to advertisers. On top of that, many of its users interspersed their posts on various fandoms, obsessions and memes with sexual content. “A lot of advertising clients, particularly in the U.S., get disproportionately nervous about being seen next to someone’s boobs,”

Advertisers instead turned increasingly to the ostensibly safer realms of Google and Facebook. Together, the two giants now suck up 57% of all digital ad spend, according to eMarketer.

Of course, we are long past banner ads and eyeballs, today it’s all about data, data that enables targeted advertising, which is far more effective than banner ads could ever hope to be. There’s an old saw about advertising: “Half of all advertising spending is wasted, we just don’t know which half.” That was true in the days of broadcast media, like newspapers, magazines and TV, where it was a one-size fits all advertising model, meaning that one-size fit very few very well. Today targeted advertising brings in billions upon billions of dollars for Google and Facebook.  And users are basically selling their identities for the privilege of using the ostensibly free services. Now the federal government wants to get involved in what users see on the web, what companies do with users’ data, and more. Meanwhile print media is dying as they “Replace analog dimes with digital dollars” and vainly seek for new business models.

But to me its survival of the fittest on the Web and what we have been seeing is an evolution of monetization models. Just like homo sapiens triumphed over other species due to our larger brains and better ability to adapt to changes in the environment, Google and Facebook have focused on constantly buying up the best and brightest brains extant. If any company threatens them, like Instagram and WhatsApp threatened Facebook, they simply buy them. And if they can’t find enough job applicants organically they just do a few “aqui-hires” where they acquire a company for its talents and they kill off their product.

No wonder the anti-trust forces in the federal government are awakening from their long slumber – basically since Microsoft was under the anti-trust microscope.

Where will this all lead? One of the technologies I’ve been watching – and waiting for – is the concept of micropayments to enable paying for microcontent. For example, I’m embarrassed to tell you, but I have a subscription to Vanity Fair. Why? Because virtually every issue there is one interesting and well-written article buried in hundreds of pages of ads for fashion and perfume. My dream is, and has been, to be able to buy that one article a la carte. None of the advertising or People style celebrity articles. Let’s do the math. I can get a subscription to Vanity Fair for somewhere between $12 and $24, depending on what deal I find. If I paid Vanity Fair $2 a month for that one great article they would have the same revenue, but only about 10% of the cost: no paper, printing, or binding! No shipping cost! Maybe I’d even like to view some of their cool covers or artwork for 25 cents each. But the killer problem that micro-transactions hasn’t been able to solve is that it’s totally uneconomical to use a charge card to pay for for buying anything that costs less than about $10.00. In fact many restaurants won’t take a charge card for a bill of less than $10.00.

But just as I waited over 25 years to see AI commercialized, it’s about 25 years since Ted Nelson came up with the idea of micropayments and even began to implement it for his Project Xanadu. Unfortunately Ted was – you guessed it, 25 years ahead of his time.

Just as iTunes enabled music fans to buy just the songs they wanted, not the entire album that was probably loaded with filler, NewCo will enable readers like me to buy just the articles I want to read, without all the other stuff.

Monetization models on the web won’t stop with personalized advertising. Perhaps the rise of crypto currencies will enable micro transactions for content. I already have a long list of magazines where I’d like to pay for micro-content starting with The New Yorker and all it’s cartoons every week.

So what Mr. Mims and other pundits seem to miss in articles like this one, is that the Web is a living, evolving thing, that it adapts to its environment like other living things. Print media will have to evolve or die; the same existential choice faced by the music industry. Blogs sites like Tumblr will have to do the same. And what saved the music industry? A new delivery and monetization model pioneered by Spotify – music streaming. All you can eat for $9.99 a month. My bet is that there will emerge a Spotify for print media that will crack the code just like Spotify did. Only it may take a few more years. I can wait but I’m getting impatient.

When to be strategic versus opportunistic

decision

Virtually every early stage founder has to be opportunistic, meaning they pursue chances offered by immediate circumstances without reference to a business plan or strategy. Why? Because every startup needs staff, needs customers, needs funding, and for most founders there is only a relatively short runway, meaning that there is only so long they can go without any income. Sweat equity can only take you so far.

Examples of being opportunistic are hiring the guy from your university’s B-school who you met at a networking event as your VP of Business Development. Hiring is very easy; firing is hard. Being a founder is lonely and taxing, so adding another founder seems like a great solution to both problems. There are two problems with this opportunistic decision: one, the founder rarely has developed an org chart and hiring plan for their venture and prioritized hiring by position. And second, it is rare that startups need a VP of Business development. They need a VP of Sales; but many MBAs consider sales below them, thus try to join startups with a fancier title and a less quantitatively judged job.

Founders need to make better decisions! But how?

As Jeff Bezos writes, there are two types of decisions:

Type 1 decisions are not reversible, and you have to be very careful making them.

Type 2 decisions are like walking through a door — if you don’t like the decision, you can always go back.

The mistake many startup founders make is to habitually use Type 2 decision-making process to make Type 1 decisions. These companies are likely to go extinct before they get large enough to make the opposite mistake: using the heavy-weight Type 1 decision making process on most decisions, including many Type 2 decisions. The end result of this is slowness, unthoughtful risk aversion, failure to experiment sufficiently, and consequently diminished invention.

Type 1 decisions include hiring for your senior team and key individual contributors; taking on an investment that doesn’t give you the right to buy out the investor on acceptable terms; entering into exclusive deals with partners or vendors; entering into contracts with no termination date or a weak or non-existent set of termination terms and conditions.

Type 2 decisions include your company’s name and its logo; where you locate your offices; your company’s tag line; and hiring contractors.

The way to make Type 1 decisions is to be strategic, meaning you identify the company’s long terms goals and the plan to achieve them. Type 1 decisions should fit your plan. Otherwise known as a business plan. At various entrepreneurial programs at MIT, such as I-Corps, the business model canvas has replaced the PowerPoint presentation which in turn replaced the 20+ page text-heavy traditional business plan of previous generations.

One of the most important balancing act of the many founders must undertake is between short term and long term goals. It’s fine to be opportunistic on taking a sublet on an office or accepting friends and family investment. But taking an angel investment is moving the needle up to strategic, though you can make them reversible. Once the needle hits VC investment you are firmly in strategic territory and better have thought through the long term consequences to taking investment from this particular firm.

Decision making is a huge part of a founder’s job. For additional help on decision making see these six posts on Mentorphile.

 

 

What’s missing from “Rise and Quick Decline of the First ‘Killer App’

 

visicalcThe Wall Street Journal article 40 Years Later, Lessons From the Rise and Quick Decline of the First ‘Killer App’ subtitled Remember VisiCalc, the world’s first spreadsheet? Today’s tech giants do, and that is why they buy up and invest in potential competitive threats is accurate as far as it goes, but misses two very important points.

I joined Software Arts in 1980, the year after it launched VisiCalc, the first electronic spreadsheet. And I was there when Mitch Kapor’s Lotus 1-2-3 for the IBM PC became the standard spreadsheet in business, until it too was eclipsed, this time by Microsoft Excel, now the long standing spreadsheet standard.

Most of the founders I work with can’t remember VisiCalc because they weren’t even born 40 years ago! I find I have to be very careful in the examples I give from my 39 years in the tech industry, as for example I found out the hard way that no one in my mentorship cohort has even heard of Alan Kay, esteemed computer scientist. So if you are up for learning a bit of personal computer history, read the WSJ article on how VisiCalc was developed for the Apple II and by the time it was ported to the IBM PC which took over the business computing market, it had been virtually totally replaced by Lotus 1-2-3. There were a lot of mistakes made at Software Arts, but I’m going to focus on only two of them.

While Christopher Mims gives Mitch full credit for going from VisiCalc’s Product Manager at what was then called Personal Software, to being king of the personal software marketplace with Lotus 1-2-3, he leaves out very important experience Mitch had which drove the success of 1-2-3. Mitch was quick to realize that VisiCalc users wanted to be able to plot graphs of their spreadsheet models. He went on to develop a program called VisiTrend/VisiPlot that imported VisiCalc files and created a variety of charts and graphs. He later sold it to Personal Software. Graphing became the “2” of 1-2-3 and helped it become the powerhouse of spreadsheets (#3 was a flat file database). Mitch was no novice in the personal computer industry having created two programs of note before VisiTrend/VisiPlot: Tiny Troll, a graphics and statistics program, and Executive Briefing System. While neither was a killer app, he gained vital experience in user experience design and graphics, his contribution to 1-2-3, which was programmed by Jonathan Sachs.  Software Arts never added graphing to VisiCalc because it was too busy developing new programs, like TK!Solver, rather than learning from VisiTrend – nor by buying it, as Personal Software did.

The meta point that Mims misses entirely is my saying, “When the platforms change, the players change.” I doubt that is original with me, but I don’t know who said it first. Be that as it may, it has proven true over the past 40 years.  Microsoft was the early leader when personal computers were called “microcomputers” as it developed the killer app for the Altair, the first microcomputer, by porting the BASIC language to it. That lead to a significant business for Microsoft in developing programming languages for the personal computers like the Apple II, Radio Shack TRS-80, and the Commodore Pet.

VisiCalc was the king of the first true platform, the personal computers that succeeded the Altair and knocked Microsoft out of its leadership position by being surpassed by Lotus Development Corporation.

But Microsoft drove the next business software platform by creating Windows for PCs, thus providing the graphic user interface for the IBM PC and its many clones. Mitch and Lotus missed this opportunity, as it was too busy developing 1-2-3 for IBM’s operating system, OS/2 which proved to be a loser, as Microsoft totally took over the operating system market with Windows.  The platform change from DOS to Windows left many developers behind. Microsoft rode Excel, which it had developed specifically for Windows, to overtake Lotus as the world’ biggest software maker.

But the platforms changed once again when Apple unleashed the iPhone. But Steve Balmer, then Microsoft CEO ridiculed the iPhone, as did Bill Gates. Thus Microsoft totally missed the platform change to mobile, where Google now dominates by volume, though Apple dominates by revenues. Microsoft totally gave up on their mobile software development efforts when it became clear that they would be a distant number three to Google and Apple, at best.

And why did Mark Zuckerberg acquire Oculus for $2 million dollars before it had even shipped a product? Because he was afraid the next platform would be virtual reality (VR) and he didn’t want to miss that platform change as Software Arts, Lotus, and Microsoft had missed the previous platform changes.

My estimation is that VR will not become the next platform, but perhaps AR in the form of stylish glasses may make an impact. Wearables seem the most likely next platform for individuals. What’s next in terms of business and social platforms – your guess is likely better than mine.

Pros and cons of building on platforms

slack

As I’ve written previously, a lot of my founders aspire to creating platform companies. But many don’t pay enough attention to what it takes to create an ecology of developers around a platform and the many platforms out there already competing for developers’ attention.

But there’s another route developers can take – develop for a popular platform, like Slack. In fact it’s clear that Slack aspires to be the workOS of the enterprise.

The article Why we’ll see more startups built on platforms like Slack by ANDREW KIRCHNER on VentureBeat provides a very good list of the pros and cons of taking of such a pilot fish strategy.

  • Pro: You’re fishing where the fish are – I consider customer acquisition as the major challenge for most tech startups. As I tell my engineering mentees, I believe engineers can build just about anything, but I don’t believe they can sell just about anything. The goal of a platform is to be a demand aggregator. Instead of your venture spending gobs of money finding customers you just have to present a compelling proposition to the customers of your chosen platform. Still a challenge, but much less expensive. The key to success is choosing the right platform. Years ago Evernote was hot; now it’s not. Today it’s Slack, but tomorrow it could be something still incubating in someone’s garage. You also need to make sure there’s a match between your competencies and the tools your chosen platform provides. Choosing an integration-first product like Salesforce is similar to choosing iOS or Android or Windows or Mac – but far more complex, as there are at least two orders of magnitude more would be platforms to choose from than operating systems.
  • Pro: No extra login for customers Estimates put the total number of cloud products per enterprise at more than 1,000! Who wants to deal with even 10% of those logins and passwords?!
  • Pro: It’s easier and cheaper to get to market. By developing for a platform you can use their UI and save lots of development time and effort. Plus you eliminate 90% of the learning curve for your customers. Much, much more efficient for a small startup to join an existing ecosystem of a giant than to go it alone. 
  • Pro: You’re immersed in the culture of your clients. This is the weakest argument, but certainly you want to choose a platform that shares your values.
  • Con: Smaller customer pool. The total size is not as important as the growth rate. You want to choose a platform with a high growth rate, not one that is stagnant or even shrinking. It’s not as simple as a pure numbers game. You are going to have to predict the future – just like any other startup – by picking a winner.
  • Con: You may struggle for visibility.  This is an issue of timing. Getting in early with a platform gains you visibility, but increases your risk. Apple’s App Store and Google Play with their millions of apps, make invisibility the norm, as they are mature platforms. So once again you have to pick wisely, a young but growing platform versus a larger, but mature platform.
  • Con: You’re at the mercy of the platform. Some platforms, like iOS and Windows, have years of experience and teams of engineers supporting their ecosystems. But others, like Twitter have even shut down their platforms after a period of time. So once again you have to measure risk versus reward and choose wisely.

Let’s face it, startups are risky. Typically investors consider there to be three risk factors: technical, market, and team. Riding the wave of an existing platform can do a lot to reduce the technical and market risks. But that path introduces a new type of risk: your chosen platform may not grow or may even shut down to outside developers.

Strategic elements that rarely appear in a startup’s presentations

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There are hundreds of books, articles, and blog posts on what should go into a startup’s investor presentation and a very large number of what should go into a customer or partner presentation, but Jeroen Kraaijenbrink‘s Forbes article The 10 Ingredients That Every Strategy Should Have has four elements that every founder should include in their company’s strategic plan. Think of this as the founder’s presentation to their company at an all-hands meeting.

The first six of the author’s core elements should be included in your investor presentation and every one of your staff should be familiar with them, though Partners, number 5, can often be overlooked.

  1. Value Proposition: What products and services you offer, how you offer them, and what added value they have for the customer.
  2. Customers & Needs: The organizations and people you serve and which needs of them you fulfill.
  3. Competitors: Others that your customers will compare you to in deciding whether or not to buy your products or services.
  4. Resources & Competences: What you have, what you are good at, and what makes you unique.
  5. Partners: Who you work with and who makes your products or services more valuable.
  6. Revenue Model: What you receive in return for your offer, from whom, how, and when.

But let’s take a more detailed look at the last four elements of Jeroen Kraaijenbrink’s list of ten elements:

Risks & Costs: What financial, social, and other risks and costs you bear and how you manage these. Any with-it founder should have the financial costs of their venture down pat. Operational costs are the easiest costs to predict and to manage. And as such they will appear in your financial statements. However, what about social risks? And what about the “other risks and costs,” such as dealing with government regulations, your startup may face?

Going into depth about social risks is well beyond the scope of this article. But founders need to be aware of such major issues of the day as: diversity in startup’s founders, senior execs and staff; income inequality; and for manufacturing and packaging companies, environmental impact issues; and work-life balance. The day when investors and senior managers only had to worry about profits and losses are long over. Today’s companies need to be active forces in their communities. Founders need to assess the social impact of their companies. My recommendation to founders is get your heads out of social media and tech news and pay attention to local, national, and international affairs. The Washington Post, The New York Times, and the Guardian, PBS News amongst other news sources, can keep you abreast of what issues you and your team need to be aware of and take into account in your tactics and strategy.

Values & Goals: What you want, where you want to go and what you find important. I’ve written previously about values in startups in such posts as Values: the bedrock of startups and Netflix Culture and Values. Values are the foundation of any venture. If you haven’t elucidated your venture’s values to your team, what are you waiting for?

Organizational Climate: What your culture and structure look like and what is special about them. I consider corporate culture so important that I devote an entire category to it on this blog. Corporate culture is the invisible hand of management and can be a key competitive advantage. It’s the layer built above the foundation of corporate values.

Trends & Uncertainties: What happens around you that affects your organization and what uncertainties you face. A VC I worked with was fond of terming this as exogenous risk factors, that is external factors over which you have little or no control, like government policy and regulations. And like social and governmental risks and costs, founders need to carefully monitor their environment and always be on the lookout for issues and trends that could affect their venture, for good or ill, in the near-term, medium-term, and far term.

When I worked for the Thomson Corporation, now Thomson Reuters, I wrote a business plan for a new startup within Thomson. I wish I had kept a copy of their format. But there were two elements in Thomson’s business plan template that I’ve not seen elsewhere: What is the absolute best case scenario for the venture? What is the worst case scenario for the venture? and What risks does the venture face and how will you deal with them?

Take a look at a prospectus for an IPO for a public company in your market. It should contain a detailed section on risks that is worth studying and comparing with your list of financial, social, governmental and other risks that are part of your strategic plan.

Finally, review the Strategy Sketch above, that contains many of the same elements as the business model canvas.  Both are excellent planning tools for founders

How do you build retention into your product?

 

retention 2There are three key customer-related tasks for any consumer company: customer acquisition, customer engagement, and customer retention. Subscription businesses, be they telecom companies, Netflix, Apple Music, or SaaS companies, are all faced with the problem of customer turnover, known as “churn.” In fact churn can be so high that many telecom and cable companies report churn on a monthly basis, trying vainly to disguise how high their rate is on a yearly basis – typically in double digits.

Previously I blogged about building virality into your product, an issue I’ve written several posts about. I read a lot of business/tech news, but I’ve yet to find anyone sharper and more helpful to founders than Gabor Cselle, who posts on Medium. I have to admit to not considering how founders build retention into their products, but Mr. Cselle obviously has given it a lot of thought, resulting in his article 11 Ways to Build Retention Into Your Product. Interestingly Mr. Cselle breaks startup growth into just two components, customer acquisition and retention, baking engagement into retention. But I beg to differ, as getting a lot of users registered for your product or downloading your app does very little for your business unless they are engaged. In fact studies show that the vast majority of smartphone apps downloaded by users sit unused on their phones.

As before with Mr. Cselle’s brilliant post on building virality into your product, I’m not going to attempt to annotate all his eleven ways to build retention in your product, but will highlight a few and refer you to his original article for a deep dive into the subject.

Perhaps the most powerful tool is variable rewards, and here’s why:

Highly retentive products often draw in the user with variable rewards. Research shows that levels of dopamine in the brain surge when you’re expecting a reward. Introducing variability into the reward multiplies the effect. Variability creates a hunting state, activating the parts in the brain associated with desire. I recommend reading Hooked if you want to learn more about this.

Classically, slot machines and lotteries have benefitted from this effect, but variable rewards are prevalent in popular tech products as well. Building variable rewards into a product is incredibly powerful — please use them for good, not evil.

eBay did a brilliant job of building an entire business on the hunting state, with a focus on buyers winning auctions. The entire auction model, which fires off competitive urges that can cause buyers to pay far more than an item’s actual worth just to win the auction, has been successful for generations.

1. Human interaction

Facebook and Twitter discovered early on that human interaction was necessary, but not sufficient for retention. Baking in notifications seals the deal. Users are curious as to what that notification is about, thus driving clicks and engagement. Of course, developers are going to kill the golden goose as users are getting notification burnout from the flood of notifications from different apps interrupting their lives.

The solution to this is personalized notifications, which is number 7 on the hit parade of 11 ways to retain your users.

2. Turn-based Structure

This is a game based modality in which one person is expected to act first – make the first move in chess – which then creates the very powerful expectation and motivation in the second user to act reciprocally. The more turns, the better. Turn-based structures can create expectations of responses in users, basically guilt-tripping them into responding to requests, such as the feeling of obligation in LinkedIn’s contact feature: Ignore or Accept.

4. Status or Badges

Status and badges are part of the attempt to gamify applications. However, there’s been a backlash against this recently as some apps are now hiding status numbers that they were once highlighting. In general, I would warn founders to be careful of the whole gamification strategy unless you are addressing sports or fitness, which by their nature are very competitive, with winners receiving actual medals, as in the Olympics.

8. Share Improvements

Continually improving your product – known as upgrading – has been a software retention strategy for decades. But with the rise of social media and messaging it’s far easier to notify users of improvements that may incentivize them into staying with your product. But as Mr. Cselle points out, this is by far the most expensive way to retain users because it demands expensive engineering resources. But given how competitive tech markets are today, sitting pat and not upgrading your product is a formula for slow-motion suicide. You must continually improve your product, so make sure you publicize these improvements, especially to your installed base.

9. Drip Marketing

Drip marketing is a fancy way of describing sending email to your users. Given how much email most users get and how often they will unsubscribe from emails from vendors, I suggest you tread very carefully on this one. However, if you have a deep product with a lot of features users may welcome tutorial emails that help them get more return on their investment in your product by learning about how specific features help them get their jobs done faster, better and/or easier.

Mr Cselle divides retention techniques into those that are built in and those that can be added to any product.

retention

I would recommend the following strategy:

Always include human interaction in your product, as it drives engagement and retention and should be core to any product that can be used more than once. Then decide if any of the other five “Core to the Product” techniques align with your strategy and build that one in. There are really only three “Can be Added to Any Product” as you can eliminate Spam, and should include Share Improvements. Try A/B testing to determine if any of the three will increase your retention rate.

 

 

Pros and cons of keeping your day job

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During my few years as a sound reinforcement engineer I worked with lots of local acts, as they would open for the established headliners like Aerosmith or ZZ Top. (One of those opening acts was Jay Leno, believe it or not!) These musicians virtually all had day jobs, as playing music didn’t pay the bills. But the goal was to quit your day job and live off playing live and your record royalties. Aside from Jay Leno, Billy Squier was another local (Jay was from Andover MA, Billy from Wellesley) who made it big.

So what does this have to do with startups? Well first of all, bands are all startups and they are all teams, though Billy and Andy Paley dominated the band the Sidewinders, who I worked with several times. The conventional wisdom is that founders need to quit their days jobs. Well let’s look at the pros and cons of doing just that.

Paul Graham, co-founder of Y-Combinator, maintains you can only have one job, your startup venture.  “The number one thing not to do is other things,” Graham has advised entrepreneurs. “Don’t go to graduate school, and don’t start other projects. Distraction is fatal to startups.”  So one pro is the ability to focus 100% on your venture.

There’s no doubt investors will have issues putting money into a company that’s run by a part time founder. After all, if the founder isn’t all in, why should the investor be?

And how are you going to recruit for your team? Will everyone have a day job? That’s a tough company to manage!

But the Inc. article Richard Branson: You Don’t Have to Quit Your Job to Start a Business. I Didn’t, sub-titled Can’t go all in on your dream? That’s probably a good thing, according to the Virgin founder (and science) makes several good arguments for working two jobs, your day job to pay the bills and your night job, your startup that runs on sweat equity.

“Some of the world’s most successful companies began as side projects, with their founders working evenings or weekends to turn their ideas into realities. Virgin is a prime example of this — all of our Virgin businesses started while we were working on something else,” Branson reports. “Virgin Records was originally a side project as part of Student magazine,” while Virgin Atlantic started “as a side project while we were running Virgin Records.”

Keeping your day job gives you some breathing room and removes the anxiety of giving up what is probably your only source of income. You can get the details from the post on Branson’s blog: Embrace the side hustle.

But aside from Branson’s advice there’s actually been a study done comparing those who have a side hustle with all-in entrepreneurs that found that those started as a side hustle were actually 33% more likely to survive!  A full 20 percent of CEOs on Inc. magazine’s 500 fastest-growing private companies list indicated that they continued to work a paying job long after founding their organization.

Frankly I’ve subscribed to the “go big or go home” conventional wisdom with my many startups and as a mentor. I’ve believed that focus, along with perseverance, were the key ingredients to survival for a startup. But based on this and related articles I’m going to have to rethink going along with the conventional wisdom.

As Branson points out, “if you have an idea for a business that is keeping you up at night, it would be such a shame to waste it.”

The biggest success I can think of where a founder kept his day job was Apple. Steve Jobs quit his job at Atari but it took him months of his high pressure salesmanship to get Steve Wozniak to quit his day job at Hewlett-Packard.

So perhaps you shouldn’t be afraid  to be a founder who isn’t all in. My advice would be to set some triggers or milestones that would cause any founder to quit their day job. Typical triggers would be getting a first paying customer, getting some funding from friends and family, or forging a valuable partner for sales or distribution.

 

What the heck do we mean by strategy?

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The term strategy gets tossed around in a large number of mentoring sessions. Yet I’ve never heard anyone define it. And I plead guilty as well, as I’ve not defined it on my blog either.

So the Forbes article by Jeroen Kraaijenbrink What Does Strategy Really Mean?caught my attention.

JK defines strategy for business very simply: the venture’s unique way of sustainable value creation.

He goes on to disaggregate this sentence and I’ll provide my own interpretations:

Value Creation

Strategy answers two of my six questions: what value your organization creates and for whom. Value is created through the delivery of products and or services to organizations or individuals. Mentors and othersearth shorthand this as your value proposition. But as I’ve said before, value is in the eye of the beholder. Customers buy to fill a need or desire, but that need or desire may vary. So it’s the job of the founder to find the mode, that is the most common reason customers buy and make that the bull’s eye on the customer target, with other reasons radiating out from the bull’s eye. Thus your marketing and sales effort must always be on target, even if you miss the bull’s eye.

Sustainable

The term that mentors, investors and other tend to use is sustainable competitive advantage. But note, this is not a customer-centric phrase. Great entrepreneurs like Jeff Bezos obsess about satisfying their customers, not necessarily creating some advantage over their competitors, that’s a byproduct of a customer-centric strategy.

But to be sustainable means that your strategy is hard to copy or circumvent by others. Otherwise as soon as your venture appears on the market radar screen you’ll be copied and soon out of business. JK makes a third point that I’ve seldom heard: your strategy can’t rely on resources that are easily depleted.

Unique

One of my pet peeves is the use of unique as a variable. It is not. Unique, like being dead or alive, is a constant. The term “our product is  the most unique ever created” is meaningless. Your product is unique or not. Thus JK wisely uses the term different. And he adds that neither your product nor service needs to be unique, but an element of either should be unique. For example, Michael Dell built a billion dollar business out of his unique delivery model: mass customization of personal computers. Finally JK wisely adds that your unique element doesn’t have to be unique in the world, but only in the market you target.

Way

Way strikes me as an odd term; what he means is process. Your strategy must be operationalized, in other words translated into what you do. And what you do on a daily basis. Strategy is not a one-time thing, hashed out around a table at an off-site meeting of the founders. Strategy imbues everything your venture does.

To summarize: strategy is your venture’s unique way of sustainable value creation. You need to both define it and operationalize it. Then it all comes down do one thing: execution.

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