Raising capital for a not-for-profit company

newmanitarianwebsiteheaderI’ve worked with and for a number of not-for-proft companies in my career, but I’ve never been responsible for raising the capital for their operating costs. Aside from writing several successful grant applications for the Watertown Free Public Library, I’ve not raised a significant amount of capital for a non-profit. But I am familiar with the various approaches which I’ll recap here as they may be helpful to those few startups that choose the non-profit route. We see very, very few non-profits at MIT VMS, though many of the startups are focused on social impact.

One major difference between for profits and non-profits when it comes to raising capital is that non-profits have no stock to sell. So that eliminates investment and no return on capital – period. No vcs, no angels, no convertible debt. So how do you raise money?

The most important thing to keep in mind is that non-profits must get a 501 (c) (3) designation from the IRS. In short this enables donors to deduct their donations from their income taxes. It is very hard to raise capital for a non-profit without a 501 (c) 3 classification from the IRS. Unfortunately in my experience it can take 6 months or more to get the charitable designation from the IRS. There is a workaround as founders can route donations through another 501 (c) (3) corporation. Startups in Massachusetts affiliated with MassChallenge are able to use MassChallenge in this manner. However, it is just a short term fix. It appears that the current partial government shut down may affect the IRS and slow down 501 (c) (3) applications or halt them completely until the federal government fully reopens.

So where does a 501 (c) (3) corporation go for funding?

Friends and Family

This tried and true method of fund raising has been used by for-profit companies forever. While friends and family may feel better investing in a charitable organization those funds are not really an investment as there is no mechanism for a return, it’s really a charitable donation.

Foundations

Foundations like the Bill and Melinda Gates Foundation grant billions of dollars every year to non-profits. However, there are at least two problems with foundation grants. One, many of these grants are one-time grants. It is difficult to get multi-year grants. So that leaves non-profts in the position of having to constantly raise money. The other issue is that typically foundations work by the calendar: applications must be submitted by fixed date each year, applications may then take months to be reviewed and more months may go by before a check is cut to the “winning” grant applicants. Many foundations have terms and conditions around their grants and may also require periodic reports on how the grant money is spent.  Preparing and administering foundation grants requires a lot of work on the part of founders. Understand the opportunity cost before embarking on a quest for foundation grants.

Government grants

The best known grants in the tech world are SBIR grants. These Small Business Innovation Research grants can provide valuable support for a startup. I even knew one entrepreneur who had financed his entire company with multiple SBIR grants. I would encourage every startup, not just non-profits, to consider filing for an SBIR grant. Government granting agencies can move even slower than the IRS and require more detailed applications. I would encourage every non-profit to hire someone with deep experience applying for and administering foundation and government grants. They should be able to more than pay for themselves, especially if they are working on a part-time, project basis.

Donations

Wealthy people typically have their own foundations or what is called a family office. I would encourage founders to study up on family offices as many invest in startups and/or make donations to non-profits. Large corporations may set aside a portion of their profits for charitable donations. They key is finding these offices and if possible getting a warm introduction to their administrators.  Again, your non-profit must have a 501 (c) (3) designation to work with a family office.

Work for hire

Just because you are a non-profit it doesn’t mean that you can charge for products or services. It just means that any excess capital beyond your operating costs has to get plowed back into the organization – which could even be salary increases for your staff.  If your non-profit possesses a particular skill such as training teachers, you can run training workshops and charge their parent organizations a fee for the workshops.  You could even develop a product, such as a portable water purifier, which you could sell and use the proceeds to support your organization. Grant making organizations and individual donors tend to look favorably on startup that generate revenue, as donor organizations do not want to be the sole source of support for a non-profit. Similarly they don’t like be the first money it. Thus generating some revenue can be the first money in and encourage foundations to look more favorably on your grant application.

Products

Their is nothing to prevent a non-profit from making and selling products. In fact my absolute favorite charitable organization is the Newman’s Own Foundation, set up by the late actor and run by his daughter. Not only do they give grants they also have created an entire product line of excellent food products – we especially like Newman’s Own salad dressing and frozen pizzas. They have reached a milestone of $535 million in donations!

Non-profts should act like for-profit startups in that they need founders, a fleshed out management team, a great business plan, traction, a customer acquisition plan, etc. One nice thing about non-profits is that while they do compete for grant money, in general they may well be more collaborative and cooperative with other non-profits.

This post would be incomplete without mentioning the Social Innovation Forum, They are a greater Boston organization that helps startups raise capital and increase their social impact. I’ve had the privilege of working with them on founders’ presentations and SIF is an excellent organization which I highly recommend to Boston area non-profts.

My last word on non-profits is that you should acquire and use a .org domain name. .com signals a for-profit company, .org signals a non-profit. Since web and social media are so important in today’s marketing you want to make sure you are viewed as a non-profit from the get-go.

 

 

 

The rise of services startups

service

Back in the Pleistocene era of startups, in 1989 when we raised my first round, venture capitalists wouldn’t touch a service business even if you paid them to do so. “No economies of scale, no IP, no barriers to entry.” Well here we are thirty years later and three of the biggest venture-backed companies in the U.S. are service companies: Uber, AirBnB, and WeWork!

And the number one product company in the world, Apple, is struggling as the market for premium-priced smartphones is saturated and low price competitors are attacking Apple’s literally gross margins, the standard playbook for going up against entrenched competitors who have gotten too fat and happy.

Even Apple is dipping at least five toes into the services business with Apple Music, iCloud, Apple pay, iTunes Store, etc. and proudly touts the growth in this part of their business as they simultaneously hide the actual unit shipment of their products.

What the heck has happened over the past thirty years! Two things: the digitization of everything and the gig and entrepreneurial economy.

Let’s face it, Uber and AirBnb would be nothing without their smartphone apps – what they are doing would have been impossible in 1989 even though the services they are delivering, ride sharing and home sharing, have been around in other forms for decades. Similarly, WeWork is a new play on what were called “executive office suites” back when I was starting companies and lacked the cash to rent a full size office. Regus and others would provide entrepreneurs like me a small office and a set of basic business services: reception, copying, coffee, a mailing address and a conference room. Basically Regus was the grandfather of WeWork. And they are still around today, but valued as commercial real estate not as a high tech company, as WeWork is. Smartphone apps tied into cloud computing have enabled Uber, AirBnb and dozens of other companies providing services to today’s time poor, cash rich millennials and their cohorts. Food delivery, like Uber Eats, DoorDash, Instacart et al is an entire service category where VCs have poured hundreds of millions of dollars.

The other driving force behind the rise of services is the sharing economy or the gig economy or whatever you want to call it. This new economy relies on contractor labor, whether it’s drivers, delivery people or owners who rent out their apartments or houses (landlords) all to make a buck in ways the weren’t either possible or profitable decades ago. The rise of startups has also driven the need for office space with amenities, thus WeWork. Contractors are much cheaper than employees as they get no benefits: no healthcare, no vacation or sick leave, no unemployment insurance, and can be hired and fired at will.

So should founders target services business today to hop on the VC gravy train? As usual, it depends. The most important criteria are the same as they were 30 years ago: you need a large market, one capable of sustaining a billion dollar market cap company. A market that is growing, not shrinking. And it helps if the incumbents are asleep at the switch. You still need a great team and some kind of secret sauce that gives you an unfair advantage. But building products, whether they are hardware or software, can be very time-consuming, expensive and risky. May be better to add a layer of services driven by software to an existing business model, as Uber has done with ride hailing, aka taxi and black car services.

Or you may want to hedge your bets by combining services and software. Data is the new oil and how to you drill for oil when Google and Facebook own most of the oil fields? Crack that nut and you may have a successful startup.

But if you do aim for a startup keep in mind why investors historically have shied away from services companies: you need to be able to scale, you must keep your employee count low, keep overhead low by using contractors, and attack a sleepy market, as Harry’s did with shaving.

There’s a ton of opportunity out there for a smart team to solve customer problems by combining digitization with the gig-based workforce to leave the dinosaur companies in the dust.  But the fundamentals of a startup must be adhered to: great team, large market opportunity, and the secret sauce.  And keep in mind that if you succeed you will have a thousand imitators, so plan out how you will stay ahead of the competition, not just disrupt the incumbents. And don’t be afraid to go after VC money, because unlike the last century, they will now greet top gun teams building a service business with open arms.

Barrier to entry or sustainable competitive advantage?

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If you spend any time amongst investors you will no doubt hear the phrase “barrier to entry” quite often. Investors fixate on their companies building a barrier to entry. But what is a barrier to entry and how can you build it?

I think we all understand the concept of a barrier: a circumstance or obstacle that keeps people or things apart. It’s “entry” that seems unclear. Entry to what? The concept is that you have dominated a market niche and you want and need to keep other companies out of your market. Investors love monopolies! As one VC told me, We are always seeking an unfair advantage. There’s at least one problem with this concept. It assumes you have created a greenfield market, one that didn’t exist before like vaping, dominated by Juul. But often you will have a new and better idea for an established market, such as the MIT startup that invented a much better car shock absorber. There were already many companies in that market. So how can you create a barrier?

The other question you may also hear is how will you create sustainable competitive advantage. I find this a preferable way to think. A startup needs some kind of competitive advantage to get market traction in the first place. It may be the typical FCB – Faster, Cheaper, Better – or more to my liking, different. So let’s assume you built that better car shock absorber. How do you maintain your competitive advantage?

I tell startups that for every good idea there may be another half dozen or more companies working on the same idea at the same time. They need to worry less about the competition and more about their customer. It’s when a startup becomes successful that these hidden competitors come out of the woodwork. Failure is an orphan, success has a thousand imitators.  Investors worry that either another, better funded startup will copy your idea and overtake you with better marketing or sales or that an established company will decide to copy your idea and compete with you. The best known example of the latter is SnapChat. What originally differentiated SnapChat was its disappearing messages and photos. But Snap kept on innovating and developed stories, an easy way for users to link together images to tell a story about their life. This feature became a big hit. So what happened next? Instagram, owned by Facebook which has a history of attempting to copy startup features without success, added stories to Instagram. Whammo! Instagram took off and SnapChat was wounded seriously, though not fatally.

So how do you build a barrier to entry? How do you sustain a competitive advantage?

  1. IP – investors love patents, as a successful patent can ensure a monopoly, which they love even more. But filing patents can be expensive, it can take years to win a patent, and in the meantime the patent process forces you to disclose how you implement your idea. Then you may have the cost in time and energy of defending your patent! Patents seem to be more valuable in biotech than in the media, internet, publishing, and software fields where I mentor. Copyrights can be help in protecting you product name or other aspects of your business, but they are far less helpful in building a barrier. There are always workaround for competitors. And you don’t want to spend time in court suing over “copyright infringement.”
  2. Customers – there is a lot of debate over the so-called “first mover advantage“, means whichever company gets to market first with their idea will win. But there is no arguing with building up a large customer base. However, the old advertising phrase, I’d rather fight than switch! Should be your goal. Gaining customers is not enough, you need loyal customers. And it helps if you make switching to another product a non-trivial task.
  3. Strategic relationships – The most common reason to develop a strategic relationship is for distribution. At Course Technology not only did we have NACS – the National Association of College Stores – as our exclusive distributor, their parent company, NACSCORP was also an investor. This relationship helped us compete with much larger, better known, and entrenched competitors.  While the prime function of strategic relationships needs be creating value in your venture, the second function should be gaining that unfair advantage investors salivate over. While many big companies will tell you they can’t be your exclusive partner I would tell them the same thing. But that I believe in performance exclusivity. As long as you perform really well and deliver value to your partner they are unlikely to want to enter into a similar relationship with one of your competitors.
  4. Brand equity – brand equates to trust. If you can succeed in building your brand it will become a competitive advantage. Thus much advertising is not for products but to help establish brand awareness. But advice is save your money. Spend it on media relations. Stories about your company are far more credible and more valuable than ads. Too few founders have a PR plan as part of their go to market strategy. They just seem to think having the standard set of social media accounts is sufficient. Twitter, Facebook, Pinterest, etc. may be necessary, but they aren’t sufficient. Ignore the established media – print, radio, TV, direct mail – at your peril.
  5. Constant innovation – as a successful startup you will have a target on your back. Make that a moving target for competitors. The key is to constantly innovate. We saw this for years in the iPhone market. But the smartphone market has stagnated, basically because yesterday’s phone is just as good as today’s for all practical purposes. Recently there have been no innovations powerful enough to get users to upgrade their phones. Develop a product roadmap and observe your customers closely. Make sure the brilliant engineers who invented your first product have the company equity and resources they need to keep your competitive edge. I’ve seen too many startups become dominated by marketing and sales and their innovation dies on the vine.
  6. Capital – it is hard to raise money and it is time consuming. I was taught by VCs that the best time to raise money is when you don’t need it. When your product is hot and you have ample cash in the bank, raise more money. Capital can become a competitive weapon, whether in the war for talent or in funding new product development. We’ve seen this playbook with many high profile internet companies like Airbnb and Uber. Don’t worry about equity dilution, worry about creating a more valuable company. Capital is the accelerant for growth.
  7. Constant learning – I’ve written elsewhere that I consider startups to be learning machines. Don’t rest on your laurels if your product is a hit. The great football coaches criticize their teams more after a win than a loss. Keep in mind it’s harder to stay on top than to get on top. Constant learning will feed constant innovation – innovation not only in product but in business models, marketing methods, and even in sales and support. Learning and innovation should not be reserved for the engineering team.

A single company may not be able to deploy all of these techniques to stay ahead of its competitors. While individuals at companies I worked for held patents, none of my companies ever earned one. But we were masters of strategic relationships. Find where your venture can exercise the most leverage and focus your energy there.

Occasionally I’d get into a disagreement over barriers to entry, usually with an angel, rarely with a VC. Then I’d ask them, “Tell me, what is Bruce Springsteen’s barrier to entry? What about George Lucas?” If a potential investor is fixated on barriers to entry he or she may not be the investor for you. They should be fixated on exactly how they will help you grow the company and trust that once you reach the top you’ll have learned how you can stay there.

 

Find a niche and dominate it!

niche

I see about two new ventures a week in my mentoring role. A significant number of those ventures every year haven’t defined a target market. This is especially true of B2C companies. When I ask them who is their customer their answer is “Everyone!” But that I preach to my mentees just the opposite. I believe in the maxim that if you are trying to be everything to everyone you will end up being nothing to anyone. Startups differ from large established companies in several ways:

  • Resources are constrained – that means people, equipment, tools and cash – are limited and have to be deployed very carefully for maximum payback. That’s the art of the startup – doing a lot more with less.
  • Lack of credibility – most people are risk averse. It is only the small minority who are innovators or early adopters. The first thing most consumers look for is a name brand – that means a safe choice. A substitute for this can be a startup with buzz, but rare are the companies that can achieve this.
  • Resiliency – a mistake in a big company might cause a bruise or even a wound, but they are rarely fatal. The same magnitude mistake – like launching a product with a deal breaker bug – can kill a startup. Big companies can easily recover from mistakes that will fatally wound or kill a startup.
  • Existing customers –  not only do existing customers provide cash flow – and cash is king in startups – but the best way to grow is to sell new products to old customers. What startups must do is sell new products to new customers, exponentially more difficult.
  • Market education not needed – the more differentiated your product, the more new and different it is, the more you will need to educate the market on its features and benefits. That can be time-consuming and expensive. Startups lack the long runway of established companies. But the more like existing products the more likely it is that consumers will go with the safe, name brand. This is the paradox of product differentiation.

So with all these disadvantages how does a startup get off the ground given its short runway? Very, very few companies can be a helicopter and take off straight up. So the advice I give is to find a niche and dominate it. What is a niche? It’s a group of customers that share a significant number of attributes. Those may be age, demographic location, life style, use of another product, or stage in life. But those attributes must be easily identifiable and the cost in time and effort to communicate with that cluster of customers can not be excessive. Best is a group that talks with each other, as word of mouth will help your product gain new customers without a high customer acquisition cost.

Ok, enough with abstract generalities. How about an example? The best example and one I usually use is Microsoft. Bill Gates and Paul Allen were top flight programmers. And beyond that they were very smart entrepreneurs. They realized that the purchasers of the early microcomputers lacked the skills and even patience and attention to detail those machines required – they had to be programmed by turning on and off a series of switches on their front panels! There was no programing language built in. Equally brilliant, Gates and Allen realized that there was an easy to learn, easy to use programming language in the public domain, BASIC, developed by John Kemeny at Dartmouth College as the ideal language for novice programmers. And in yet another smart move, their company, then called Micro-soft, contracted with the largest microcomputer company, the tiny Altair, to develop a version of BASIC for its microcomputer. Long story short, Microsoft’s target market was programmers and its product line was programming languages – the must-have tools for programmers. By targeting this niche Microsoft established its brand, learned a tremendous amount not only about its customers and their needs, but about the bundling of software and hardware, and the market dynamics of the personal computer industry. Many can say they were just lucky when IBM called on them to create the operating system for its first personal computer. But luck is a confluence of timing, ability, and preparation. Microsoft had all three. Microsoft leveraged its dominance in programming languages to a dominance in operating systems to launching Microsoft Office, which has dominated business software for decades.

Obviously not every startup will become a Microsoft no matter how closely it follows its playbook of finding a niche market that it knows well from its founders experience, can learn from, dominate and then leverage to what are called market adjacencies. These are similar markets to your niche market that don’t require a huge leap of faith nor leaps of product development and marketing costs to reach. Microsoft’s first customers were programmers and Altair. It’s next became computer manufacturers who purchased MS-DOs – which became a must-have purchase for every microcomputer company.

It doesn’t matter if you are a B2B company or a B2C company, your goal during the all important customer discovery phase is to find not just a customer, but a cluster of customers, a niche, that has an unfilled need for your product and that you can reach economically.  Finding the elusive product/market fit is much easier when your market is small and homogenous, a niche than a very large and heterogeneous market.

May founders get anxious when I preach this strategy to them. “But what if a competitor comes along who will address everyone, not the tiny market you are telling us to target, won’t they end up winning?” No. Your goal should be building barriers to entry to your niche, not worrying about the rest of the world. That’s trying to boil the ocean, as they say. Making sure you have a growth strategy and have identified adjacent markets to move into on the backs of your niche customers will also protect you against competitors.

Yes it is possible to have a product for everyone in a market. VisiCalc, the first electronic spreadsheet and its progeny, Lotus 1-2-3 and Microsoft Excel, were used by virtually every business person, though financial professionals – accountants – were the first adopters and features became targeted at that group for years. But VisiCalc was not just a generational product it was a foundational product. Spreadsheets, word processors, databases – these were the foundational products of the personal computer revolution. Followed in quick succession by a whole new market – computer games.

Find a niche. A group of customer whose problem you can solve in dramatic fashion. Where you are 10X better than existing solutions, which are often manual, clunk,y and expensive. Where customers talk to each other and word of mouth will be your best marketing tool. And stop worrying about all the potential customers you are “leaving behind” and money you are “leaving on the table.” Because they are just that prospects, not paying customers. You’ll get to them in due time – after you dominate your niche.

 

What makes strategic alliances work?

ww inc

As a community services/media manager at a local public library, my first job after attaining my Master’s degree in library and information science, I lucked into my first strategic alliance. As I’ve posted elsewhere, the library main great use of the federal governments CETA (Comprehensive Employment and Training Act) in the late 1970s. By writing simple grant proposals, I was able to hire several media developers on one-year contracts, paid for by the federal government. Maybe it’s time to bring back CETA, this time with an emphasis on training.

One of the people I recruited was a film maker, who specialized in animation. We wanted him to teach film making to the community’s children. But he needed cameras and film; CETA paid for neither and the library had no budget for equipment or film stock. Through a connection I’ve long since forgotten, but most likely through our dynamic library director, Sigrid Reddy, I was introduced to an executive at Polaroid, Sam Yaffee, if I recall correctly. Sam and Polaroid had a big problem. Edwin Land, the genius behind Polaroid, had gone off the rails and developed an instant film, called Polavision. The problem was one of timing: video recording was just getting into the hands of consumers. In fact our library had a Sony Portapak. It was just a matter of time before video overtook film for amateur film makers. But Polaroid had a huge stock of unsold Polavision cameras and film. Sam, as VP of Community Relations, came up with the idea of getting community groups to use Polavision, in the hopes it would gain a foothold there. And he offered us a deal we could not refuse: all the Polavision cameras and film we could use, for free! So Andy Jablon, our filmmaker, went on to teach a popular and successful course in film animation for Watertown’s children. What we had, but I didn’t know it at the time, was a “strategic alliance” between Polaroid Corporation and The Watertown Free Public Library. Polaroid got exposure for its new technology, the library got free cameras and film to use in its film courses. Unfortunately for Polaroid, despite the success of our animation class Polavision flopped in the market and took Polaroid down with it.

But this experience was my first exposure to how a large established company – like Polaroid, then a very significant national company and the Watertown Library, which was tiny in comparison. But it showed me that small organizations could have something to offer larger companies, not just vice  versa.

Landing at Software Arts I inherited several OEM distribution agreements for VisiCalc.The one I remember best was with DEC, Digital Equipment Corporation, then a multi-billion dollar minicomputer giant. However, I saw the handwriting on the wall for DEC – they insisted on using their own proprietary diskettes for the DEC PC (and they had not one, but two incompatible product lines) – which caused us no end of manufacturing grief. But Software Arts was paid 50% of the revenue from distribution agreements so these were great deals for us.  Yet again I saw how a very large and established company could not only help a small startup but the startup had something the large company lacked – a game changing software program called VisiCalc, the first electronic spreadsheet.

When I began my serial entrepreneurship career I spent considerable time and energy building strategic alliances. But I found that many, including our Macintosh Across the Curriculum (MAC) alliance with Apple Computer, didn’t actually deliver any real value. The strategic alliance that really helped us launch Course Technology was with Lotus Development. And what made that alliance work? Money changed hands! Lotus not only was helped to become a standard in higher education, but we also had an agreement to sell their entire product line to college and university IT departments. This turned into a real revenue generator for us and Lotus, and helped Lotus cement it’s leadership status not only with academics, but with college and university IT directors as well.

I was reminded of my long career forging and managing strategic relationships by The Wall Street Journal article Blue Apron Links With Dieters in Comeback Effort by Heather HaddonBlue Apron is a meal-kit provider that’s hit hard times, its stock falling from $10 a share to 69 cents as of the time the article was written. Someone at Blue Apron realized that they needed help on customer acquisitions, as they were failing to meet their numbers for meal-kit subscriptions. In fact the entire meal-kit market is showing signs of saturation or stagnation.

At the same time Blue Apron was struggling since its IPO, Weight Watchers was repositioning the company from a focus solely on dieters to the millions of people interested in healthy eating. Thus the name change from “Weight Watcher” to WW, Inc. Reminiscent of Kentucky Fried Chicken becoming KFC, as consumers started to shy away from fried foods.

So WW, Inc. saw Blue Apron as a way to help it both towards its strategic goal of repositioning the company and its customer acquisitions goal of growing beyond the dieter market. For Blue Apron, WWW provides access to a whole new customer base without the cost of advertising or other promotions. But from my experience what will make this strategic alliance work will be the the payments by Blue Apron to WW from its sales of Blue Apron subscriptions.

The lesson learned is that there are simple distribution agreements, where one company sells the products of another for a commission on sales or similar performance based arrangement and there are strategic alliances, where both companies are helped to achieve their strategic goals by combining forces. But the most successful strategic alliances all include some type of financial arrangement, such as sales commissions or bounties paid for new customers.

In fact, when I used to pitch large companies on strategic alliances I finished my presentation with two slides. The second to last was “Strategic Benefits”, the last was “Financial Benefits.” The first slide is aimed at senior management and at marketing, both groups being focused on the long term vision for the company. The last slide was focused on the sales organization and the CFO, whose focus is short term revenue and profit. Only by winning over both groups will a small, emerging company be able to forge a successful alliance with a large established one.

Find a niche, then dominate it

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One of the most common problems I see in mentoring founders is the “boil the ocean” approach. Everyone is looking to build a horizontal application, a platform or both! The problem with this approach is that when you try to be all things to all people you can end up being not enough of anything to matter to anyone.

The classic case for starting out by targeting a niche, then dominating it and moving on to market adjacencies, is Microsoft. Bill Gates and Paul Allen targeted the nascent microcomputer industry when they formed Microsoft. Being programmers themselves they immediately realized that machines like the Altair were very difficult to program. Being familiar with the BASIC programming language, their first project was to port a version of BASIC to the Altair – and Altair was their first customer. Basically Microsoft built the company on building programming languages for developers.

By their good fortune IBM came calling on Digital Research for an operating system for their top secret PC, code named “Peanut.” But Gary Kildall, the founder of Digital Research, was off flying his plane that day and his wife refused to sign IBM’s NDA. So IBM went to Microsoft where Bill Gates did not let the fact his company had no operating system for any computer, let alone IBM’s Peanut stop him. Microsoft went down the road and purchased an OS for the 8086 from a developer they knew for $50,000. When the Peanut arrived at Software Arts under extreme secrecy the OS diskette was labeled “Seattle Computer Systems” not “MS-DOS” for Microsoft DOS, not “PC-DOS” for IBM’s version.

Gates used his relationships with developers built selling them programming languages to get applications programs like databases developed for MS-DOS. And thus from programming languages to operating systems to applications programs Microsoft moved into adjacent markets where its enormous leverage and brilliant strategies enabled it to dethrone incumbents like Word Perfect.

I was reminded of this strategy by the story in today’s New York Times A Toaster on Wheels to Deliver Groceries? Self-Driving Tech Tests Practical Uses by Cade Metz. As Cade Metz wrote “… self-driving is still a technology in search of a purpose.” This is the most common problem with engineering driven startups, they have a solution in search of a problem. Instead of finding a small niche where their tech can be proven out – called “proof of concept” – before tackling larger markets, they worry that a niche is too small and thus flail and fail trying to find a large market for their technology.

Tarin Ziyaee, who worked on autonomous technologies at Apple and who recently left Voyage, a company that is bringing self-driving cars to retirement communities has a great quote: “After maybe biting off more than they could chew, people are concentrating on one particular part of the problem they might be able to actually make money from,”

Nuro, which raised $92 million in funding, decided to focus on creating tiny self-driving cars — they measure 104 inches long by 43 inches wide by 70 inches high — that would solely make local deliveries. That’s a small and practical niche. By removing the issue of passenger safety, since there are no passengers in a Nuro, they’ve gone to market much faster than the very ambitious passenger vehicle ventures like Waymo.

Of course, the issue with Nuro is the size of the demand for “last mile” delivery of goods and services like food and laundry. But by getting to market quickly with a relatively modest capital outlay they will find out pretty quickly.

Finding a niche and dominating it is the implementation of the focus, focus, focus strategy. I’ve never heard of a company going out of business because they were too focused, but many have failed for lack of focus.

 

Lessons to be learned from a web publisher

buzzfeed
Saeed Jones and Isaac Fitzgerald, replying to tweets during a commercial break on “AM to DM,” a weekday morning show produced by BuzzFeed News. The show is paid for by Twitter.CreditDavid Dee Delgado for The New York Times.

Today’s New York Times article Founder’s Big Idea to Revive BuzzFeed’s Fortunes? A Merger With Rivals contains a number of great lessons for virtually any startup, not just web content publishers like Buzzfeed. Here they are:

You can start you venture as a “side hustle”

Side hustles, or starting a new venture without giving up your day job, have become a startup meme for good reason. While the general population thinks being an entrepreneur is all about taking risks, the truth is just the opposite. Venture capitalists and other investors want to see the four types of risk be mitigated as the company grows. And so should the entrepreneur who started the venture. Joshua Peretti started Buzzfeed while he was employed at another web publisher, The Huntington Post.  While this strategy obviously worked for him, I’d be careful about starting up a venture that could be perceived as a competitor by the company which currently employs you. From my experience publishers tend to be more open about this than most, perhaps because most of them lack trade secrets that high tech companies guard so jealously.

Run experiments

Buzzfeed was an experimental project by Joshua Peretti. Startups are successions of small experiments, it’s how founders learn and find the elusive product/market fit.

“BuzzFeed has always been very experimental,” he said. The ethos that led to its viral content and mining of memes to explain the day’s news is now being applied on the business side, he said, “to consider commerce and advertising and even donations.”

Choose your company name with care

Buzzfeed is a great example of compounding two evocative short words into one for your company name. Microsoft may have been the first tech company to do this. It still works and is far better than creating monstrosities like iFoobarystas.ai.

Start small

Starting small doesn’t mean starting with a minimal viable product, or one that can barely has a pulse. It means two things: one, creating a minimal remarkable product and two, launching a product you can learn from.

Have multiple revenue streams

As a colleague pointed out to me, monocultures are highly risky in the world of tech, where the environment can change overnight. Just one change to Facebook’s newsfeed can and will cut revenues of publishers drastically.  Buzzfeed has very diverse revenue streams.

BuzzFeed now sells cookware at Walmart and accepts banner ads on its web pages. It runs a morning show on Twitter, a weekly one on Facebook and another on Netflix, all of which are paid for by the platforms. Its newsroom and its entertainment studio churn out thousands of videos and articles each week, to an audience of 690 million people every month. The company also gets a commission when a reader buys a product on Amazon or other commerce sites after clicking through from one of BuzzFeed’s recommended product links, known as affiliate marketing. And on Monday, BuzzFeed News announced a membership model that provides exclusive access to newsletters and behind-the-scenes content for $5 a month.

Virality is essential in B2C startups

The cost of customer acquisition tends to be greater than customer lifetime value in a consumer facing company, so you need to build virality into your product.  Virality literally jumpstarted Buzzfeed, as by accident as an email spat between Mr. Peretti and Nike went viral via email. It eventually reached millions of people. Mr. Peretti ended up appearing on the “Today” show debating labor issues with a Nike executive.

Diversify as you grow, not as you start

As the saying goes, more companies die from indigestion than starvation. Focus is the name of the game in startups. But growth is also the demanding taskmaster. The trick is to grow and diversify without losing your core values and the focus on your mission.

As BuzzFeed’s audience has grown, so has the diversity of its content. Hard-hitting investigative journalism lives alongside listicles, quizzes and cooking videos

Money is a means to an end

Whah? You ask. The great entrepreneurs, from Steve Jobs on down, realize that they need capital to realize their vision. Money is a way to fund progress towards that mission. If you are only in it for the money find an easier way than founding a company. Startups are just too hard. Go to Wall Street instead. Profit is a byproduct of creating a great product and serving customers well, not the sole purpose. This ethos has survived at Apple beyond the death of Steve Jobs.

Be willing to hide your ego

These lessons on how to start and grow a company are incidental to the Time’s article throughline, which is that web publishers may need to merge in order to obtain greater economies of scale and negotiating power. Mr. Peretti and his colleagues at web publishers like Vox Media, Refinery29, and Group Nine see a merger as an opportunity, not as the loss of their personal autonomy.

Philippe von Borries, a co-chief executive of Refinery29, said that in the next year or so there might be “an opportunity for the leading media and entertainment companies that emerged over the past decade to come together,” provided all parties could settle on a shared culture and vision.

While these lessons are all extracted from an article about web publishing, they are applicable to virtually any startup. But one last lesson: lessons are contextual, they are not commandments. In the language of programmers they are local, not global. It’s up to you as a founder if and how you apply these lessons to your own venture.