by lilibalfour | | think
The biggest mistake that startup founders make in allocating their capital is not monitoring financial results. As a result, they end up engaging in activities that fail to enhance profitability. Here are three profit-eroding expenses that startup founders should avoid:
Sexy Markets
Too many founders target markets that are sexy in order to attract great publicity. But if that segment isn’t buying, the business is just throwing money down the drain.
Tip: Position your company in front of high-value customers, not just sexy customers. Find the most profitable markets, regardless of the flash and hoopla.
Vanity Events
Founders often fall into the trap of believing that they need to attend every industry event on the planet. Yet traveling usually requires sacrificing time and money.
Tip: Attend only events that have potential to result in revenue generation. A low-key event in your home town may yield stronger financial returns than a posh soiree overseas. Do your homework and know before you go.
Excessive Hiring
Another mistake that many founders make is to try and solve problems by hiring a lot of high-priced talent. They wrongly believe that more bodies equates to more sales.
Tip: Only hire people who believe in your product or service and are willing to work on a primarily commission-basis to prove themselves. One highly motivated salesperson can produce the same results as a team of demotivated, salaried workers.
by lilibalfour | | think
The biggest mistake I see entrepreneurs make during fundraising is taking too much money too soon and from the wrong people.
Seed Funding
I believe the best money you can raise is from your customers. With the increasing popularity of crowd funding, and the new legal changes, it has become easier for entrepreneurs to secure non-dilutive funds for their idea.
If crowd funding is not a fit for your company, you can attempt to seed your company by solving a real problem for a paying customer. This strategy is also a non-dilutive event that allows you to avoid accepting the wrong investor(s) too soon. A paying customer also provides credibility to your idea and valuable feedback.
If neither of the options above work well with your funding strategy, you can always raise money through a convertible note. A convertible note will allow you to avoid placing a valuation on the company and issuing equity. It is still critical that you select the right investor(s) and negotiate the right amount, as note holders do have the right to convert into the next equity round.
Once you’ve successfully seeded your company, and have demonstrated growth, you are ready to look at Series A investors.
Series A
There are three things to consider when selecting Series A investors.
Board Seats – Most venture capital funds will require a board seat for the partner who leads the investment in your company. Naturally, you will not want to give away more than three board seats during your first institutional round, so you will need to structure this accordingly. Prioritize your list of investors, and select based on fit, not deal terms.
Expertise – As you bring on more investor, you bring on more opinions. Be certain that each investor you bring on is adding value. You don’t want to add an investor who is bringing capital only. Passive money seems like a good idea at the time, but those who do not have domain expertise are likely to become a liability when they decide they want to exercise their right to provide input into managing the company.
Expectations – Make sure you understand, and are comfortable with, the expectations of your investment team. Most investors will require submission of financial statements and attendance at regular board meetings. It is best to be proactive in managing your investors’ expectations. Don’t wait for something to go wrong to ask for help. Communicate with your investment team on a regular basis.
In summary, less is more. Many entrepreneurs make the mistake of believing they should raise the most capital possible at the highest valuation possible. In reality, entrepreneurs should focus on taking the least amount of money possible from the right investors, regardless of valuation.
by lilibalfour | | think
As an entrepreneur building a company, you should always be focused on learning from those who came before you. With that goal in mind, I’ve documented five lessons from five entrepreneurs who shared their wisdom at Startup School.
Diane Greene
Current: Founder of stealth-mode company and board member at Google
Past: Founder of Vxtreme (acquired by Microsoft) and VMware (NYSE: VMW and acquired by EMC)
Lesson 1: Have a big vision and be persistent.
When you have a big vision, and work diligently toward it, you will attract the right resources. Diane Greene set out to build VMware during the dotcom implosion. It was a difficult time to get funding, but her passion for her idea attracted the brightest minds and the biggest wallets.
She knew recruiting Larry Sonsini to her board would position her company for success. Larry has been a part of nearly every major tech deal in Silicon Valley. The only problem: she didn’t know him. But when you have a big vision and are passionate about it, you will find a way to succeed.
Diane knew an attorney at Larry’s firm and promised VMware’s business, contingent on the attorney setting up a meeting with Larry. Unfortunately, she met with Larry on a Friday afternoon and he said he was not currently interested in joining any new boards. But when you’re passionate about your vision, you see opportunity when others see obstacles. She took the opportunity to talk to Larry about her vision for VMware. She left his office feeling disappointed that he didn’t accept her offer, but content knowing she gave it her best shot.
On Monday morning at 6:00 AM she received a voice mail from Larry Sonsini. He was ready to join her board.
Jack Dorsey
Current: Founder of Square
Past: Co-founder of Twitter (NYSE:TWTR)
Lesson 2: Create a list of dos and don’ts.
Jack Dorsey is known as one of the founders of Twitter and current founder of Square. At the age of 36, two incredibly successful companies is a major accomplishment. So, how does he do it? Jack let us in on his secret weapon: a do list and a don’t list.
Do — Stay present, be vulnerable, drink only red wine and lemon water on the weekdays, do six sets of squats, run three miles, meditate, say hello to everyone, video journal, and get seven hours of sleep.
Don’t — Avoid eye contact, be late, eat sugar or wheat, or drink hard alcohol.
It pays off to create a list of things you want and don’t want in your life if you plan to be a successful entrepreneur.
Chase Adams
Current: Founder of Watsi
Past: Pacific Community Ventures and Peace Corps
Lesson 3: Let go of fear.
Chase Adams had a brilliant idea for a company. While he was working for the Peace Corps, he saw firsthand the power of connecting real stories of people in need to those who could assist them. He worked on his idea for months. When he emailed friends and family to announce his company, he received a lukewarm response.
Unwilling to give up, he started to brainstorm. He wondered where he would find people interested in his project. Then he had a brilliant idea: what if I posted this to Hacker News? His fear set in as he recalled witnessing other entrepreneurs face scrutiny and ridicule after posting their ideas. He decided to post and wait for the outcome. After posting his idea, he received 16,000 visits to his site and 100 percent of his projects were funded.
A few months later, Paul Graham, founder of Y Combinator, read about Chase on Hacker News and sent an email requesting a meeting. An hour after the meeting Paul made an investment.
Chris Dixon
Current: Partner at Andreessen Horowitz
Past: Founder of Hunch (acquired by eBay) and Site Advisors (acquired by McAfee)
Lesson 4: Be willing to take on problems that are not popular.
Sometimes good ideas look like bad ideas. The big companies are already focused on the ideas that look good. It’s up to entrepreneurs to tackle those problems that are not obvious. Some times those not so obvious ideas look like bad ideas.
Many of today’s top companies were initially met with disapproval. Google, eBay, Kickstarter, and AirBNB struggled to find initial traction with investors. Many dismissed them as too niche or structurally flawed. However, the entrepreneurs behind these companies knew they needed to be open to criticism and rejection if they wanted to succeed.
If you are focused on building a billion dollar company, you have to be willing to filter the naysayers. Not all good ideas are obvious at first.
Nathan Blecharczyk
Current: Co-founder and CTO of AirBNB
Past: Stellar engineer
Lesson 5: Don’t quit until you’ve given it 100 percent.
We all know and love AirBNB, but few know that success did not come easy for the company.
Following in the footsteps of Twitter, AirBNB launched at SXSW. The company hoped for astronomical success, yet only yielded 12 sign ups. Undeterred, they heard that the Democratic National Convention was in a few months. They reached out to property owners and signed up 800 properties per week. Their story was picked up by the local news channels and CNN International. Yet again, the results were discouraging.
Believing that they wanted to give it 100 percent before closing shop, they applied to the Y Combinator program. They were accepted, but unfortunately their acceptance was during the most difficult time to raise capital for startups. They were told to get “ramen profitable,” an expression that is used to describe the state of barely breaking even. They worked from 8:00 AM to 12:00 AM every single day to figure out what was needed to make their company a success.
Their big breakthrough came when Paul Graham told them to, “Do things that don’t scale.” They focused on their most devoted market: Manhattan. They flew to New York and met with forty committed renters. They built relationships, offered to take professional photos of the properties, and wrote property descriptions for free.
A few months later, an investor they met through Y Combinator was impressed by their vision and tenacity and wrote them a check.
In summary, entrepreneurs need to be persistent, humble, and focused. You will fail in the beginning. People will laugh at your idea. The idea of quitting will haunt you. You will feel like a complete loser. The biggest lesson I learned at startup school is that winners are resourceful and they find opportunities. They don’t make excuses for why it won’t work. They get focused on ways they can make it work.
by lilibalfour | | think
I had the pleasure of hearing Kevin Weil, VP of Product Revenue discuss Twitter’s monetization strategy at Ad Age Digital. His presentation gave me insight into the question that everyone wants to know: How much am I worth to Twitter?
By now, we all had a chance to look at Twitter’s historical revenue and metrics. We learned that in 2012, the company saw $316.9 million in revenue, with $269 million derived from ad services and the balance, $47.5 million, derived from licensing data to third parties.
With 500 million registered users, we could extrapolate an average revenue per user (ARPU) of $.63 ($316.9/500). However, that wouldn’t be accurate, as this number includes an estimated 20 million faux Twitter accounts. When we take this into consideration, our number would be closer to 480 million users. Yet, 480 million doesn’t account for inactive accounts. We know from the S-1 that there were 218 million monthly active users (MAUs) and 100 million daily active users (DAUs). We could estimate that each user is worth $1.45 based on MAUs or $3.16 based on DAUs. However, we are still missing valuable data regarding the true value of a user. We need to understand the percentage of users who click ads and make purchases. Twitter is full of users who use it for entertainment, but we want to know who is driving revenue.
From the Twitter blog, we learn:
The average Twitter user follows five or more brands. Users who primarily access Twitter on mobile are 60 percent more likely to follow 11 or more brands. They are also 53 percent more likely to recall seeing an ad on Twitter than the average Twitter user.
Advertiser Tip: Create Tweets that align with what mobile users need: real-time information that helps them make decisions as they go about their daily lives. They may be shopping near your store and a Tweet about your current promotion might get them in the door. They may be waiting in a line at your bank and looking for information that will make the transaction easier. Think about creating campaigns centered around useful information or special offers that someone can act on immediately.
Bottom line: As consumers continue to shift their time to mobile, a big opportunity arises for brands. Mobile is in our DNA at Twitter, which means our platform can connect your brand to users in real time, wherever they are. Because mobile ads on Twitter are part of the organic content experience, they create a particularly powerful vehicle for brands to create reach, build frequency and drive engagement.
Your value to Twitter is tied to the likelihood that you use a mobile phone and have the tendency to make compulsive purchases. If you are using Twitter for entertainment, your value to Twitter is on the lower range ($.63) as they can still extract value from your data whether you click the links and/or make a purchase. If you’re a power user, who is glued to your phone in search of deals, your value is probably on the higher range ($3.16).
Today, Kevin reported that one recent study showed 10 percent of users who engaged with a certain brand’s ad converted to paid customers. Naturally, the more you engage the higher the probability of conversion and hence the higher your value to Twitter.
What type of Twitter user are you? Have you clicked Twitter ads in the past? Did it compel you to make a purchase? Let me know in the comments!
by lilibalfour | | think
About 50 percent of all startups will not make it to year five and approximately 67 percent won’t make it to year 10, according to historical data gathered by the Bureau of Labor Statistics over the past 18 years. The good news is I’ve documented why the average company fails.
You Don’t Test Your Product or Service
The last time you hosted a BBQ, I’m sure you surveyed your guests to determine the type and quantity of food they were interested in consuming. You didn’t buy 10 pounds of kale patties with the hopes that they were vegans. Yet, you are building a company without ever asking your target audience what it wants.
You could have utilized free resources that teach you how to read your target audience, but you were too busy frantically building a product that nobody wants.
Tip: Don’t build it until you have sufficient evidence that points to the fact that they are coming. Build it and they will come only works in the movies.
You Ignore Metrics
You make it a point to check into MyFitnessPal each morning to analyze your caloric intake, yet you have no meaningful data on your startup’s fat, sugar, and carb intake.
You could have put together a basic Excel spreadsheet or used the various free and inexpensive tools to measure your performance, but you were too busy chasing high maintenance customers who never converted to profitable clients.
You could have built a monthly financial model, with relevant metrics to measure your progress and understand which customers to chase.
Tip: Different revenue models focus on different metrics. Focus on what matters.
A subscription-based model should focus on churn (% of users who leave) and retention (percentage of users who stay). It is normal to have a 1 percent monthly churn rate while you are getting started. The goal is to decrease the churn rate by ascertaining the reasons users are leaving the service.
An ad-based model should focus on user retention by tracking the percentage of daily active users (DAU) over monthly active users (MAU). The DAU/MAU ratio, which illustrates the percentage of users who log in each day, should stabilize at 50 percent, which implies that half of your users are daily users. Popular sites, such as Facebook, achieve 85 percent daily activation. Ad-based models should also focus average revenue per user (ARPU), by dividing revenue over number of users. ARPU ranges from $4 (Facebook) to $189 (Amazon).
A retail (or pop-up store) model should focus on sales per square foot (SPSF). Warby Parker’s showroom achieves $3,659 SPSF, which is far beyond what most retail stores achieve. Startups should target between $500 to $1,500, depending on the price point of their goods.
To balance the analysis, it is important to look at customer acquisition cost (CAC) and lifetime value of customers (LTV). With a subscription-based model, you hope to earn back your CAC in one year. With an ad-based or retail-based model, this period will be longer as startups will spend money attracting users and foot traffic prior to monetizing.
You Don’t Manage Your Talent
You have an Excel spreadsheet to manage your love life, but you treat your employees like interns.
You could have focused on creating goals pegged to an equity roadmap to motivate and retain key talent.
Tip: Let your founding team understand what is expected of them at the onset. When things go south, you’ll have a benchmark to measure upon.
Most founders issue equity and stock options on a vesting schedule. This typically serves as a motivator and a benchmark. Founders can discuss what is required for continuous employment and vesting.
The employment and vesting criteria should be tied to a base number of hours of performance each week and specific milestones. I wrote about constructing an option pool for employees here.
Below is a basic, high-level example:
Kyle and Kara each own 50 percent of their company, which is contingent on each of them dedicating 70 hours per work to a set group of initiatives.
Kyle and Kara are ready to build a team and use their own employment and vesting guideline for new hires. They carefully create a list of expectations for each new C-level employee and director in order to communicate what is needed for continued employment and vesting. This in turn provides guidance for all future hires.
Did I miss anything? Let me know what you’ve learned from your failures in the comment section below. Remember: There is always a lesson in each failure.
