I am a big fan of A16Z podcasts, and they just released terrific episode on Network Effects.
Network Effects is an important and somewhat confusing topic.
The reason Network Effects are important is that the businesses with true Network Effects are highly defensible, have strong retention and engagement, exhibit characteristics of monopoly, and tend to last for a long time.
Definition of Network Effects
A Network Effect is achieved when adding new users creates value for existing users.
That is, the overall experience and value being inside the network increases with the addition of new users.
How exactly does it work?
Users want something from each other. Each user in such a network is both producer and consumer.
For example, I write blog posts, and I also read them. I post tweets, and I read other people’s tweets. I check traffic on Waze and I also contribute to traffic reports on Waze.
In other words, I am both a producer and consumer. I am both a reader and a writer.
Businesses with Strong Network Effects
Let’s consider three different types of businesses with strong network effects – Social Networks, Multiplayer Games and Sensor Networks.
Let’s start with a canonical example – Facebook. It is famous for its Network Effects and organic growth. Facebook started at Harvard and grew deliberately and slowly to ensure strong connectivity. The more friends and family that joined, the more value existing users derived.
The core Network Effect is that basic activity on Facebook is sharing or posting to your network. Posts are the glue and the trigger.
Each Facebook user is both a producer and consumer, both the writer and the reader.
Next, let’s look at Twitter, which, much like Facebook, has strong Network Effects. The interesting thing about Twitter is that because it is based on a unidirectional “follow” relationship, it has stronger virality. News spreads a lot faster on Twitter. Yet, Facebook is a stronger network because of the family and friendship ties with personal photos acting as a super glue.
Another kind of business that has strong network effects are Multiplayer games.
By definition, these kinds of games are designed to be played with others. When new players join, existing players are better off. Just like how on Facebook we see formation of cliques of friends, in the Multiplayer games we see cliques of players.
The glue and the trigger for the Network Effects in games is the game itself and objects inside the game.
They provide touch points and the opportunities to co-create the game world for the players. The games are highly sticky because the players need to level up, and starting from scratch in these co-created worlds is very costly.
Lastly, consider Waze, a traffic app acquired by Google. Cleverly, Waze creators realized that people in traffic would be willing to share their location in exchange for being informed about the overall traffic patterns and alternative routes.
Each app writes data points and reads back the traffic. Each app is both a producer and consumer of information.
Network Effects and Virality
Next lets look at the difference between Network Effects and Virality, Marketplaces and Economies of Scale — terms often confused with Network Effects.
Virality is about something spreading quickly over an existing network. Network effects, on the other hand, are about creation of a brand new network.
For example, word of mouth is an example of virality – news about an attack in Paris travels quickly through Twitter. PokemonGo is another example of virality – millions of people raced to play the game. And of course, funny cat videos on YouTube are known to be viral.
Virality is great and is really important in successful businesses, but it doesn’t always last. All of the examples above are examples of short phenomenon that spike up and then go away. We don’t think of these events as sustainable over time. They are hits, or outliers, and not a solid foundation for the business.
To put it differently, virality doesn’t guarantee Network Effects, but Network Effects guarantee Virality.
Network Effects and Marketplaces
Next, let’s look at the relationship between Marketplaces and Network Effects.
It would seem that businesses like Uber and Airbnb would have built-in Network Effects, and they do to an extent for some subset of the users, but it doesn’t appear to be true at scale.
Marketplaces have two sides — supply and demand, producers and consumers.
In the case of Uber and Airbnb, some producers happen to be consumers, but not all. Not all Uber drivers take Uber rides, and not all Uber riders are the drivers. Not all Airbnb hosts are also guests and not all Airbnb guests are hosts.
These, and other Marketplaces, have strong virality via word of mouth, but weak network effects.
Economies of Scale vs. Network Effects
In addition, Marketplaces and other businesses at scale achieve supply efficiency or economies of scale.
For example, UberPool becomes cheaper at scale. That is, once enough people want it, your rides get cheaper, so in a way, there is a Network Effect by virtue of more users joining.
Another example would be delivery services like Postmates. If the volume of the orders is low, then each delivery is a one off and expensive. As the volume increases and gets clustered, then deliveries become cheaper because you can aggregate deliveries together along the same route.
In general, the economies of scale are achieved as the business grows. For example, the business can negotiate with suppliers and get a discount in exchange for buying in bulk.
This has nothing to do with the Network Effects – it is related to monopolies and business defensibility.
In general, the businesses with bigger margins at scale become more powerful and more defensible.
Network Effects in Nature
Before we dive into the mechanics of Network Effects, let’s turn to nature which is full of Network Effects.
In science, they are called self-organizing networks. If you aren’t familiar with this concept, I highly recommend you read Complexity, which is one of my favorite science books.
Carbon-based life, the entire living world around us, is based on DNA and RNA, which has the fundamental ability to copy itself. More importantly, DNA and RNA likely emerged as a result of a process called auto-catalysis.
This may sound like a bunch of scientific gibberish, but it is actually really easy to understand and plays a key role in understanding Network Effects.
Imagine the basic blocks of life called A and B. One day they got together and created a new block called AB. Next, A and B blocks can be mixed with AB to form AAB or ABB. Next, you can make AAAB, AABB, BAAB, BABB and so on.
That is, simple combinations of basic blocks can create more and more complex blocks and chains. A virtuous cycle or feedback loop.
How to Engineer the Network Effects
Now we are ready to understand how you may engineer or check for Network Effects in a business.
Each node needs to be part of a simple feedback loop.
On Facebook, the users are readers and writers. Reading and writing creates a strong feedback loop. It is this loop that pulls the users back to use the service. Much like with basic building blocks of life, it is not one to one interactions that are so precious, it is the one to many interactions.
Groups of Facebook users – friends and family, constantly create and consume information, referencing each other, creating basic feedback loops and pulling each other back.
Facebook is a massively successful business because it is a self-organizing network fueled by Network Effects.
The defensibility of Facebook is the network structure and the ongoing Network Effects – the support and formation of new parts of the network. Users who try to leave are constantly being pulled back by their friends and families.
If you found this post helpful, please give examples of other types of businesses with strong Network Effects. Let’s have a discussion and debate!
Time is one of the things we, unfortunately, don’t have more of.
As the amount of information we have to deal with is accelerating, our time seems to be shrinking.
Here are 12 ways for giving back and being respectful of other people’s time.
1. Schedule Shorter Calls and Meetings
We have written here before about calendar management. One of the ways that time gets wasted is by booking more time for meetings than necessary.
For example, Google calendar and other booking tools often default to 1 hour. That’s a really big chunk of time and is rarely necessary.
By default, schedule 10-15 minute calls, and 20-30 minute in person meetings. Having shorter periods of time makes people skip small talk, and get straight to the point.
This makes conversations amazingly productive and people don’t feel like you are wasting their time.
2. Book Less Time Initially, Go Deeper As Necessary
Always start by booking a short discovery meeting instead of a long one. Get on the same page, identify key issues, and schedule follow ups.
With this approach, you accomplish several things – first, everyone is on the same page about scope of the problem and big picture.
Secondly, you figure out separate follow ups that need to be done and schedule additional meetings as needed. No time is wasted and everyone is feeling productive.
3. Try to Discuss One Topic per Meeting
A lot of meetings meander because people move from topic to topic. Try to have a rule of one topic per meeting. If you can get into a habit of doing this, you will be very productive.
Need to discuss multiple topics? Break them into separate shorter meetings.
With this strategy, it is a lot easier to stay focused, reach a conclusion and come up with the next steps.
Here is a system that I’ve been using for holding office hours at Techstars that works remarkably well. Divide a chunk of your calendar into time spots of 20 minutes each and allow people to book you for 20, 40 or 60 minutes.
The key — only 1 topic is allowed regardless of how much time is booked, so it is up to whoever is booking to think through how much time is needed.
4. Always Have An Agenda and Plan Time per Topic
For most internal meetings you can actually have 1 topic per meeting, but this strategy doesn’t work with, for example, board meetings.
In case you have to have a longer meeting, set the agenda and set the time allowed to discuss each topic on the agenda.
Unless you do that, there is a chance that the a topic will drag and you will never get to other topics. As a result, the whole meeting may run over and feel unproductive.
If you are out of time, sum up the takeaways and schedule a follow up. Don’t spend more time than you are budgeted.
5. Prepare and Send Materials in Advance
The meetings are remarkably unproductive when people aren’t prepared.
Getting everyone prepared is hard because it involves asking for more time.
For example, if you are running a board meeting, it is much better to send materials ahead of time so that the board members have time to review.
Another great strategy that Jeff Bezos instrumented at Amazon is to budget the time in the beginning of the meeting to review the materials. Either way, people need to invest more time to prepare to be productive in the meeting.
It is also helpful to ask people to write stuff down ahead of time. This way, everyone can think things through and really prepare. The culture of writing things down is a super effective tool and helps to avoid wasting time.
6. Summarize Each Meeting and Next Steps
Set aside the last 5 minutes of the meeting to summarize what was said and map out the next steps. Unless you do this, people will walk away from the meetings without a sense of progress and with the sense that time was wasted.
If there is a follow up meeting, be clear on what the topic / agenda will be, who is responsible, and communicate this to everyone. This way, people will feel engaged, positive and productive instead of feeling like their time was wasted.
7. End Calls and Meetings Early and Give Time Back
One of the most wonderful things you can do during a meeting or a call is to end it early.
If there is nothing to discuss, if you got through everything, then wrap it up. Say – we are done, I am giving you 5, 10, however many minutes back.
Get into the habit of doing that and people will LOVE you.
I make a point of repeating this a lot during the Techstars program – I am giving you time back. I am respectful and grateful for your time. By doing so, I hope that founders will start respecting their time, my time and other people’s time more.
8. Don’t Be Late
This is an obvious one, but it is important.
People who are constantly late aren’t aware that they waste other people’s time. There is no situation or reason why this would be okay.
If you happen to be late, always apologize and make it clear that you respect the other person’s time. It’s a seemingly small thing, but it really matters.
9. Don’t Cancel or Re-schedule Last Minute
Another pet peeve is cancelling the meeting last minute or on the same day. I am guilty of doing it a few times myself, and it is really bad.
Cancelling last moment is literally unacceptable if the person has to travel to meet with you because you just wasted hours of their time.
If the meeting is a call or a Google hangout, cancelling last minute isn’t ideal, but it is not as bad, since technically you are giving the person time back.
Still, it is not great because it throws people’s plans and routine off.
10. Don’t Ask for Last Minute Meetings
I’ve written about this topic in a whole post. When you ping people last minute and ask to meet, it is a bad vibe.
First of all, people most likely already have plans, so by reaching out to them last minute, you are implying that they aren’t busy.
More importantly, these unplanned meetings are rarely as productive. This is particularly true if the meeting is meant to be a working session, or there are specific asks. The last minute meetings aren’t great because the other person doesn’t have the context and isn’t prepared.
11. Send Less Email
Email is a beast. The more of it you send, the more of it you get.
Just making a bit of an effort to reduce the volume will help others and help you reduce the volume. See what you can cut out and see what doesn’t need a reply.
Most importantly, quickly move people to bcc when it makes sense, and avoid unnecessarily cc-ing people on your emails. Those add up to a massive waste of time.
12. Use Asynchronous Communication and Google
While Slack and texting are great in some respects, they cause constant context switching.
The loss of context is super costly, because people, after the interruption, have to get back to what they were doing and that takes time.
Do you really have to ask this question? Can you find the answer on Google or internal docs?
If you do have to ask a question, how urgent is it? Does it need to be immediate? If not, use asynchronous communication channels, such as email or tools like Voxer.
Be mindful of interruptions, they are total productivity killers and causes of stress.
And now, please share with us your productivity tips and ways you help others save time.
This was originally published on Alex’s Blog.
Every single company, and startups are no exception, depend on software. Software went from being critical to every business, to being THE business.
Software creation is an art, a craft and a process.
Building and shipping software is a marathon that lasts the entire lifetime of the company.
To ship software effectively, you need to establish cadence and a process. In this post, we discuss a lightweight framework and tips that startups can follow to ship quality software regularly and effectively.
1. Setup Sprints
To start, you need a light process for identifying what to build and how to actually build it. Teams that choose to ship without a process end up being chaotic, stressed out and ultimately not successful.
Here is a light process, called a sprint, that will help your team ship to production every 2 weeks.
The sprint starts with planning what to build. The features are organized into two lists – all features you want to implement and a subset of features you will actually implement in this upcoming sprint.
Before the beginning of the sprint, the team gets together and re-prioritizes all features. Once the ranking is complete, the top 3-5 features are moved into the list to be completed for the upcoming sprint.
Once the features are selected, they are LOCKED for this sprint. You can’t add new features in the middle of the sprint.
This is critical. Making changes in the middle of the sprint throws off the timeline and causes massive stress to your engineering team. Avoid doing this at all costs.
Similarly to having 2 lists for features, you will have 2 lists for bugs as well. Before the start of each sprint, re-prioritize all the bugs and move the ones that need to be fixed into the list for this sprint.
Here is a sample setup for your sprint:
- Planning: 3 days before the start.
- Fix Bugs:
- Day 1: Wednesday
- Day 2: Thursday
- Day 3-7: Friday – Thursday, except weekends
- Day 8: Friday
- Day 9: Monday
- Day 10: Tuesday
There are a few tricks to setting up the sprint.
Never release into production on Friday or in the evening.
Why? Because things tend to break and then you might end up ruining your weekend or be stuck in the office all night.
The second trick is to always fix the bugs first before coding new features. This way you are making sure that you are building new features on a solid foundation.
If your sprint is 2 weeks, you have 5 days to code new features. This is plenty of time assuming you broke down your features into small chunks. In fact, this system forces you to do that. You are always making progress, improving the product and moving forward.
The last part of the sprint is testing and making sure you release quality software.
The last few days of each sprint should feel like a spiral.
You test, find bugs and fix them. The closer you are to the release, the less bugs you should find. Once there are no bugs found, you are ready to ship.
When you are in the home stretch of the release, it pays off for everyone to focus on specific bugs or features together. When everyone is focused together, you squash down a bug faster and then move onto the next problem. This strategy helps the entire team spiral down towards the release together.
2. Prioritize and Handle Emergencies
In addition to implementing sprints, get your team to always prioritize and stack rank features and bugs.
When everything is important, nothing gets done.
Create simple and clear language that everyone can adapt when talking about priorities. For example:
- P1 – highest priority, business critical
- P2 – important, needs to get done, but not critical
- P3 – not important, nice to have
If there is a P1 bug that is found in production, and it impacts the business, you need to pause the release and push a fix into production. This situation should be rare.
If you are finding that this happens all the time, then you aren’t doing a good job testing and fixing bugs in the final stages of your sprints. You need to revisit how you are handling your spiraling down towards the release.
As you review your lists of features and bugs, re-rank and re-assign priorities. It is totally fine to have priorities change between sprints, just not during the sprint.
3. Pair Program and Test
Agile software development comes with a toolbox of methods to help build high quality software. My favorite two are pair programming and testing.
Pair programming is literally two engineers working together. One is typing the code and the second one is watching.
Pair programming may seem like a waste of time, but it is actually a more effective way to code especially critical pieces of your system.
Pair programming increases the quality of the code and establish awesome camaraderie between team members. You create clear and bug free code out of the gate.
Testing, and unit testing in particular, is another strategy to ensure quality code. It is actually pretty hard to write and maintain a body of tests for your code, but it is necessary and it pays off. After all, if you didn’t test something, how do you know it really works?
There are two types of tests that are particularly helpful. The first set of tests are for critical pieces of your software, things that just can’t break. The second are a set of tests that exposes the bugs you find. Whenever you find a bug, first write a test that exposes it and then fix the code. This way, you are certain that if the bug returns, your test will catch it.
4. Refactor Your Code
Like anything else in the universe, software decays over time. This may not be as obvious because we don’t readily see rust in the code, but it surely is there. Overtime, large-scale software becomes tangled and fragile and needs to be refactored.
The way to deal with it is to constantly refactor or improve your software. Much like how you go to dentist for a cleaning, you need to proactively clean your code.
Encourage the engineers to remove unnecessary code and constantly improve the software to make it better.
In addition, every 6-8 weeks schedule a cleaning and improvement sprint. In this sprint, instead of business features, the team is focusing on cleaning up the code, making it better and writing tests.
5. Create a Happy and Productive Engineering Team
It is really easy to grind down your engineering team, and most startups manage to do it quickly.
Startups thrive on chaos, but a chaotic approach to building software just doesn’t work. It is like trying to sprint through a marathon – you can’t do it.
Writing software is a highly creative and intellectually intense activity and requires a fresh brain, clarity and specific cadence. Software engineering can be either incredibly rewarding or incredibly stressful.
Setting up sprints and clear priorities is a great first step to creating a happy and productive engineering team.
By creating cadence, you reduce stress. By enabling your team to ship to production frequently, you are making the engineers happy. After all, there is nothing more rewarding than seeing the code you created work and make a real difference in the world.
Please share with us the strategies and techniques you use for building software in your startup.
This post was originally published on Alex’s blog.
I was recently chatting with one of the Techstars founders and found myself asking her – What is the API for your business?
This may sound like an odd question, but it actually is not.
Every single startup, every single business, has an interface that it offers to the world. Some of these interfaces are super simple, like Google – all you can do is search. Some are more sophisticated, like ordering things from Amazon – you can browse, search, add to cart, order, request a refund, etc.
Even if you aren’t an engineer or a product manager, it is really useful to think about the API that your business will offer to the world. Thinking about your business as an API allows you to get a lot of clarity of what your business actually does, and why.
API mentality forces you to be minimalistic and clear.
What is an API?
API stands for an application programming interface. You can think of API as an interface or a contract through which a software component, a web service, or in our case, a business, interacts with the world.
In other words, an API is a protocol for communicating, sending requests and receiving responses from a software component, a web service or a business.
For example, take a simple Check Box, a UI component that we see around the web. The interface for Check Box allows you to check or uncheck it.
/check -- causes checkbox to be checked /uncheck -- causes checkbox to be unchecked
A different example of an API would be, for example, launching 10 servers on DigitalOcean web service cloud. That API may look like this:
/launchServers?numServers=10 -- starts running servers in the cloud.
In this last example, the launchServers command allows the user of the command to specify the number of servers to launch. Most services allow this kind of customization or parameterization for maximum flexibility and reusability. It wouldn’t make sense to have a different command to launch 10 or 20 servers, since it is essentially the same command.
What is the Business API?
When thinking about your business API, it is handy to think about the key concepts of your business and the commands associated with them. What can the users of your business do? Here are some simplified examples of the Business APIs that you will likely recognize:
google.com/search?term=techstars amazon.com/browse?category=books amazon.com/buy?bookId=b&customerId=c uber.com/orderCar?location=loc&customerId=c twitter.com/postTweet?text=t&userId=u facebook.com/friend?userId=u&friendId=f
Modern businesses run in the cloud, and the way we interface with them is using HTTP protocol. This maybe counter intuitive since most of us, as end users, see pretty screens and friendly apps, but the nuts and bolts interface, the actual commands, are sent over HTTP.
The reason this is important is because HTTP reminds us of the actual bare bone APIs of these businesses. These are raw, direct interfaces that ultimately define EVERYTHING we can do with these services.
How To Design Your Business API
Now let’s focus on your business. When you are starting out, you are doing a whole bunch of things – understanding your founder market fit, talking to customers, thinking about your unique insights and advantages, your go to market strategy and a ton of other things.
Building the API for your business should be one of the early activities you do.
Use HTTP protocol (it is not that hard!) and map it out. Way before you build your MVP, design your API.
The exercise of designing your API will help you get a lot of clarity about your business. You will make decisions about what you will or won’t do in your MVP. You will prioritize some commands over others. You will realize, by writing on a piece of paper, whether you are doing too much or not enough.
Make your API as simple and as elegant as possible. Don’t think about what to add, think about what to remove.
Your basic API will be an amazing tool for helping you communicate with your customers and with your team. It will also be a stepping stone to building your MVP.
Once you design your API and you are happy with it, implement it. One by one, get the raw API working via HTTP. That’s right, you don’t need fancy UX and pretty apps to start. You can get a feel for your business by implementing your API.
Evolving Your API With Your Business
As your business evolves and grows, so will your API. Keep updating it and making it better. Keep adding to it, but be stingy. The best companies have simple APIs.
Think about Google – it has an amazingly simple interface, but it does something incredibly complex inside. Similarly, Steve Jobs always pushed Apple to make the interface as simple as possible, something that just works. Apple products hide incredible complexity and engineering ingenuity beneath a simple interface.
You want your business to be as simple as possible, and the services behind the interface as valuable as possible.
As your business grows, different parts of your business will evolve their own APIs. You will have a public interface and internal interfaces. It is incredibly helpful to keep all your interfaces simple and clear. Push yourself to always have clean interfaces and use them.
Your own business should always be the first and the biggest customer of your own API.
As your business grows, so will the ways it can be accessed.
You will have a desktop and mobile site, text messages, bots, iOS and Android apps and dozens of other ways your business can be accessed online. All these things can be thought of as clients of your API, clients of your business.
We now live in the world of cloud services and automation. Every major web company, whether it is Google, Amazon or Facebook has APIs for services they offer.
In the future, every single business will be accessed not just through a graphical user interface, but programmatically. As AI and automation enter our world, more and more transactions and access will happen through web services and APIs.
As a startup, you can prepare yourself for that exciting future by simply starting to think about and writing down your own API.
What commands your business offer to its customers? What is your API?
Originally posted on Alex’s blog.
One of the worst things that can happen to a CEO of an early-stage company is to be in the state of perpetual fundraising.
Here is how you can tell that it may be happening to you:
- You have been fundraising for a while
- You are fundraising and running the business at the same time
- You don’t have strong interest from investors
- Investors aren’t engaged / don’t ask a ton of questions
- Investors keep telling you it’s early / to keep them posted
The list can go on, but you get the point.
You are wasting your time because you aren’t prepared and the timing is likely off.
Please go and read my popular post about 9 seed funding gotchas and I will be right here when you come back.
Disorganized, prolonged fundraising is exhausting and harmful for your company and your personal brand.
So what can you do?
Here are some things for you to consider to help the situation.
Do the Gut Check
Be honest—are you really READY to fundraise?
Have you prepared enough, or are you going out too early? When you go to bed at night and think about it, like really think about it, are you really ready?
The best way to fundraise is not to go out early, but to first prepare and answer a whole bunch of key questions about the business and the opportunity.
Think about questions like: why are you the right team, why are you going after this opportunity, why now, how do you know this is needed, what are the early indications of product-market fit, what is the business model, what are the unit economics, how are you going to acquire the customers, what is the pricing, what will this business be like in three years from now, who are the right investors, why would they invest, how do you get in front of them, what will be important to them—etc, etc, etc.
The nerdier you get about fundraising, and the more prepared and disciplined you are, the higher the chance you will be able to get it done faster.
Build Investor Pipeline
Assuming you passed the gut check, and you really feel like you are ready, next assess whether you are able to get in front of enough qualified investors.
Like sales, fundraising is a numbers game. If you don’t have a strong enough pipeline, you can’t get to the finish line.
Every single NO should cause you to add 3-5 more prospects to the top of the funnel.
If you are early on in the process, particularly a first-time founder without a strong network, you will find that fundraising is taking a long time because you aren’t even getting that many meetings.
Your fundraising process is stretched over weeks and months, but you aren’t seeing a lot of investors. As a result, you obsess over every single opportunity, like a few conversations you are having instead of focusing on having a lot more conversations.
What you need to do is to pause and focus on filling up your pipeline with 20-30 new investors. Just keep filling the pipeline, but do not take the meetings. After you have the pipeline filled up, THEN go and pitch everyone. This strategy will help you get a real signal and have a chance at creating momentum in your round.
Understand Investor Feedback
Assuming you have enough in your pipeline and you are meeting a bunch of investors in a short period of time, you really need to understand their feedback. What is the reason that people are saying NO? Do you not have enough traction? Is the space not interesting? Is the opportunity too small? Is it something else?
Whatever it is, your job as a founder is to avoid happy ears, parse the feedback you are given and really take it to heart.
If you are early and don’t have enough traction, then you need to understand the milestones people expect and go build the business until you hit them.
Investors may tell you that they don’t believe in the market size, or in unit economics or in your customer acquisition strategy—whatever feedback they give you, whatever the signal is, go back and address it. Understand the pushback, do research, get data, execute and come back with a fix.
Also, know that there are more subtle things that people won’t necessarily tell you about. For example, investors may not believe in the founding team and don’t see strong founder-market fit. Investors may not like the space. They may have issues with well-funded competition. If the issue is more subtle, try to really figure out what it is.
The bottom line is whatever the feedback is, no matter how tough it is, go back and address it.
Pre-seed Fundraising Strategy
Now let’s look at specific strategies for types of financing.
Your pre-seed round is truly an idea stage. You don’t have a product and you may not have your team fully assembled. You are super, super, super early. Read this other post I wrote first.
If you are a first-time founder, focus first on your friends and family, people who really know you and already think you are great. Get at least a little bit of their capital, and maybe even your personal capital so that you aren’t at zero. Being at zero is the worst state.
Don’t spend any time with VCs at this stage; you are WAY TOO EARLY.
You can raise capital from angels, but the key things are to a) get a little first from friends and family, b) target the investors correctly, and c) figure out milestones.
To build a correct list of potential investors, talk to other founders and ask them who the pre-seed stage firms and individuals were that funded them. Research, research and research some more to build the right list, otherwise you will be massively wasting your time.
Only specific funds and individual angels invest so early, so your job is to find investors whose strategy it is to fund the companies at your stage.
Next, think through all the tough questions you will be asked. Do the gut check—do you know the market, the customers, competitors, etc.? The more fluent you are in the problem and the business, the higher the chance you will get the check.
Lastly, clearly define milestones you are going to hit with the pre-seed round.
A typical milestone at this stage would be shipping the product. A better one would be shipping the product and getting a few early customers. No investor wants to give you a check to support your burn.
Investors want to fund you to the NEXT MILESTONE.
In the case of pre-seed, the key question an investor needs to answer is what milestones will enable you to raise a seed round. That’s really the meat of getting the pre-seed check—articulating milestones and metrics that will get you to the next round.
Seed Fundraising Strategy
Everything that we said for the pre-seed applies to the seed round as well.
Keep in mind that the bar is now higher in the seed round. You can’t be pre-product; you need to know your customers and you will likely be expected to have early traction. The game overall is upped significantly compared to pre-seed.
In addition, since the amount of capital you are raising is larger, you need to spend more time on identifying more relevant investors and getting introductions to them.
In terms of targeting investors, start with angels and micro VCs and try to get a few hundred thousand committed. Don’t spend a ton of time early on talking to venture firms, as they take longer and most of them would still think you are early.
By getting several hundred thousand committed on the round, you will be able to create momentum and will have better chance of getting larger checks.
Start with small checks—get to 1/4 or 1/3 of the round then shift focus to larger checks.
Also, how much capital are you asking for? 1.5MM – 2MM may be too high. Review your financial model. Can you make things happen with 1MM? If so, revise your model to be more capital efficient.
It is always better to start lower and then, based on the demand, over-subscribe vs. starting high and never getting there.
Series A Fundraising Strategy
It’s really tough to raise series A if you don’t have strong metrics. Some founders raise on a story, but they are either repeat founders or working in the hyped-up spaces. Most founders will need really strong metrics.
There are exceptions, but if you are already generating revenue, you will be judged by your a) MRR/ARR and b) MoM Growth. However, strong metrics alone won’t get you a check. Not in this market, anyway.
The dance to raise series A involves identifying the right firms and identifying the right partners, then getting to know them and letting them get to know you. It will also involve a lot of guts and luck.
Clearly assess how much appetite there is on the market. You should have a gut feel.
If the demand is not there, cut the burn (you should do it anyway), and go back to building the business.
Focus on getting to profitability.
Get feedback from the investors on what your metrics need to look like and keep them posted every eight weeks or so. Assuming you are growing well and hitting profitability, the investors will likely be open to another conversation.
In conclusion, fundraising is stressful, complex and needs to be done thoughtfully or else it is extra painful and takes way too long.
A lot of founders get fundraising wrong.
Do not fundraise randomly and perpetually. By doing so, you are literally harming your company and your personal brand.
As the CEO/founder, have the strength to listen to feedback, understand that you are not ready, pause, regroup, improve, and go back to the market.
And lastly, get help! Read up, connect with other founders and get 2-3 key advisors on board. You don’t have to do this by yourself.
Originally posted on Alex’s blog.
I once had the pleasure of hearing Lou Gerstner, former CEO of IBM, speak. Something he said stuck in my head: “Never let anyone own your schedule.” It’s simple, it’s obvious, yet it’s genius.
Over the years, whenever I didn’t follow this advice, I was stressed and unproductive. Gradually, I learned that planning and following a routine makes a huge difference in how I feel and what I get done. Here are some of the things that help me manage my schedule that you may find helpful:
1. Create a routine
No matter what you are working on, create a routine. Block times for specific activities and stick with the plan. Turn your calendar into a bunch of blocks, and put activities into those blocks. Whatever is not planned, you don’t do. If you want free time / exercise time / reading TechCrunch time, plan it all.
Your routine may change throughout the year, but at any given time it’s better to have a plan. For example, if you are working on launching a company, and need to do customer discovery, coding, and hiring, then prioritize and block specific times for each activity.
Here is a sample calendar I made that illustrates some of the concepts and ideas from this post.
2. Group meetings and calls into blocks
Group meetings and calls into time blocks. For example, if you need to have outside meetings, block two 1/2 days a week for those meetings, and go to the outside meetings only during those times. Do the same thing for in-office meetings. This way you are not only creating a chunk of time for meetings, you are also creating other blocks of time that you will be able to focus on important P1 work. Do the same thing with calls – book them all back-to-back.
3. Optimize time for different meeting types
Personally, I am now a big fan of 30-minute meetings and 10-minute calls. I think 10-minute calls are a great way to initially connect with someone or give someone quick advice. You can do a Google Hangout or Skype if you prefer to see the person instead of just hearing them. The reason 10-minute calls work is because people skip the B.S. and get to the point. Try it – 10 minutes is actually a lot of time, if you focus. I prefer to do these calls on Fridays, when I am usually working from home.
I am not a big fan of introductory coffee meetings, lunches and dinners. I am a huge fan of coffee and meals with people I already know. Those meetings are typically productive and fun, but the first time you are meeting someone, it’s more productive to do a call, or an actual 30-minute meeting in the office.
Here are the types of meetings you might want to book:
- 30-min meeting in the office to get to know someone or catch up
- 45-min meeting outside of the office, allow 15-min travel time
- 10-min call to help someone who needs advice
- 15-min daily standup – great for startups / engineering teams
- 30-min weekly staff meeting
Whatever meetings you do, group them into blocks depending on your particular schedule. If you feel like a particular type of meeting needs more or less time, then adjust the block accordingly.
4. Use Appointment Slots
There is a great feature in Google Calendar called Appointment Slots. It allows you to book a chunk of time and then split it into pieces. For example, I can book 3 hours of outside meetings and then split it into 3 meetings – 1 hour each. Or I can book 1 hour of calls and split it into 6 calls, 10 minutes each. There is also a bunch of specific tools, like doodle, that do that too.
The next step is to create bit.ly links for different blocks of time. You can have a link for your outside meetings, another link for 30-minute inside meetings and yet another one for 10-minute calls. You then share these links with people and they can book the time with you. I’ve done this with Techstars candidate companies and it was amazingly effective. It minimized the back-and-forth on the email and saved a ton of time for me and the companies.
This won’t work with everyone, because some people may find this rude. I personally don’t find it rude at all when someone sends me their availability. In any case, if you are not comfortable sending the link to someone, then you can use your own Appointment Slots, suggest a few meeting times, and then book the specific slot yourself.
Btw, if you are asking someone to meet, always propose several specific alternative times such as Tuesday at 4:30 pm, or 5:00 pm, or Wednesday at 11:00 am, or Friday at 4:30 pm.
David Tisch gave a great talk that covers scheduling meetings and many more basics of communication.
5. Block time for email
This is the most important tip in the whole post. Email will own you unless you own it. To own your email you must avoid doing it all the time. To do that, you need to schedule the time to do your email. It is absolutely a must. In fact, it is so important that I wrote a whole entire blog post just about managing your email. Go read Inbox 0.
6. Plan your exercise and family time
Unless you put it on the calendar, it won’t get done. Well, that applies to your exercise and time with your family as well. Whether you go in the morning, afternoon, or evening; whether you do it 3 times a week or every day, put the exercise time on the calendar. My friend and mentor Nicole Glaros, makes it very clear that her mornings, until 10 am, belong to her. She hits the pavement or the gym, depending on the weather, and rarely deviates from her routine.
I have been guilty of not having regular exercise routine because I am adjusting to my new in-program schedule, but I am jamming exercise in whenever I can, 4 times a week, and actively working on locking in my specific exercise schedule. Without regular exercise, I can’t be productive at running the fast-paced 13-week marathon called the Techstars NYC program.
Same thing goes about planning time with your family and significant others. If you are a workaholic like me, you will end up stealing time from your family, unless you book it in advance and train yourself to promptly unplug. Many people in the industry have talked about planning family time. My favorite is Brad Feld, who talks about it a lot.
7. Actually manage your time
I think about my time a lot. I think about where it goes. I think about where I can get more of it and how to optimize it. When I was running GetGlue, I had an assistant who was managing my time. She was awesome, she really was. But when I joined Techstars, I decided that I will manage my calendar myself. I have to confess that I am super happy about this decision.
I find myself thinking about what I am doing, who am I meeting with and why a lot more. I meet with a HUGE amount of people every week. My schedule is particularly insane during the selection process. Yet, because I manage my calendar, follow a routine, plan meetings in blocks and use Appointment slots, I find myself less overwhelmed and less stressed.
Taking ownership of my calendar and planning my days and weeks made me a happier and more productive human. I hope this post helps you get there too.
And of course, I would love to hear your productivity tips. How do you manage your time? How do you handle your calendar? What tools do you use? Please share in the comments below.
Originally posted on Alex’s blog.
Josh Kopelman, co-founder of First Round Capital, one of the most iconic and successful venture firms, just posted a must-read Tweetstorm.
Josh’s insight is that founders need to be even better pickers than VCs.
Previously, when asked about First Round’s investment strategy Josh shared these two insights:
1. We think that founder-market fit is very important. I’ve lost a ton of money investing in founders with years of enterprise experience who now wanted to pursue a consumer idea — and vice versa.
2. An initial, compelling and unique insight. We want to understand what about your thesis is contrarian (i.e, why do you think the existing players are wrong) — and why you think a startup (and yours specifically) will win.
So what exactly is Founder-Market Fit, and WHY is it so important?
Founder Market-Fit is literally an indicator of a match between the founder and the problem they are going after.
What compelled the founder to start the business?
What experiences this founder has in the space?
What unique insight does the founder have in order to win?
The reality is that most founders start businesses in the spaces they don’t know much about.
For example, when you ask someone what business they’d start if they could? Most people say they would open a restaurant.
Opening a restaurant is a terrible business idea for 99% of people. Restaurants business has razor thin margins, and a high failure rate. Just because you eat food and love food, doesn’t mean it makes sense to open a restaurant. Most people don’t have founder-market fit to start a restaurant, they don’t get how hard it is to win in this business.
Similarly, we meet a lot of young founders that are thinking about starting a business that helps young people discover nightlife in big cities. The logic is that they had trouble finding what to do, and so did their friends, and therefore it makes sense to start a business helping people discover what to do.
This is not a great business idea and there is no real founder-market fit here either. Yes, this is indeed a problem, but it is not a unique problem, and there is no specific insight that the founders have.
A bit more subtle problem is when you have experienced founders going after the spaces they don’t know much about. As Josh Kopelman said, just because you were successful as a founder of b2b company doesn’t mean you will be successful as a founder of a b2c company. This is exactly what happened to me – I sold my first b2b company to IBM and struggled with my second company, which was a consumer facing startup.
Domain experiences and insights really do matter.
If you are starting in a business in the space you don’t already know, you are literally spending money and time to get educated. It is literally like going to school, except instead of your parents it is your investors who are paying for your education. And the investors typically don’t like that.
Experience is particularly important in b2b space, where domain knowledge is critical. Without strong understanding of the space you can’t identify real gaps and real opportunities.
Founders that start businesses in the spaces they don’t know about typically struggle.
On the flip side, if you do know your space, you can identify real opportunities, go fast and build a great business. Here are some of the examples of Techstars founders who have a great Founder Market Fit:
DigitalOcean is now the second largest hosting provider in the world. The company was started by a team that worked in the hosting space for 10 years and knew it inside out.
GreatHorn is a security company focused on preventing spearfishing attacks. GreatHorn is founded by Kevin O’Brien who was previously part of five security startups.
The founders of ImpactHealth, a direct-to-consumer health insurance company, have over 10 years of experience in the healthcare and insurance space.
Rahul Sidhu, founder of SPIDR, a company that is focused on modernizing police intelligence, was previously a law enforcement officer in a Los Angeles area.
Bora Celik from Jukely, a Netflix for concerts, spent over a decade as a concert promoter.
These founders know their markets and because of that, they are able to identify real opportunities, go faster and build the business.
What about you? Do you have founder market fit? Why are you doing what you are doing? What unique insights do you have that will help you differentiate and win?
Originally posted on Alex’s blog.
We spend a lot of time talking to Techstars founders about focus. We talk a lot about saying ‘no’ to things that don’t matter. We talk a lot about not chasing too many things at once. We try to give founders tools for deciding what’s important. We try to give them a framework for how to get things done.
For me personally, it boils down to three things – my next daily task, my next milestone and my big goal. Let’s call them GMT. Here is what they look like right now:
1. My next task is to send semi-weekly update emails to Techstars mentors. This is something that I do every other weekend during the Techstars program to keep the mentors posted on what’s going on in the program at large.
2. My next milestone is to have a great Demo Day. Not only are Demo Days the culmination of the Techstars program, but they are also significant milestones for me as a Managing Director at Techstars. Demo Days are the stepping stones to my bigger goal.
3. My next big goal is to become great at my job, to become a great investor in New York City. My vision is to help founders create great, transformational, lasting businesses in NYC, have fun along the way, and make a lot of money.
Being really clear about your next big goal, next milestone, and next daily task helps you keep your head straight.
If someone asks you what they are for you, and you don’t know, that’s not great. It likely means you don’t have clarity, and may not be working on things that are important.
Pick your goal first, and then work backwards from the goal while measuring progress along the way.
Work Backwards from the Goal
In my case, the goal is to become a great investor. To do that, I need to keep finding and investing in great startups. The way I do it is to fund them in batches and run them through Techstars program. To have Demo Days as milestones is natural, because the Demo Days are the culmination of the program and the start of the fundraising for most companies.
What makes for a great Demo Day? A bunch of things, but first and foremost, great companies (check out Techstars NYC Winter 2015 class).
Techstars is a mentorship-driven accelerator. We connect each company with a group of great mentors who work with them during the program to help accelerate the business.
The semi-weekly mentor email is just one small task on my list to make sure mentors and the companies are connected. It is a small but important task that is a step towards a great Demo Day.
The daily tasks add up to a milestone, and the milestones add up to the goal.
GMT: One Goal, One Milestone, One Task
If you can stick with the system, it works.
First, you set your goal, and figure out the milestones. Then you are down to the tasks, and it actually gets harder, because there are a bunch of tasks you need to do over time to get to a milestone.
On any given day, I try to be very clear about the single most important task I need to get done. If it’s not in my head, I don’t think I am focused enough. I then go to my to-do list and look through it to get back into the groove.
If you always have your top task in your head, you know exactly where you are going and why.
It’s okay for some days to be muddy and disorganized, but most days need to be pretty clear.
What works for me is a weekly routine. I know what I need to do on Monday, on Tuesday, and all other days of the week. For example, I know that every other Sunday, I send mentor updates. Having a routine really helps me stay organized and keep executing.
The routines can change from month to month, but I use the calendar to chunk my times during the week and that helps me set a rhythm. And that, in turn, helps me focus, prioritize, and know what my next task is.
Don’t Do Stuff that Doesn’t Matter
When you have clarity about your goal and milestones, you also have clarity about what doesn’t matter.
Prioritizing and deciding becomes a lot easier. That’s why for me, if something doesn’t contribute directly to having a great Demo Day, I won’t prioritize it. For example, a lot people want to meet with me, but I can’t take a ton of these meetings before the Demo Day. I am busy helping the companies. So, I explain it to people and ask them to follow up with me after Demo Day.
Also, I have a bunch of tasks and projects related to broader Techstars ecosystem that I will get to after the Demo Day. I simply don’t have the time to do them, and they are not included in my next milestone. This system of Action and Idea lists is helpful for staying organized.
Use KPIs to Measure Progress to the Milestone
I use KPIs and data to measure progress towards the milestone. Using numbers to measure progress is important, because otherwise you can’t tell if you are getting closer to the milestone.
One of the ways that investors, myself included, measure progress is by looking at the value of their portfolio. It is difficult to do for early-stage companies, and by no means is this an exact science.
Still, as long as you have some sort of consistent measurement, it works. For example, I know that the 2014 batch of Techstars NYC companies have raised over 20MM in funding, and I know that this stacks up pretty well historically against other NYC and Techstars classes. While this does not mean that I am becoming great at being an investor, a lack of financing of the companies would imply that I am not doing well.
I also use other KPIs to help me check that I am heading in the right direction. For example, we ask the founders during the program and afterwards to rate my performance. High ratings mean that founders are happy with our help. When they graduate, this would lead to a positive word of mouth, and they will recommend the program to other founders, and that would help me invest in more great companies.
Apply This to You and Your Startup
How can you apply this to you and your startup? Actually, this system works equally well for individuals and startups.
For a startup, you need to start with your Vision. What does the world look like according to you? What does the world look like when you are a successful business?
The Vision leads to the Milestones. What do you need to achieve the Vision? How do you get there? For most startups, the first few milestones are about traction and funding. Typically, the first milestone is to prove that your product is needed, to prove that there is a demand, and to get early customers.
The second milestone is typically funding. Once you’ve proven that your idea has potential, it is easier to raise funding.
You set KPIs and drive to the milestone. Build the product customers want. Do things fast, have hypotheses, test stuff, iterate, be organized and chaotic all at the same time. But at any moment, be clear about your next task – what are you working on and why? What milestone are you trying to hit? What is your big goal?
So let’s try this out.
Do you know what your goal, milestone and next task are? Please share it with us.
This was originally posted on Alex’s blog.
The following post was originally posted on Brunchwork.
Seasoned entrepreneur and investor Alex Iskold recently spoke at brunchwork. If you are involved in the startup scene, especially in New York, you probably already know Alex from his position as a Managing Director of Techstars, the leading accelerator. Before Techstars, he founded and sold two startups: Information Laboratory, which was acquired by IBM in 2003, and GetGlue, which was acquired in 2013.
Now an investor in over 40 different companies, Alex shares his advice for early stage founders:
1. Know your market.
Entrepreneurs should be well equipped with expertise in their industry. In fact, founder/market fit is one of the main criteria that companies need to be selected by Techstars.
“Don’t start companies in the spaces that you don’t know anything about. Your parents are willing to pay for you to learn in college. Investors aren’t willing to pay for you to learn something you don’t know.”
If you don’t have the necessary expertise and are still itching to create your own business, attach yourself to other early stage companies, learn from them and gain the experience needed.
2. Think about revenue early on.
The mistake that many early startups make is that they are wrapped up in the problem and their solution. However, they don’t have the numbers to support them as a viable, revenue-generating business. These numbers are paramount to investors.
“The definition of business is revenue that can support itself. The best dollars are not venture capital dollars. They are customer dollars.”
3. Be strategic about what metrics and KPIs you track.
Big data allows businesses to keep track of practically everything, but that doesn’t mean that they should. In fact, Alex said, “When you have too many metrics, it is as good as having zero metrics.” Entrepreneurs need to focus on and understand “which numbers drive [their] business and why.”
“There are no universal KPIs, but there is a universal system of applying KPIs to every single business.”
At Techstars weekly KPI meetup, companies are organized into groups depending on their business model.
4. Start pitches with a hook.
A common mistake founders make when pitching is they begin by talking about the problem they are solving.
“People want numbers, data, some sort of facts to latch onto.”
Entrepreneurs can grab investor attention by first highlighting their expertise in the space, their number of paying customers, or their existing investors. When companies lead with the problem, “people tune out and that is because, unless they know that you have some sort of traction or you are qualified, it’s just abstract words,” Alex said.
As the Managing Director of Techstars NYC, Alex Iskold has helped dozens of young entrepreneurs and businesses develop their strategy, build their brand, and receive the funding they need to realize their potential. He is also an avid blogger, so if you want to learn more valuable insights about starting a business, check out his blog here.
Only serial founders with strong domain knowledge, track record and traction get funded quickly. For most founders, raising a seed round is a lot more work, but there is a method to the madness.
We often write here about raising capital. Capital allows startups to go faster and generate growth. However, raising capital is not simple, at least for most founders.
Let’s start with what is probably the worst case scenario – you are a single founder, right out of college, with an idea in a space where you have no domain expertise. That is, you have no team, no product, no traction, no experience in general, and no experience in the space specifically.
This extreme case illustrates the reasons why investors are skeptical – this is a very risky investment situation. That is, you may be brilliant, and you may pull it off and build a massively awesome business, BUT this is clearly a very risky bet.
Investors, particularly angel investors, look for ways to reduce the risk when they are funding a company. That’s why the founders who get funded the fastest are the ones that REDUCE INVESTMENT RISK.
Below we discuss the profiles of founders that investors gravitate to and tend to invest in.
1. Serial founders
You already know this, but I will say it anyway. The world is not fair.
Serial founders who’ve been successful are MUCH MORE LIKELY to get funding.
I’ve met many investors who simply would not fund first-time founders. They are not bad people. It is just not part of their fund strategy.
When these investors raise money from their LPs (limited partners, i.e. investors who give money to investors), they promise them in their decks to only focus on serial entrepreneurs. This is no different from an investor saying they will only focus on healthcare or they will only invest in NYC companies. It is fund strategy, and while I personally do not believe in investing that way, I recognize that it is a perfectly legitimate strategy.
Investing in serial founders with domain expertise makes sense.
First, serial founders avoid making silly mistakes in just about every single aspect of the business that first-time founders make. Serial founders intuitively know what NOT to do.
They know what WON’T work. Because of that, they tend to execute better, grow companies smarter, and get to revenue faster. Not always, but that’s the perception of the investors.
2. Founders with domain knowledge
When you are starting a business in a space you don’t know much about, you are at a MASSIVE disadvantage.
Think about it, when you don’t know something, you have to study it. For things like physics or international affairs, you go to college. You spend years learning, and you have to pay for your learning.
When you start a business in a space you aren’t familiar with, investors feel that they are paying for you to learn the business. That is, you aren’t executing right away—first, you are learning.
Investors aren’t your mom and dad; they don’t want to pay for your education.
Investors are attracted to founders with domain knowledge. Investors talk about so-called founder-market fit.
Why are these founders doing this business? The answer investors are looking for is—the founders know a ton about the space and have identified an opportunity. The founders know that there is an opportunity based on their strong domain knowledge and years of experience in the space.
3. Founders with Traction
While your business is just an idea, investors will come up with 1 million reasons why it won’t work. But if you keep growing week-over-week, month-over-month, and grow your revenues and customers, eventually all objections go away.
Investors can’t resist funding growth. Investors can’t resist funding traction.
Growth and traction are indicators of a product market fit.
They are indicators that the business is really working. Whether you’ve done a startup before or whether you know the space or not no longer matters. Growth and traction mean that you have figured it out and it is working, so the investors want to jump on board.
4. Founders with Experience and Network
If you aren’t a serial founder and don’t have a ton of domain expertise or traction, you can still get funding, but it is A LOT HARDER.
There is a pattern in the industry where founders coming out of top tech companies like Google and Facebook get funded. If you spent years and proved yourself in a product or engineering role at one of those top tech companies, potential investors tend to take you more seriously.
This is because you are likely to come recommended from a strong network of alumni from those places who can vouch for you and introduce you to the investors. For example, you worked with a founder whose company got acquired. When this person is introducing you to their investors, the investors will be paying attention.
In a way, this dynamic is not very different from graduating from a top-tier school. You lean on a strong network and leverage your connections to get an introduction to investors.
5. Mission Driven, Intellectually Honest Founders
Some founders clearly stand out from the rest. You can tell how obsessed they are. These founders won’t go away and won’t give up no matter what. Investors often refer to these founders as mission-driven.
In addition to being mission driven, these founders are deeply self-aware and intellectually honest. They are socratic and introspective.
Mission-driven founders are on a journey of discovery. They have a true north, but are flexible about the specific path that gets them there.
They radiate power and awesomeness, and although they may be young and inexperienced and early, they manage to convince investors with their mix of enthusiasm and knowledge. Mission-driven founders have infectious energy that attracts investors. Investors decide to roll the dice alongside these founders.
When raising capital, think about the types of founders that tend to get funding. Which one of these founders are you?