Designing Your Product: The sweet spot of lifetime value.

The Sweet Spot for Buying

 
Some people love the charts and graphs. They're helpful in thinking about the business you're in and how you're going to design your product offerings. I actually use a number of these same thoughts in designing medical service businesses and teach them to doctors (who also love to cram in the kitchen sink).  I would guess that the actual sweet spot moves over time.

Via: LukeW

In response to my Sweet Spot on the Curve article, Klaus Kaasgaard, Yahoo! Director of User Experience Research, pointed me toward a Harvard Business Review article titled Defeating Feature Fatigue that highlighted some additional considerations for determining the feature curve sweet spot. To paraphrase Klaus:

“Before using a product, people will judge its desirability and quality based on ‘what it does’ (i.e. the number of features). Even though they may be aware that usability is likely to suffer, they will mostly choose products with many features. After having used these products however, usability will start to matter more than features and people will choose easy-to-use products over products with many features. The dilemma is that in order to maximize initial sales one needs to build products with many features, products that do lots of “stuff”. But in order to maximize repeat sales, customer satisfaction and retention one needs to prioritize ease-of-use over features.”

Barry Schwartz echoed this situation in his talk at User Interface 11 when he articulated the capability vs. usability tension inherent in decision-making. In a test Barry referenced, participants preferred to have CD players with 21 features to ones with 7. But if they first used the 21-feature player for a while, they preferred the 7-feature one.

Elegant Design

Strive for Elegance, Not Simplicity

“Simplicity is a myth whose time has past, if it ever existed.” Thus claims Don Norman in a new article for Interactions magazine. Joel Splosky concurrs, noting

Making simple, 20% products is an excellent bootstrapping strategy because you can create them with limited resources and build an audience. It’s a Judo strategy, using your weakness as a strength, like the way the Blair Witch Project, filmed by kids with no money at all, used the only camera they could afford, a handheld video camera, but they invented a plot in which that was actually a virtue. So you sell “simple” as if it were this wonderful thing, when, coincidentally, it’s the only thing you have the resources to produce. Happy coincidence, that’s all, but it really is wonderful.

Startup Entrepreneure: 9 business selection criteria.

From Fabrice Grindas 9 business selection criteria:

 
Fabrice Gringa has an interesting history in startups. Listen to Fabrice Gringas podcast on Venture Voice and you'll see what I mean.

He also has taken the time to detail what he sees as the 9 criteria that need to be filled in order to undertake or launch a new venture. It's a great list. I've added my own views as a counterpoint. 

Fabrice details an number of points that stem from his self analysis that he has a lack of creativity so he must ride the coat tails of others if he's going to be successful. It seems to have worked so far. 

Note: The 9 criteria are all represented here but some extraneous comments are not included. Fabrice's entire post is here.

9 Business Selection Criteria

The traditional cliché of entrepreneurs is that they have an idea and vision. They build companies to fulfill that vision. I am not this type of entrepreneur. I realized long ago I lacked the creativity to come up with brilliant new ideas. Frankly I lack creative skills in general including the ability to paint, dance or sing :)

To cover up for that deficiency, I use a rational thought process in evaluating business ideas to decide which business I will create, invest in, buy or join. These are my 9 criteria:

1. At least a $1 billion addressable market
This criteria is inherently personal and depends on the entrepreneur’s ambition, but there are good reasons to target larger markets:

• It’s easier to obtain funding
• Many Internet businesses have a certain amount of fixed costs but limited variable costs, therefore the larger the business, the higher the net margin
• I find it more interesting to build larger companies

This does not mean that the market must be a $1 billion market at the launch of the company, but that it must have the potential. 

2. A valid business model understood from the get go
There is only a 5% chance that a company created today will still be around in 5 years. I have not seen official statistics, but many VCs seem to believe that only 0.1% of the company started without a valid business model succeed. It’s so risky to create a company to begin with, I would rather have all the odds in my favor…

3. Does not require more than $2 million in seed or $15 million in first round VC money
If it requires much more, the business might be too capital intensive which could lead to too much dilution and suggest that this is an idea that is easier for a large incumbent to fund rather than a new startup.

4. A business where you have a real shot at being one of the top players - at least in the region you are targeting
Avoid entering businesses where many players are well funded or where the incumbents have a sustainable advantage. That is not to say not to enter businesses where there are incumbents - just make you have a hard to replicate edge on them - after all Skype did extremely well because it entered the telephony market with a radically lower cost structure than the traditional telcos and used it to its advantage.

5. A scalable idea
This is again a very personal criteria. Walmart and Starbucks are great businesses, but I would rather not be in a business where I need to open a new store to increase my sales as it leads to slower growth and greater capital requirements. Internet businesses are magical as they give you the ability to build and grow global companies in record times - just look at what Google, eBay, Skype and many others accomplished in less than 10 years - in some cases in less than 5 years!

6. A business with little or no risk of disintermediation and/or margin compression by suppliers and/or customers
You are in a much safer position if you are much larger than your customers and/or suppliers. Walmart exerts tremendous pressure on its suppliers which are much smaller than it is and depend on its sales. eBay can also continuously increase prices on its sellers - none of which is in a meaningful position to fight back on its own. 

7. A business that is in a rapidly growing market
A rising tide raises all boats. Growing markets generate more interest from the press, consumers, customers and suppliers. Moreover, if you are gaining share in a rapidly growing market, this can create exponential growth.

8. An idea that I know how to execute on or can learn how to execute on
For now I will probably focus on technology ideas as I have a clear comparative advantage in the field as I understand technology and know how to manage technology organizations.

9. An idea that I like and want to do!
One of the keys to happiness and success in life is to do things you love and are passionate about…

A few things to note:
As you can see, I did not mention barriers to entry as a business selection criteria. While it would be nice to be in a position to have strong barriers to entry from the get go - it’s relatively rare to be in a position to have a sustainable barriers to entry from the start especially as it is becoming easier to duplicate technology or even get around many patents. I prefer to focus on building the barriers to entry with the business - the very fact of operating a business - having customers, suppliers, press attention, creating a brand - creates barriers to entry.

Googles Big Idea Challenge:

Google nips startups.

It seems that Google thinks that good ideas might be germinating in the halls of higher education. I can understand Googles motivations, they want to have the smartest people working for them rather than competing with great ideas.

Via Google Blogscoped: Sam Davyson says, “This morning in my university pigeon hole I got a flyer about the Google Big Idea challenge. They're targeting grads.” The flyer reads:

The Google Big Idea Challenge
What is Google’s next revolutionary product and why?*
Graduate Jobs at Google

We are looking for final year students and recent graduates who are creative and think differently. By answering the question posed above in the The Big Idea Challenge, you have the opportunity to impress us and get a job at Google. Your answer can be in any format you choose; this might be a business plan, schematic diagram, presentation, or just some text. The top entrants will be invited to the Googleplex in London to meet the the team and talk through their Big Idea.

How to Apply

• Visit www.google.co.uk/bigideachallenge to find out more
• Send us your application by January 5th 2007

*This must not be an existing Google product.

I am curious about what kinds of reaction they'll get. I would think that they might get some great ideas and scoop up a few crack troops, but it might be that the best startup ideas won't be attracted to working for the man. The allure of becoming a G-man may begin to wear thin. I'd think that working for Google is beginning to resemble many large tech companies (free food notwithstanding).

The Business Networking Lunch: Eating for entrepreneures.

'Never eat alone' as a startup.

I can't remember where I first heard the above statement, 'never eat alone', but it's a truism for entrepreneurs that has legs.

Last week I had a number of lunches with people I'd like to get to know better. Nothing particular in mind and no presupposition other than to know someone better. Last week I had lunch with Jordy (jordyblog) and Pete (shmula). I knew neither of them well. Now I would count them both as friends.

I had no ulterior motive. No pressing need. No 'reason' other than I would like to know these individuals better.

Opportunities come from relationships. Everything's an old boys network, even if there are no boys and they're not old.  You will never know who is in a position to help you or your business.

Corporate Alliance has some excellent thoughts on this. They refer to it as 'relationship arrogance', which I thinks an accurate description. CA posits that you will never be able to distinguish who is truly relevant to you and in disregarding anyone, you circumcise your network. Ouch. (They don't actually use that term.) Corporate Alliance is not a perfect solution for entrepreneurs, but they do have a number of good philosophies and mechanisms for creating relationships.

Some of my very good friends have come from just going to lunch. 

Startup Funding: The CRV QuickStart Seed Funding Program

From Charles River Funding: QuickStart Seed Funding

Charles River Funding (Boston & Silicon Valley) is launching a new program looking to move them down the food chain and get into companies while the gettin's good. Read the NY Times article: Venture Firm Is Giving Loans A Try. (registration required)

Here is how the loan works:

• A standard interest bearing loan will be made to a corporation, which we will help you establish if you do not already have one in place. This arrangement eliminates any personal liability for the loan.
  
  
• It is our intention to convert our debt into equity if and when your company closes its Series A round. If the company successfully raises its Series A, in exchange for sharing the risk with the entrepreneur, CRV receives a discount on the conversion price when the loan is rolled into the Series A. The discount will be a maximum of 25% (determined ratably at five percent per month, depending on how long it takes to create a Series A financing, up to the maximum).
  
  A simple example: if CRV loans your company $100,000 with a six percent interest rate, and six months later the company closed a Series A round, at that point the loan balance (with interest) would convert at a 25% discount (value = loan dollar amount plus interest / .75) into $137,333.33 worth of Series A stock. Given that seed funding amounts are typically very small compared to the amounts one might expect to raise in a Series A round, as the example illustrates, the aggregate discount amount, in this case $37K, is a tiny fraction of what is likely to be a multimillion dollar Series A financing.
  
  
• In addition, CRV would like the opportunity to support the Series A financing and thus retains an option to contribute up to 50 percent of your Series A funding. For example, if you raise a $3M Series A round, we can contribute up to $1.5M of the round.

Redeye VC thinks the move is to address exit trouble:

It also is a recognition of some of the challenges that larger venture funds face.  Take a hypothetical traditional $400M VC firm.  In order to achieve a 20% IRR, the fund must return 3x their initial capital over a 6 year term -- or $1.2B.  Now say this hypothetical VC firm typically owns 20% of their portfolio companies at exit (an industry average).  That means that at exit their portfolio needs to create $6 Billion dollars worth of market value (ie, $1.2B / 20%).  Assuming that their average investment size is $20M, that means that they invest in 20 companies -- this assumes an average exit valuation of $300M PER COMPANY.  Given the tight IPO Market and an average M&A exit value of less approximately $150M, this math creates some real challenges.

From VentureBeat

The advantage of a seed round is that it done as a “convertible” loan, which means the $250,000 is essentially a no-strings-attached loan to an entrepreneur. There is no equity stake claim by the investor at the time, which is good for the entrepreneur, who can see how good his idea is first. If the idea gains traction, he can raise money in the series A and negotiate a high valuation for his company. If he can command a $5 million valuation, for example, the investor’s $250,000 seed money converts into only 5 percent of the company.

Zachary  says he sees too many entrepreneurs giving away between 10 to 20 percent of their company in the seed round. They have fewer shares to give to employees, and they’re less attractive to venture capitalists.

There is almost no liability for the entrepreneurs, because the loan is made to a corporation formed around the entrepreneur. If the company fails, the company goes away, and the founders aren’t liable. “We’re all big boys,” says Tai, explaining that CRV doesn’t mind when this happens. “We go into this with eyes wide open.”

Fred Wilson of Union Square shares his analysis

I think that's a very fair deal. The loan is structured very similarly to what some angels are doing these days (loans that convert at a discount) and Charles River gets to take up to half of the round on the same terms as the other new investor.

Read the first bullet: There's also no personal liability. Something that Utah investors could take note of. 

Local text messaging: The perfect way for geeks to meed, I mean 'meet' girls.

Via: Springwise

How it works: every Wiffiti screen displays its own unique screen ID and the number to text one's message to. Texted messages show up in seconds. Besides replying, other users can also grow or fade messages by texting commands and a message's tag to the same screen.

The first Wiffiti screen was installed inSomeday Café in Boston, MA, a city that now has three additional Wiffiti screens. Other screens can be found in Chicago, Denver, Seattle, Knoxville, Boulder and New York. Costs for a user are the same as for sending a standard text/SMS message.

Makes for a great conversation starter, pick-up tool or interactive soapbox, and should go down well in other cities , especially as the rest of the world is truly SMS obsessed. And don't forget, there's ALWAYS money to be made the moment you figure out how to get consumers to start sending text messages.

Website: www.wiffiti.com

Entrepreneure: Parallel, serial, or out of work?

 Are parallel entrepreneurs functional? A post Via A VC.

This week we saw Evan Williams launch Obvious Corporation.

Obvious is a place where Evan and other developers can build web services and launch them. They can do this in parallel as they have already done with Odeo and Twitter. Buying out the investors in Odeo means that Evan and his colleagues are doing this with their own time and money.

I think its a smart model. Build a network of web services (Evan calls them web apps), use the popularity of one service to launch another, keep the services that are small but successful, shut down the ones that don't work, and spin off the ones that really take off. I like it.

I think we are seeing more and more parallel entrepreneurship. It makes sense. Entrepreneurs realize that serial entrepreneurship means putting all their eggs in one basket. VCs get to leverage a portfolio effect and I think we'll see more entrepreneurs try to do the same."

Startups, venture, hiring, tech, geeks, & other smarts.

Paul Graham writes insightful essays on... 

• How to Start a Startup.
  Build something users love, and spend less than you make.
• Hiring is Obsolete.
  The market is a lot more discerning than any employer.
• How to Make Wealth.
  To get rich you need to get yourself in a situation with two things, measurement and leverage.
• Ideas for Startups.
  The initial idea is not a blueprint, but a question.
• Why Smart People Have Bad Ideas.
  A hacker who has learned what to make, and not just how to make, is extraordinarily powerful.
• The Hardest Lessons for Startups to Learn
  Some things about startups are kind of counterintuitive.
• How to Fund a Startup.
  Venture funding works like gears.
• How to Present to Investors.
  Explain what you're doing and why users will want it.
• The Venture Capital Squeeze.
  Why not let the founders have that first million, or at least half million?
• The Other Road Ahead.
  You may not believe it, but I promise you, Microsoft is scared of you.
• What Business Can Learn from Open Source.
  There may be more pain in your own company, but it won't hurt as much.
• What the Bubble Got Right.
  Even a small increase in the rate at which good ideas win would be a momentous change.
• A Unified Theory of VC Suckage.
  If you're not one of the very top funds, you're condemned to be the bad guys.
  

Tag Jungle presents at Launch: Silicon Valley Venture Showcase

Tag Jungle has scored a big win in the visibility wars before it's even launched. The Tag Team has been pushing hard to go live with the site while Phil has been scrounging around trying to keep everyone fed.

The Tag Team announced tonight that Tag Jungle has been invited as one of only 30 tech startups to present at  Launch: Silicon Valley Venture Showcase. This is a big win for the wonderbread boys.

Tag Jungle will be showcasing their solution to make sense of the blogosphere. With a bazillion blogs up and running and Google and Technorati hitched to a linear search strategy of back links and keywords, there's room for a better solution. Tag Jungle thinks they're it.

I've seen it. They might be.

Tag Jungle uses some novel approaches to make sense of the millions of blog posts and sorts them using recognition patterns developed at BYU. (Help me out here if I get off base here Phil.) This new context recognition ability allows Tag Jungle to determine what the salient points of the post are and what the post is about without the keyword cha-cha. It also determines what other relevant tags might be of interest to the user and displays them as a tag cloud along the right.  I've seen this in action and it is mucho impressive. The user can use filters to target the information they're interested in including a cool 'sentiment' filter. (I'll let Phil describe that.) The relevance of the search results promises to be an order of magnitude over what's available.

If you're blogging and don't have any hardwill towards the Tag Jungle Tarzan Team (ie. If they don't owe you money.) throw them a bone and link to their site. You'll also want to jump on as a new user and try out the cool little gizmos they've built in.

Multipreneure or Parallelpreneure?

 From the Mercury News,

``Basically, everyone I know is involved in five or six projects right now,'' said Scott Rafer, 38, former CEO of the search engine Feedster and now CEO of blog tracker MyBloglog.com, co-founder of Mashery.com, a stealth-mode company aiming to help Web developers, and chairman of WiFinder.com, a WiFi hotspot directory. ``VCs spread their risk across numerous companies,'' said Rafer. ``Why shouldn't we?''

George Zachary, a venture capitalist at Charles River Ventures on Sand Hill Road, compared the climate to Hollywood. ``It's like how multiple people get involved in multiple movie projects as insurance. Entrepreneurs are responding to the hits-driven nature of the industry, where only a few big acquisitions are happening every year.''

... Indeed, most observers agree that a committed business partner is critical to make running more than one company work. ``The entrepreneurs I've studied have found partners who complement the entrepreneur very nicely and who devote fuller attention to an individual venture,'' said Noam Wasserman, an assistant professor at Harvard Business School.

Searching for the invisible man: Entrepreneurs as a measured value.

The French, according to George Bush, have no word for them, economic theory has surprisingly little room for them, and it is a mystery why anyone would choose to be one of them. Entrepreneurs are the leading men of capitalism, the venturesome protagonists who move the plot forward. But economic theory gives them few if any lines to read.

Translated literally, entrepreneur means one who undertakes—one of life’s doers. To start a firm you need gumption, and to succeed you need an eye for a gap in the market. That in turn demands alertness, as Israel Kirzner, of New York University (NYU), has pointed out.

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