Musings of a VC in NYC

Product > Strategy > Business Model

One of the mistakes I see entrepreneurs make is they move to business model before locking down strategy. The way I like to think about this is get the product right first, then lock down the strategy of the business, then figure out the business model.

Getting product right means finding product market fit. It does not mean launching the product. It means getting to the point where the market accepts your product and wants more of it. That means different things in consumer, saas, infrastructure, hardware, etc, but in every case you must get to product market fit before thinking about anything else. And, I believe, moving to business model before finding product market fit can be the worst thing for your business.

Once you find product market fit and start thinking about business model, I suggest you take a step back and work with your team (and investors) to develop a crisp and well formed strategy for your business. Investors, at least good investors, are very helpful with this stage. If you watched the John Doerr interview I posted yesterday, you hear him talk about strategy a lot (Intel, Amazon, Google, etc). The best VCs are very strategic, have seen strategies that work and ones that don't, and can be a great partner to develop a straetgy with. This is one of my favorite things to do with entrepreneurs.

I remember back to the 2009 time period at Twitter. The service had most certainly found product market fit. And the team turned its attention to business model. There were all sorts of discussions of paid accounts, subscriptions, a data business, and many more ideas. At the same time, Ev Williams was articulating a strategy that had Twitter becoming the "an information network that people use to discover what they care about." And so the strategy required getting as many sources of information on to Twitter and as many users accessing it. It was all about network size. That strategy required a business model that kept the service free for everyone and open to all comers. That led to the promoted suite business model. Twitter executed product > strategy > business model very well.

We have also had many portfolio companies build revenue models that did not line up well with the strategic direction. And in some cases, the companies really did not have a well articulated strategic direction at all. That led to a lot of wasted energy building a team and a customer base that ultimately was not of value to the business. We have seen teams walk away from parts of their business because of such mistakes. 

These kinds of mistakes are usually not fatal. Not finding product market fit is fatal. But going down the wrong path in terms of strategy and business model can be fixed. But it is painful, costly, dilutive, and sometimes can lead to a change in management.

So my advice is not to rush into business model without first finding product market fit and then taking the time to lock down on a crisp, clear, and smart strategy for your business. From there business model will flow quite naturally and you will be on your way to success.

Life Lessons From Improv

The Gotham Gal and I just watched Dick Costolo's commencement speech which he gave yesterday at the University Of Michigan. He went back to his time doing improv in Chicago and cited two big lessions he got from that experience; take big chances and be in the moment.

It's a good talk, brief as these things go, and relevant to everyone working in the startup world. It's about 17 minutes long.

TechSpeak for Entrepreneurs

I met Nelly Yusupova as we were recruiting software engineers to teach computer science in the NYC schools. She's a software engineer and entrepreneur with a passion for sharing what she knows with others. A few weeks after we met, Nelly came to see me to tell me about a two day bootcamp she runs called TechSpeak for Entrepreneurs.

TechSpeak for Entrepreneurs teaches entrepreneurs how the software design and build process works. Nelly had observed, as have I, that entrepreneurs who are not deeply technical spend too much money, time, and effort trying to get their ideas turned into software products. Many hire the wrong people, get a product that doesn't meet what they wanted, and worse of all, many get ripped off in the process. The idea behind TechSpeak for Entrepreneurs is to help entrepreneurs avoid these mistakes. The agenda/curriculum for the two day bootcamp is here.

There are bootcamps coming up in Phoenix, the Bay Area, and NYC:

Phoenix, AZ   Apr 05-06

Silicon Valley, CA   Apr 13-14

New York City, NY   May 04-05

The NYC bootcamp is at Columbia University and there is a week left to get an early bird discount. Here are the details of the NYC bootcamp:

What: TechSpeak for Entrepreneurs 2 day bootcamp

When: May 4-5

Where: Columbia University: Uris Hall, Room 301

Register: http://www.techspeakforentrepreneurs.com

If you are a non technical entrepreneur, I strongly advise you to get technical. And TechSpeak for Entrepreneurs is a good way to start on that journey.

 

Video Of The Week: The kbs+ Ventures Interview

I sat down with kbs+ Ventures late last year and they produced this interview which I think came out well. This video is part of a series on Creative Entrepreneurship that includes a book on the topic. The book is available for a free pdf download here.

Video Of The Week: 3D Printing and The Future Of Shopping

Here's a great interview that ReasonTV recently did with Peter Weijmarshausen, who is the founder and CEO of our portfolio company Shapeways. It's only 6 1/2 minutes long so it's short and sweet.

Video Of The Week: Jerry Colonna on Entrepreneurship, Delusion and Peace of Mind

Some people have reported getting a different video on mobile browswers. If you are not seeing an interview with Jerry, click this link

Who You Want On Your Board

One of the guys who taught me the venture capital business used to say "success is in inverse proportion to the number of VCs you have on your board." He was right. For a few reasons. First of all, most VCs get on your board by virtue of financing rounds you do. If you do a lot of financing rounds, you will collect enough VCs on your board to field a basketball team. And that sucks. And it means you had to raise too much money too. All of which are bad things.

But there is another reason and it became perfectly clear to me on Tuesday when I had back to back board meetings.

The first meeting was almost a celebration. The company had put together a phenomenal year in 2012 and there wasn't much to be concerned about. But the best question asked of management in the entire meeting was asked by an independent director who happens to be a CEO of a company that is five times bigger than our portfolio company. In the midst of the "celebration" he brought everyone back to reality and got folks to think about what we could be doing better. It was a great board moment.

The second meeting was even more interesting. The CEO was seeking advice on some important strategic questions. And this board has two investors and three very experienced operating executives on it. And one of the investors (not me) has deep operating experience. So you had essentially four very experienced operating executives plus me giving the CEO advice. It was a great meeting. I walked out thinking "that is the way a board should be constructed."

If I could construct the perfect Board for the companies I am invested in, it would be the CEO, me, and three CEOs who have built and/or run one or more tech companies of scale. If you have a very experienced VC on your board, you really don't need more of them. But you can never have enough peers on your board who have been where you are before. That is invaluable.

The Women Entrepreneurs Festival

Today is the Women Entrepreneurs Festival at NYU. Many of you know that the Gotham Gal is the co-founder of this event with Nancy Hechinger who is on the faculty at NYU ITP.

The live stream of the festival is here. 

This is the third year this event has been put on and I attended the first two and I will be there today.

This event celebrates and educates women entrepreneurs. The conventional wisdom has it that there aren't many women entrepreneurs but the truth is they are all over the place.

The Gotham Gal has been writing a post every Monday featuring a women entrepreneur for a few years now and she never runs out of women to feature.

Having observed the Gotham Gal build this festival, blog about women entrepreneurs, and invest in them over the past few years I have come to believe that we will see a lot more women starting companies in the coming years. And I think we will also see more women starting tech companies, getting venture funded, and having movies made about them when they are hugely successful. Its about time.

Guest Post: Startup Business Development 101

Holger Luedorf has been doing business development in the web/tech/mobile sectors for almost 15 years. He currently leads Business Development (BD) for our portfolio company foursquare. Holger has contributed a guest post with a bunch of great advice for startups that are just getting around to BD and what they should do and what they should not do. His views and opinions are his own and not those of foursquare.
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The Beginner’s Guide to Start-up BD: 15 Basic Rules

A lot of the rules below will seem like no-brainers to any seasoned business development manager, but I think it is worth putting them together in one list.  I hope that they will be useful for teams that are building up BD teams from scratch or to those start-ups without a dedicated BD team and in which for example the founders or others take on BD as an additional responsibility.  I don’t think this list is complete and I am planning to add additional rules over time.  If you have any direct feedback, please tweet me at @holger.

Create clear BD targets - This goes without saying, but it is worth repeating.  Without clear targets, a BD team will aimlessly chase deals and in the worst case have a distracting effect on the rest of the organization by creating deals that are not core to the company but take up valuable executive, product, and engineering resources.  Ideally, BD targets are a subset of the overall company goals (e.g. grow the user base, expand internationally, outsource a critical technology etc.) but they could also be outside the core company goals, like exploring alternative business opportunities, seeking M&A opportunities etc.

Structure your approach – Don’t just run off and randomly approach partners.  Once the goals are set, the first thing the BD team or person should do is set priorities in terms of who your ideal partners are.  This includes market sizing, market and competitive analysis, and a clear timeline.  If you are new to the industry you better start researching yesterday.  There is nothing worse than being pitched by someone who did not make the effort to understand your business and the challenges you are facing.  Secondly, you need to put a lot of work into figuring out how to approach these partners (more to that in point 3). Finally, you have to make sure you have all the necessary contacts to approach your target partners.  If not, work your network.  Cold calls are rarely effective.  Unless you come recommended by a trusted source, chances are very low that you will get someone’s attention.  Ideally, you have built up a ton of what I call “good karma” by helping out others friends in the industry in previous situation so that you can call in some favors and ask for introductions.

Solve problems, help partners reach their goals – This is one of the most critical business development tasks.  Partnerships never work when the benefits are one-sided.  In addition to helping you reach your own targets, you really have to figure out how your proposal helps the potential partner reach their goals.  Again, you would think this is a total no-brainer, but this does not seem to be the case judging by the large amounts of proposals that I get that are not really solving any of my company’s problems, or are so obviously mass-emails without any direct relation to myself or my organization.  I consider these proposals to be spam and will refuse even reading those emails once I realize what they are.

Be prepared, research the companies you want to partner with – In addition to a well thought out, mutually beneficial proposal, it is important to research your target partners.  To me this is like prepping for an interview.  Nothing worse than realizing that the person you are interviewing knows nothing about your company or the issues you are facing but at the same time tells you how “passionate” s/he is about your business.  Try to figure out what is top of mind for your potential partner. Is it facing a particular competitive thread, has it had a major product launch failure, has the team that you are speaking to experienced a recent change of executives etc. There are so many possible reasons that might make you want to tweak your approach, change your timing, etc.  It is always hard to know for sure what matters most, but I am a firm believer that solid preparation will help you produce better partnerships.  I am literally spending 15-20% of my work time researching the mobile, location, advertising space etc. to understand what our partners are most likely thinking of our product and our company.  This means scanning a lot of industry press and frequently meeting with peers to share information.

Understand the partner organization – This is related to the previous point, but focuses on a different aspect.  Especially when trying to partner with a large company, you want to make sure you have as complete of an understanding of the organizational structure as possible.   Who are the decision-makers, which teams or managers are heavily weighing in, who is responsible for the long-term execution of the partnership etc.  This organizational understanding will help you address the right people in the partner organization and help you identify additional contacts you might want to connect or back-channel with.

Build a hierarchy of touch points – Ideally, a start-up BD team does not act in a vacuum but is able to tap into various levels of its own managers and executives.  I am fortunate that our CEO and other execs realize the value we can drive via partnerships and that they support the BD efforts in building additional touch points between our company and that of certain partners.  For high-value partnerships, I always try to build a relationship on multiple levels, e.g. between the two day-to-day partnership managers, between the two VP-level managers responsible for those partnership, and ideally also between two or more C-level execs.  Having these multi-level relationships gives you more flexibility in dealing with your partners.  In certain scenarios bottoms-up approaches might work better and you want to convince the ground-level partner managers first but in other cases it might be better to pitch top-down knowing that an executive is passionate about certain topics and will strongly influence the decision making process of her organization.

Always be responsive – A pet peeve of mine.  I think it is disrespectful not to respond to companies or people reaching out for various reasons.  The only things I usually do not respond to are blatantly obvious sales pitches.  But if people are reaching out asking for jobs, with a partnership proposal, or some simple user feedback, I will always try to reply within 48 hours, sometimes much faster.  In many cases my answers are a short but polite “No”, but at least I acknowledge their message or request.  This is how I expect to be treated, and that is why I tend to spend a good amount of time responding to incoming email, twitter, and Linkedin messages, etc.  I am pretty sure that there are a lot of people who disagree with me on this, but that is my personal modus operandi, which I think this also creates “good karma”.  (side note: I do not connect with people on Linkedin unless I had at least a few minutes of personal interaction).

Don’t rush, don’t annoy – Always remember that you are working in a dynamic start-up while some of the bigger organizations you are trying to partner with have heaps of processes and check-points that decisions have to go through.  I remember from my time at two of those large organizations, in my case Deutsche Telekom and Yahoo!, that people in those organizations could get frustrated with impatient partners banging on their doors all the time.  My mantra: Pitch, have a solid follow-up providing additional data points or whatever else were the action points, but then let it sit for a period of time, before sending a reminder.  There might be legitimate deadlines that you want to be clear about but otherwise give your partners enough time to make their decision, at their own pace. Appearing over-eager never helps from my experience.

Can’t close? Regroup, analyze, and adapt if possible – Don’t beat a dead horse.  If a deal cannot get done, and there might be many good reasons, regroup and think why the partnership did not make sense for the potential partner.  Did you have the right partnership concept in the first place, were you talking to the right potential partners, did you talk to the right people in the organization, did the business model make sense for both parties etc.  There can be hundreds of reasons why a deal did not work out and it is important to really try to understand why and come up with an alternative approach.

Own your partners, not just deals – There is a fundamental difference between Business Development and Partner Management.  In many large organizations you have a dedicated BD team that flies in to negotiate and close a deal and then moves on to the next deal with another partner. On the other hand you have Partner/Account Management that identifies potential deals, brings in BD for potential negotiations, and then takes over full responsibility for the deal implementation and on-going partnership.   In a start-up with potentially no dedicated BD team or at best a very small one, you have to double-up and take responsibility for both the deal making and on-going partner management.  This can be tricky as in the BD negotiations you want to be able to get the best possible deal for your company and this can create friction with your partners, while as a partner manager you want to be as close to your partner as possible to understand what is going on and in order to smoothly execute the partnership. When BD is a separate function from Partner Management, it is easy to play good cop, bad cop.  The BD guys are the bad cops haggling over the best possible deal while the partner manger is the good cop back-channeling with the partner organization trying to create a positive, productive setting for the partnership.  In a start-up you really have to bridge those attitudes, which takes some experience.  In the end solid knowledge about the partner’s organization and goals will help you find that right balance.

Don’t over-commit, internally or externally – With many partnership opportunities, you only have a few potentially only one shot at getting it right, so it is critical that what you commit to towards the partner is actually something that your company can deliver.  This might be in the form of a product feature, launch timeline, support function etc.  Do not over commit as you run the risk of killing the short-term opportunity and long term relationship.  The same is true for internal commitment.  Make sure that deals are signed off by and have commitment from all internal parties involved. This includes the management team, which has to ensure that a deal is in line with the overall company objectives.

Build strong relationships with key partners over time – What goes around, comes around.  A strong working relationship with partners will help you build trust over time.  Don’t forget that industries tend to be very small so having a solid reputation for being a trustworthy, proactive interface and partner will help you when partners research you and your company.   Also keep in mind that many times, people will stay involved in a single industry over decades, so how good your relationship with someone 5 or 10 years ago was does matter in a new setting, maybe after that person joined a new company that is a potential partner of yours. Strong relationships with business partners will help getting deals done and in some cases can be the deciding factor that a decision-maker on the partner side chooses your company over another.  Following many of the points above is what creates such strong relationships.

Be present as a company – In some cases your start-up is doing so great that you are getting a ton of positive press and interest from companies who want to partner with you.  But these scenarios are rare and can change.  One factor that will support your BD efforts is that your company has a positive image in the market.  In addition to your start-up’s marketing & PR functions, BD can play an important role to represent the company to the outside world.  Participation in conferences or other speaking engagements, hosting university student visits, or providing quotes and insights to journalists are all things that can help your company and your efforts as a BD team.  Of course this should never become a time-suck for you and others on the BD team, but especially when it can be done mainly locally and without much travel involved, it can be a good way to make your company be “part of the conversation”, gain valuable market insights, and network with other people and companies in the industry.

Relay partner feedback back into your own organization – The BD team is usually one of the most outward facing teams in a start-up and as such you will be able to collect a ton of valuable feedback for company.  A lot of partner meetings generate a lot of information like product critique, observation of what the competition is doing, insights into what partners would like to see in terms of product innovation etc.  Make it a point to regularly pass this knowledge on to the respective teams in the organization as it will help educating the organization and making more informed decisions.

Make sure you have solid legal support – I have been fortunate to have had outstanding, dedicated lawyers to work with on deals in all of my past jobs and as well as in my current role at foursquare.  Having experienced legal support that really understands the big picture and has a good balance of risk-averseness and business acumen will help getting better deals done faster. Weak legal support can kill or create weak deals.

Becoming A Boss

I was watching this Charlie Rose interview with Lena Dunham and I was struck by this line:

it’s really intense to be thrust into a managerial position before my time

I have seen this a lot in my business and its always your talent for making things that puts you in this spot. And one of the big challenges is that the "managerial position" (as Lena calls it) is often in conflict with the talent for making things that got your there in the first place.

I am not saying that folks who are talented at making things aren't talented at managing people. I have come to believe that most people can be talented at managing people if they want to be. What I am saying is the time and energy and passion for making things can be all consuming and managing people can also be all consuming. Doing both well is really hard.

When we had our USV CEO summit last fall, we kicked it off by asking each founder/CEO to open with the one thing they had learned the hard way during the year. The recurring theme was that they had to let the people they hired do the work even though they wanted to jump in and do it themselves. And as they are all going around the room telling this story over and over, I am thinking "and I want you to jump in and do the work too". Because these are the people who made the thing that got us to invest, the thing that we fell in love with, the thing we believe is big enough to build a business around.

One of my favorite stories is about an entrepreneur I visited in his office away from the office. That he had one is in and of itself is telling. He was playing his acoustic guitar and singing when I arrived and I said "wow. I didn't realize you were such a talented musician". He said, "I am an artist and the most impactful art that my generation can make is websites but I see myself first and foremost as an artist." And I thought, "well it is a shame that you can't hang a website on a wall and move on to the next one."

There are a number of ways to handle this conflict that arises between the maker in you and the manager in you.

Many artists stick to making and hire a manager to focus on their business. Artists that build websites and mobile apps can do that too. In a perfect world, the manager and the maker become partners and operate the enterprise as a duo connected at the hip. The Gotham Gal and I once watched a movie about Valentino and his partner Giancarlo Giammetti and I was struck at how well defined their two roles were in their business endeavors.

You can devote yourself totally and completely to the manager role and hire people to lead the making effort. That is what many of the founder and CEOs in our portfolio have chosen to do, at least in theory. As our CEO Summit discussion pointed out, that approach is riddled with tension and conflict because makers want to make at their core and being a hired maker working for a founder/CEO maker isn't a party. It can work but it will never work perfectly.

The third way is to keep your hands in both efforts. To be both the maker and the manager. The challenge with that approach is you have two full time jobs and I have not seen many who can do both as well as they need to be done. Some choose to hire leaders below them to lead the making and managing teams but then keep ultimate responsibility for both. That can work, but defining when you plan to step in and make the calls and when you won't is tricky.

I cannot and will not recommend one of these approaches over the other. Each founder/CEO has to figure out what will work best for him or her and then build the team around them appropriately. As always, the hires are critical. Some hired leaders can deal with a founder who drops in on the decision making process better than others.  If you are the meddling kind, you should find someone who can handle meddling well. But understand that nobody handles meddling exceptionally well. Pick your battles carefully.

What I can recommend is that you stare at the elephant in the room, name it, and deal with it. The maker/manager conflict sits at the heart of many of the development challenges that founder/CEOs deal with as they scale their companies and scale themselves. Conquering it is possibly your greatest opportunity and will lead to your biggest success.