Over the years I’ve had to put together projections dozens of times for different audiences including management, angel investors, VC and potential acquirers but the process has always bugged me.  Not because I find it difficult or that I don’t think financial modeling is a valuable exercise for early stage startups, but because different audiences have very different expectations when viewing projections.  Sometimes these expectations don’t exactly mesh with reality and you can find yourself being penalized for trying to be realistic.  

The whole of an early state startup (particularly one that is pre-revenue) doing five year projections is one of these areas.  Think about how quickly the online space has changed, five years ago Facebook and Twitter didn’t even exist. Simply the idea that a startup with so many things outside of their direct control, can project with even a sliver of accuracy over those types of time frames is almost humorous.  This is an exercise in refuse to engage in and feel that if an investor expects this of me at an early stage, they are not an investor I want to be working with.  

Sure, I still need to be able to do the basic napkin math to validate the potential market:

15M potential customers x 10% market share x $25 service fee = $37.5M revenue

Another aspect that can be confusing is with how different audiences will interpret projections.  For example some VC’s will make a lot of investments hoping for the home run while most of their investments will be failures.  This causes them to expect to see numbers put in front of them, which represent the home run scenario.  The will then they’ll do their own analysis on what are your chances of hitting that home run.  

Angel investors on the other hand will invest in a relatively small number of ventures and due to lack of diversity, can’t go swinging for the fences, so they will view projections in a more conservative light.  Board members and management due to the fact they already have a vested interest are often more concerned with the most conservative scenarios, that may adversely effect them.  

To deal with these vastly different expectations, I like to create 3 sets of projections off of the same model with a different three different sets of assumptions (home run, optimistic and conservative).  I can then present different projections to different audiences, depending on the light they will view them in.  

I’m going to try to do a blog post tomorrow that shows some financial modeling I’ve been doing along with my thinking in building both the model and assumptions.

Back at the start of December I went to my first Ignite Seattle event.  For those that haven't heard of Ignite, it's was started in Seattle back in 2006 by Brady Forrest, and has since spread to dozens of cities throughout the world.  At Ignite events, speakers get five minutes on stage to talk about a topic of their choice which they are passionate about. To further add to the pressure of speaking in front of hundreds of people you have a slide deck of 20 slides, auto rotating every 15 seconds.

There was about a dozen speakers that evening, but the first presentation by budding iPhone entrepreneur Eugene Lin was exceptional.  Titled "iPhoning my way to retirement $.70 at a time", it was not only very entertaining but provides a great lesson for entrepreneurs on being persistent and adapting your ideas when you run into barriers.  

A video of the presentation was just posted YouTube, and is well worth five minutes of your time.

 

 

Some startups like to operate on "stealth mode" before launching a product, and then there's UntitledStartup.com who is operating in "anti-stealth mode".  Instead of keeping their plans secret, they are documenting the day to day aspects of founding a startup in short videos on their website.  For example yesterday, they discuss meeting with an attorney to handle IP issues and trying to figure out of a domain for their unspecified product.

Launched by two developers, Aviel Ginzburg and Damon Cortesi and incubed by Andy Sack's Founders's Coop. they openly admit they don't yet know what they are building.  I found this design brief on 99Designs.com for a logo design.

"YOU TELL US. We've got no products and we're open to anything. But it's *very* likely we'll be building social media tools in the communications space. Create a logo that would make sense for whatever you think we should do, and whatever type of company you think we should be."

I'm intrigued by this reality TV showesque method of building a startup and it will keep me checking in to see the progress.

Good luck guys...

Here cautionary tale about a startup business mistake I made about 5 or 6 years ago that continues to haunt me to this day.  During the early days of a previous startup, ActiveRain we had very limited resources, thus no permanent office space or phone land lines.  I routinely used my personal cell phone number as a business contact number, which at the time worked just fine.  If they wanted to get a hold of the company they wanted to talk to me.

This phone number got used in a wide variety of places for example the contact number on domain name registrations, a credit card processing application, bank forms and various tax forms.  As the company grew and we had more resources we switched this contact number over to an actual business number answered by an actual office assistant instead of my personal cell phone. That would have been fine except for one problem, through the magic of the Internet and networked computer systems, contact information tends to get syndicated to dozens of places when it is first entered.  Often it does not get updated when the original source does.

It's now been about a year and a half since leaving that company and to this day, I receive an average of two or three phone calls a day of people trying to contact ActiveRain.  There's nothing like being woken up at 6:00 am by an irate real estate agent complaining on how someone slandered them in a blog post wanting it removed. 

They primarily found my phone number through a random Google search or on a credit card statement.  It's been a constant battle of trying to track down the places the number is now listed and get them changed.  In many instances even though we can determine where the number was found, but we can't figure out the way to actually change it.  The worst has been the credit card processing company, who syndicated the number all over the place to various credit card companies yet seemingly has no process in place to update that number in all those places. 

So unless you want to potentially answers with calls from frustrated customers looking for technical support, or answers to billing questions for the next five years, I would suggest not using a personal number for business purposes..

By the way, if you somehow find this post on a Google search for "ActiveRain Phone Number" it's (206) 470-2901

Occam's razor is the principle that "entities must not be multiplied beyond necessity" and the conclusion thereof, that the simplest explanation or strategy tends to be the best one.

No where does Occam's razor appear to be more true than in product design and development.  Over a dozen years of building products, I've found that nearly every time the simplest solution to a problem ultimately tended to be the best one.  Unfortunately, in many cases the simple solution wasn't the one that we originally implemented, but through iterative development we ultimately found ourselves reverting to the solution which was simplest.

During design and development, massive amounts of time and resources often gets allocated to trying to solve the use cases that only apply to a small percentage of the customer base.  Shouldn't you spend the majority of your time focused on the use cases that the majority of your customers falls into?  Worse yet, you will often create a more complex solution for 95% of your customers in an attempt to try and satisfy the 5%.  Simple solutions are much cheaper to build and the maintenance costs often are increase exponentially along with complexity. 

Some basic rules for creating better products by focusing on simplicity:

• Focus on 95% of your customers not 5%
• Ask yourself is there is simpler way of doing things rather than, is there a better way.
• Provide a single way of accomplishing a function rather than many different ways.
• Avoid the urge to build comprehensive solutions right from the beginning.

I’m a huge fan of using an iterative approach not just to build products but to build entire companies.  It’s an approach that I’ve used successfully with startups in the past, and am employing in the development BigStartups.  

The basic concept behind iterative development is that instead of having a long planning and development phase, you focus on simply getting something built, live, gathering feedback and then improving what you have built based on that feedback.  For example went from conception of BigStartups to having a site live in just about a months time.  Since it first went live near the start of October, we’ve already gone through several cycles of adding or improving functionality based on our observations and feedback we’ve received.

Reasons to use Iterative Development

• 
No matter how much careful planning and analysis you do, it’s a rarity to “get it right” on your first try.  In fact I’d say even for the brightest of us, that it’s almost a matter of luck.  So why put too much effort into your first try, if odds say you are just going to have to change it?  
• One of the most common causes of startup failure is not getting an initial product launched.  While it’s almost unheard of for someone to fail because they didn’t get it right on the first try (well unless they put all of their resources into that first try)
• You can start getting customers and marketing your product much sooner, giving you a jump on the competition.
• It’s a huge moral boost to the team to be able to see something up, running and people using it, where long product development cycles can be draining.

Keys to Iterative Development

• Have a clearly defined “end goal”.  While you may not have a roadmap in front of you, it’s still important to know where you are trying to end up.
• Be flexible, adaptable and willing to admit when you are wrong.  
• Have the right team.  Not everyone can handle an iterative approach to developing a product or business.  Particularly those coming from large companies with defined processes often have an aversion to the iterative model.  
• Keep the scope under control.  Feature creep can kill the iterative development process pretty quickly, always be looking for what you can cut out of a development cycle as opposed to what you can fit in.
• Simple solutions are better than complex solutions.  Don’t over-engineer a solution, complex systems are typically much more difficult to change than simple ones, as they require you to make more assumptions up front.
• Remove stuff that doesn’t work, don’t just add more.  
• Listen and watch your customer, using your observations as the basis for your next development cycle.  

Ok, now back to iterating...

Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption.  Regulation D contains several exemptions allowing for companies to sell securities (raise capital), without having to go through an onerous and costly process of registering with the SEC.

Earlier this month, Senator Dodd circulated a discussion draft of the “Restoring American Financial Stability Act of 2009”, which would repeal Reg D.  Startup companies are the biggest drivers of economic growth in this country, and repealing Reg D would severally restrict their access to capital.  

Two local corporate attorneys, Bill Carleton and Joe Wallin, are leading the charge in trying to make sure this proposed legislation does not become law.  Below is a text of a letter they penned to Washington State's two Senators, Patty Murray and Maria Cantwell.  A group of local investors, attorneys, and entrepreneurs, including myself have participated by also signing the letter.  This is not a state specific issue, so I urge you to also contact your own representatives.  Join with them and help prevent startups from being cutoff from much needed capital.

November 23, 2009

Via U.S. Mail, Fax and Email

U.S. Senator Patty Murray, 173 Russell Senate Office Building, Washington, D.C. 20510

U.S. Senator Maria Cantwell, 511 Dirksen Senate Office Building, Washington, DC 20510

Re: Protecting the Way Technology Startups Safely Raise Seed Financing

Dear Senator Murray and Senator Cantwell:

We are writing to bring to your attention language in Senator Dodd's Restoring American Financial Stability Act of 2009 that would be harmful to technology innovation in Washington State.  If Senator Dodd's draft legislation, as currently drafted, were to become law, it would be harder for entrepreneurs in our State and indeed, throughout the nation to launch startup companies.

Section 928 of Senator Dodd's draft legislation would repeal the existing federal preemption of state regulation over "accredited investor" securities offerings.  This would end the uniform, national set of rules for financing that currently makes capital raising for technology startups so safe and so efficient.  By gutting something that is working, Senator Dodd's draft legislation would expose technology startups to a potentially Byzantine system of patchwork, state-by-state regulation, resulting in higher costs, greater legal risks and pervasive uncertainty.  Nothing would be gained from this change:  no additional protection would be provided to the types of investors who truly need protecting, and there would be no benefit to the national financial system or to the economy.

The startup ecosystem in Washington State, comprised of entrepreneurs and the angel\ investors and professionals who support them, is one of the \spawning pools from which tomorrow's great American companies are born.  In our State, as well as in other regions of innovation in our country, technology startups are funded by (a) the entrepreneurs who start them, (b) the friends, networks and family of those entrepreneurs, and (c) experienced angel investors who have a taste for startups and a passion about supporting entrepreneurs.  This community depends upon the uniformity, clarity and certainty of federal exemptions, which substantially ease the costs and legal risks of raising critically needed seed capital.

The persons signing this letter are entrepreneurs, angel investors and lawyers who found, fund and work with technology startup companies in Washington State. We ask you to look into this matter and to take action to protect the technology startup ecosystem, for the sake of the entrepreneurs and startups of Washington State and for the sake of innovation throughout our country.

Some additional posts on the topic:

Dodd to Startupers: "Let's Make it Just That Much Tougher to Raise Angel $$"

Entrepreneurs, Investors & Lawyers Ask Senators to Protect Startup Financings

Why Would Dodd Want to Gut Reg D Anyway?

But Wait, There's More! Dodd Would Let States Tinker with Reg D Offerings

Over the past week we have made a lot of changes to BigStartups.com, most noticably is a new home page design.  While we didn't add significant new functionality, we spent a lot of time redefining our value proposition to the startup community.  We discovered in the brief month-long life of BigStartups that people did not understand our value, aka "Why sign up?" 

In retrospect the problem was quite clear and matches previous my previous experiences and observations of other companies. Creating a clear value proposition is one of the most critical elements to success and an area in which kills many startups.

Customers want benefits not vision

You may have a brilliant long-term vision, but prospective customers could care less.  They just want to know what the benefits are to them. 

We fell into the trap of advertising our vision (Creating a great online resource forth startup companies) vs a clear benefit (Create a profile to promote your startup and gain some extra exposure)

You must be ONE THING

A clear value proposition needs to be a single thing, even if your product or service ultimately does multiple things. It's much easier to sell doing one thing great, than doing lots of things mediocre.  Too many features is much more often a problem than too few. 

This was a big issue with our previous home page.  By attempting to highlight many functions of the site we simply diluted the message and confused people.  We chose to focus almost entirely on the startup profiles because that is what drove  people to signup signups.  The blog posts and questions were great content but didn't cause people to take the desired action.  Incidentally we also discovered via analytics that almost none of the traffic to blog content and questions came via the home page.

People often focus on costs more than benefits

People by nature are lazy, in decisions that don't require a lot of analysis (like signing up for a website), they will usually focus more on the cost than the benefits. This means it's often more critial to lower the barriers of entry both physical and mental than to focus on increasing benefit.  It's easier to sell something with a small benefit that has a low cost than something with a large benefit and a large cost.  Time is seen as just as big of a cost as money, so it's important to make the initial time committment on the part of your customer as small as possible.

Last week I did a post about various methods I’ve used in the past to promote web startups to creating initial traffic and brand exposure.  I thought that I’d follow it up with some discussion of ways to generate long-term, sustainable, traffic flow.  It’s one area many web startups struggle with.  They built a great product, maybe they have get an initial burst of PR, but fail to build on the momentum.  

Return Visitors, Don’t be Passive

With a couple exceptions, where all you care about is a one time conversion, return visitors are your most valuable traffic source.  These are the people that find the most value in your product, create interaction, and help spread the word to others.  While it’s vital, simply providing a great product or service often isn’t enough to keep them coming back.

Most people tend to have short attention spans, are busy and need a little reminder.  Make sure to include lots of hooks to jog their memory into your product.  Facebook and most successful Facebook apps do this brilliantly.  They are constantly sending notifications to their members.  Someone tagged you, someone commented, you haven’t interacted in a while, etc.  Don’t passively make people come to you for updates, push notifications out to the places they look daily, email, Twitter, Facebook, RSS, etc.  

Obviously, there’s a line between useful and annoying you don’t want to cross, but aggressively look for interesting types of updates to push out to them.  When I look at where return visitors are coming from in the BigStartups traffic logs, it’s mostly from email notifications or Twitter updates of new posts.

Referrals, Help People Recommend You

Probably the most valuable non-return traffic resource is personal referrals.  A personal referral adds a sense of value, trust and legitimacy to product or service.  On the sites I’ve worked on, personally referred people often convert at a rate 5-10 times as high as visitors from other traffic sources.  

As with return visitors don’t be passive and just hope people will think of referring you. Ask them and do whatever you can to make the process easier.  Add the ability to send a referral via email or a social networking service and build that into the workflow of your site.  For example as the last step in the registration process.

Search Engines/SEO

Don’t discount search engines, they are still the largest traffic drivers for a lot of very large websites, and nearly every website I’ve worked on.  Even if you don’t consider your site a “content site”, adding even just a little bit of relevant material can drive a lot of traffic your way over time.

Despite the hype around SEO, driving search engine traffic mostly rests on having interesting content.  As search evolves the goal has and always will remain, getting people to what they want to read.  With interesting material getting incoming links is remarkably easy, without it good luck.  There’s almost an infinite number of articles out there on the finer points of SEO, and with a little reading, it’s pretty easy to pick up the other important parts.

Consistently blogging about relevant topics is a great way to generate content to attract traffic.  Better yet, find ways to get users to contribute things that can be made available to search engines.  Create a positive cycle of users = more content = more traffic = more users.

Advertising

I would absolutely love to have a startup where I was able to drive the majority of new traffic via advertising.  Sounds kinda weird doesn’t it?  But, if you can prove your revenue model, and know how much money you’ll make per conversion, then as long as your spending less on advertising per conversion, it’s a gold mine.

I worked on a real estate related site years ago that made money doing lead generation.  We were able to prove that on average each lead converted to about $25 (after non advertising costs), so as long as we could spend less on advertising, we could go to town.

Advertising is a science, spending money on it without being able to measure exactly what you are getting is a good way of immolate your bank account.  Nearly all startups can’t afford to fall into the trap of spending money on advertising to simply “get exposure” or “build a brand”.   

One of the more difficult aspects of startup business planning is attempting to come up with business projections.  The model itself usually isn’t the difficult part, but rather the assumptions that become the inputs.  What is conversion rates might I expect?  How much will it cost to acquire customers?  How much revenue do comparable companies earn per customer? 

Not only would this data useful in the initial business planning process but also in trying to tune your existing model.  If you can compare different area’s of your business to other similar business’ and find which area’s you are weak in then you better know where to put your effort to improve your business.

nPost run by Nathan Kaiser is launching a new service called nPost Metrics which will attempt to provide some clarity around these business metrics, and he’s looking for startups to participate.

What it does?

nPost metrics, aggregates operational business metrics across a large number of startup companies to produce an in depth quarterly report.  Startup companies are surveyed about their business metrics.  This is done anonymously, so that the data can’t be tied back to your particular company.  The first survey will be released sometime in mid November.

Why should my startup participate?

As a participating startup startup company you get free access to the data to help you tune your own business.

What does it cost?

For participating startup companies it’s free.  Venture Capital Firms, Investment Groups, Law Firms, etc can by subscription to this data for $3,000 a quarter or $10,000 a year.

How do I get started?

Head over to http://www.npost.com/npost-metrics to fill out the initial survey.  Based on this survey a followup set of questions will be sent to you, tailored specifically to your business type.