Matt's Startup Experience

Thoughts on Financial Modeling and Projections for Early Stage Startups

Matt Heaton — Jan, 26, 2010 at 10:57 PM

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.

iPhoning Your Way To Retirement 70 Cents at a Time (Ignite Seattle Talk)

Matt Heaton — Jan, 12, 2010 at 10:20 PM

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.

UntitledStartup.com - The Anti-Stealth Mode Startup

Matt Heaton — Jan, 07, 2010 at 11:50 AM

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...

Personal Phone Numbers For Business, Yeah That Was A Mistake...

Matt Heaton — Jan, 06, 2010 at 2:40 PM

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 of Product Development

Matt Heaton — Dec, 13, 2009 at 11:28 AM

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.

Iterating Your Way to Success

Matt Heaton — Nov, 30, 2009 at 1:52 PM

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...

A Call to Action - Help Protect Startup Financing

Matt Heaton — Nov, 23, 2009 at 1:57 PM

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

Just One Thing - Defining a Clear Value Proposition

Matt Heaton — Nov, 17, 2009 at 11:26 PM

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.

Strategies to Build Sustainable Web Traffic to Your Startup

Matt Heaton — Nov, 02, 2009 at 9:50 PM

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”.

How Does Your Startup Stackup? - nPost Metrics

Matt Heaton — Nov, 02, 2009 at 9:06 AM

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.

Effective Ways to Promote Your Startup (Cheaply)

Matt Heaton — Oct, 26, 2009 at 1:04 PM

Now that we have BigStartups.com live and are getting ready to start really promoting it, I've been rehashing a lot of strategies that have worked (or not worked) for me in the past. When I refer to promotion, I'm talking about generating an initial buzz or awareness in the community to get things started. You still have to be able to translate that initial buzz into recurring traffic, signups, sales, etc. Without a great product, and a long term strategy to build on the initial promotional campaign, your efforts will just be wasted.

Press releases great, press release distribution services worthless

I'll just cover this one first because it's the first thing most people think of when they think of promoting a new company, not because it's the most effective.

Press releases can be fairly powerful tools, the problem is a lot of people either don't understand their purpose or how to use them. A press release is rarely going to generate traffic or customers, the purpose is to tell a story that will help other people to write about your startup or product. Forget the marketing crap, get straight to the point tell your audience (writers) what your are doing, why it's valuable and also create a vision that makes them interested in writing about you.

As a startup with a small budget, there's no need to pay thousands of dollars to have one professionally written. Even if you don't consider yourself a great writer, it's one skill as an entrepreneur you should practice and get used to doing. Look through lots press releases of companies who you feel do a good job of PR and emulate what they do. Get people you respect to read over and give you feedback, and spend some time polishing it.

Don't bother paying money for those expensive online press release distribution services, either. I've probably done a dozen press releases over the years, and NEVER once have they resulted in a write up. Neither have I seen any significant amount of direct traffic generated. Fifty unique visitors for a several hundred dollar distribution is not good ROI.

Get your press release directly into the hands of the people you want to write about you. Email the releases yourself to key bloggers or relevant journalists. Don't spam them, take the time to personally address them and tell them why they should pay attention to you, kinda like submitting a resume with a cover letter. If it's a multi-author blog or news source, approach the jr. writers, they will be more receptive, get one tenth the people contacting them, and often do the majority of the writing. The easier you make the process of them writing about you, the more likely they are to do it.

Leveraging your personal network

You may know 100 people, but between you and your friends you may know 5,000 people. Look through your list of friends in your email contacts list or on social networks and you'll be surprise how many people you know that have useful connections. Your friends are often more than happy to help you promote your latest venture, and want to see you succeed.

Also spend a lot of time networking to increase the size of your personal network. Attend as many relevant conferences and networking events and possible to meet people.

Tapping existing communities, online and offline

No matter what your product or service there are probably relevant communities both and offline. Do some Google searches, I'm sure you'll have no problem finding plenty of them, no matter how targeted your audience may be. Involve yourself in these communities, join the discussions, answer questions, make yourself a valuable and respected community member. If you do that, almost no one will complain about your taking the opportunity every once and a while to work in a pitch about what you are doing. Another bonus is the people that participate in these communities are often the most likely ones to talk about you, so they are valuable sneezer's to reach.

Spamming communities or being excessively self promotional is one sure fire way to generate backlash and piss people off. Just don't do it, no matter how tempting it maybe, it simply doesn't work.

Blogging strategies

For many online startups I know, blogging is THE KEY component of their promotional strategy. A lot of people view blogging as simply a distraction that takes up time, rather than serving a business purpose. Why should I spend an hour a day writing a blog post when I could spend that doing something else in my business? The reason is given some time and persistence, it may become your primary marketing tool.

But what to write about? You are blogging to generate awareness of your product but at the same time simply blogging about your product is usually not going to generate interest. Find relevant things to write about that people will find interesting, want to read, share and link to. Then find ways to work in subtle promotion of your startup or product into these posts. A few ideas:

    * Promote yourself by promoting others. If you write about other people or companies they will often return the favor without you asking. For example interviewing key people in your industry is a great way to generate goodwill.
    * Writing about current industry news.
    * Advice and help articles on relevant topics
    * "Top 10" lists, these tend to be some of the most linked to and shared blog posts.
    * Syndicate yourself as much as possible. Your trying to reach an audience so get your content on places that already have an audience.
    * Don't worry about being opinionated or sometimes a little controversial. Obviously there's a line you probably don't want to cross, but just because your blogging with a business purpose doesn't mean you can't spice things up a bit.
    * Promote your posts, link them on social networking sites, tell your friends about them, share them. If you have interesting content, it's really not hard to get some traffic to it.

Other social media strategies

Utilizing social networks like Twitter, Facebook and LinkedIn can work wonders but like blogging a lot of people have no idea how to utilize them effectively. There's a lot of startups, that get most of their new customers through these social networks. Simply creating a profile and letting it sit there is not going to do anything for you. Use these networks to find and engage your target audience.

As Paul Chaney says, “Social media is not direct response marketing, but relationship marketing. It takes time to build a relationship and gain trust. It's not the quick road but it is the high road.” I’d definitely recommend checking out his book, The Digital Handshake: Seven Proven Strategies to Grow Your Business Using Social Media if your wondering how to use social media to promote your business.

A few useful places to submit

There's a few useful sites free sites to submit your new startup that I've seen generate a fair amount of traffic or other benefit. The vast, vast majority of directory sites are just a waste of time, they won't get you traffic and have next to no SEO value either.

http://killerstartups.com   (currently the largest source of new visitors for BigStartups)

http://feedmyapp.com

http://crunchbase.com

Oh and of course add it to http://bigstartups.com

Obviously this isn't meant to be an exhaustive list of strategies. I'd like to know your feedback and strategies you may have employed with or without success.

Follow up post: Strategies to Build Sustainable Web Traffic to Your Startup

We Can Just Determine Our Business Model Later

Matt Heaton — Oct, 13, 2009 at 4:44 PM

“We can just determine our business model later” is a trap a lot of web 2.0 entrepreneurs and startups have fallen into. I'm guilty of it on a couple of past projects of mine. In the web 2.0 world where startups can be launched on a shoe string budget and social marketing can drive cheap traffic, it sounds particularly inviting. For a lot of product guys building revenue can even feel like just a distraction to what you really want to do.

There is often a perception that a startup can either focus on user growth or revenue, but not both at the same time. Looking back at my previous experiences and that of other companies, it think this perception in false. Not just that but implementing a business model early can in fact aid in driving rapid user growth. There are several reasons:

Free = low value

A lot of people falsely assume that people view free as better. This is not necessarily the case, several studies have shown that people directly associate cost with value. If you give something away people are likely to value it less. Most people consider their time as a cost, often more valuable than the monetary costs. This could skew the ROI in potential users minds to the point of severally inhibiting user signups or participation.

What’s the catch?

People know that businesses are there to make money. They instantly get suspicious when they see a service without a viable business model, particularly one that claims to create a lot of value.

When building ActiveRain, a social network for the real estate industry we heard this all the time from our members. They were afraid to participate because they were worried about some potential business models we could take. Conspiracy theories ran rampant about how we were trying to steal their clients, or forming our own real estate brokerage to recruit agents. This ultimately hindered our initial growth, as well as creating a constant PR battle for us.

Setting member expectations

Implementing your business model may piss off your member base that are used to you operating something purely for free. Obviously you don’t want to take away something members are getting and make it paid, but even something as simple as adding ads, or premium services can leave members feel slighted. It’s best to set the expectations up front.

A proven model allows for aggressive growth

It’s hard to validate spending money to market and acquire users if you don’t know how much those users are worth to you. Your models may say a user will generate $20/year, but that’s just a model. If you spend a ton of money marketing and it turns out you can only generate $5/year from that member, that’s a good way of going broke.

If you can prove out a model and determine a user generates $10/year, you can might then be able to get much more aggressive in your marketing and user acquisition.

Revenues can be directed into marketing

This doesn’t require much explanation, any revenue you generate initially can be used for marketing, increasing growth.

 Another strong reason to implement your business model quickly is that the one thing most web entrepreneurs underestimate is how hard it can be to monetize a service or website. You may get to implementing your revenue model only to find it doesn’t actually work. This can put you back to the drawing board at the same time your incremental costs such as bandwidth, hardware, support are growing along with your user base.

Great Presentation: Growing from One to One Million Users By Kevin Rose

Matt Heaton — Oct, 12, 2009 at 3:38 PM

This is an unbelievably good presentation done by Kevin Rose, founder of Digg, WeFollow startups on taking your site from one to one million users. The presentation was made to FOWA (Future of Web Apps) in London. It's about a half hour long, but well worth the listen. A summary of the key points covered:

Taking advantage of user ego - Does this feature increase the users self worth or stroke their ego in anyway, via emotional or visable rewards. Uses follower counts on Twitter becoming a type of social currency as an example. Use leaderboards to create competition among users.

Simplicity - Don't overbuild features, keep the scope under control, pick two or three features and do it very well. Always ask yourself when designing a page, can we remove something from it?

Build and release - Stop thinking you understand users. Watch and learn from what they do. Avoid analysis and paralysis, just build it and see how people react.

Hack the press - Give bloggers a sneak peak or special access and they will talk about you. The mainstream press will follow the bloggers. Concentrate on the junior (smaller) bloggers as opposed to the big guys as it's easier to get their ear. Attend parties and events and meet people there.

Connect with your community - Throw parties on the cheap, by meeting at a bar, or do it around conferences. Actively participate in your own community.

Get great advisors - Find advisors in areas that aren't your area's of strength. Give them some minor stock compensation that vests over a couple of years. Makes it much easier to raise capital.

Leverage your user base to spread the word - Get your users to invite people or promote you. Build hooks into your application to make it easy to do this.

Does your site provide value for 3rd party sites - Find someway to add value to external sites, that provides a link back or promotes yourself.

Analyze your traffic - Use Google analytics or other tools to look at what your users are doing and how they interact with the site.

Take a step back and look at the big picture - Make sure to take a step back and look at how all the pieces work together to drive traffic and member signups.

Motivating Users - Points, Virtual Rewards, Games and Competition

Matt Heaton — Oct, 10, 2009 at 1:50 PM

Have you ever launched an online service which has a substantial benefit to people, but struggled to get them to just start using it?

One of the key ideas I’ve tried to used in pretty much every web application I’ve designed is the concept of using human competitive nature to create some desired action. This action maybe referring other people to your product or service, interacting with the community, posting content, or really just about anything. The competitive aspect might be against oneself or it better yet to create friendly competition among peers.

Everyone has probably watched their friends at some point in a zombie like state playing a video game for hours on end in an attempt to level up or get the high score? From an external view point these often repetitive actions seem pointless or just plain stupid, but for them it’s enjoyable. Now if you can just harness this same motivation to get a task done. This is certainly not a new concept, have you ever heard the saying about how the easiest way to accomplish a task you don’t want to do is to turn it into a game.

Here’s some strategies to get started:

Provide some type of virtual reward for accomplishing tasks or actions. Virtual rewards are just as powerful or even more powerful than a physical reward and might take the form of points, a badge, a title, etc.
Attempt to tie these rewards back into a real world benefit. For example on you get points on BigStartups.com for taking actions that help grow the community. These points determine where your startup ranks on lists throughout the site and thus how much exposure it gets. This is similar to how people strive for high search engine rankings through SEO.
Provide many ways for people can see how they stack rank against their peers, to create friendly competition. It’s important that even new members can rank highly in some views. It can be demotivating to see that I rank #24,989 out of 68,784, but wow I rank #2 in Bellevue, Washington.
Create sub -games, for example whoever gets the most points this month gets a gift certificate to XYZ.

Of course there are also some unwelcome side effects of these types of systems that you have to be prepared for.

There will be those people that try to game the system through whatever means possible to get ahead. For example if they get rewarded for posting content, they may resort to spamming the system with meaningless or useless content. You’ll need to adapt your rewards system to prevent rewarding destructive behavior. You WILL inevitably get emails from the uber competitive person at 2:00 am DEMANDING to know why service complaining that someone appears to “unfairly” be ahead of them. Take this as a sign what you are doing is probably working, and ignore them. 

While some may scoff at the idea of turning a serious task into a game, it is a massively effective tool to help spark the growth of an online service.

The Emotional Toll of a Startup

Matt Heaton — Oct, 10, 2009 at 10:40 AM

People often compare running a startup company to a roller coaster with all of it's intense ups and downs. Actually, some days it feels more like navigating 20 foot seas in a rubber dingy. New entrepreneurs often do not truly understand the emotional toll a startup can take.

One week your user growth spikes and you are sure that you have hit the elusive hockey stick. The week it comes crashing back to earth for no apparent reason. One week you pull off a near perfect product rollout, the next your servers won't stay up for more than ten minutes. Aaaahhhh, it's enough to turn a normally sane person into a bipolar, manic depressive.

A previous startup I co-founded and ran for several years, ActiveRain felt like it nearly killed me with the mental gyrations. I barely slept for months, constantly obsessing over every little detail, becoming increasingly irritable. The more successful we became the more stress and pressure I felt due to both internal and external expectations. I would go to an industry conference and feel on top of the world due to the attention we were getting only to come crashing back to earth when I had to deal with some crisis a few hours later. I didn't feel like I could take a break or the whole company would just implode upon itself.

Pretty much everything came to a head when a large M&A deal we'd been working on day and night for four months fell apart the day of closing. It was pretty much your ultimate Mt. Everest summit to depths of the Mariana Trench plunge, to go from “I could retired before 30” to, crap we’ve got 3 months of cash in the bank. There eventually came the point where I had to leave the company I'd spent five years building to preserve what little was left of my mental sanity.

I'm not sure if it's because the memory of pain fades with time, but like most entrepreneurs I’ve found myself only a little over a year later involved with multiple startups. Here are some of the lessons I’ve take away from that experience to survive this ride.

The realization the world will not come to an end if I have to take a break or a long vacation (yes I said long). There comes a point where pushing yourself harder becomes counter productive. When stressed or panicked you loose perspective and make good decisions. It was also pretty amazing to discover that the world was still turning after not checking my email for a weekend.
The realization that crisis’ are survivable and the impact is almost never as bad as it seems at the time. Servers melt down, community blowups occur, product launches may not go smoothly, but business’ survive.
Reducing both internal and external pressures, by lowering my own expectations, ignoring the external noise and avoiding those who’s expectations are not based in reality.
Forcing myself to do to the gym everyday. I’ve noticed exercise is one of the biggest keys to my emotional stability.
Most of all, the realization that if everything does goes the shit, there’s always next time.

How has running a startup effected you, and how have you learned to emotionally survive it?

Lessons Learned in the Startup World

Matt Heaton — Oct, 07, 2009 at 1:09 PM

No, I've never had a multi-million dollar exit, or run of company backed by tens of millions in VC, but I've spent the last dozen years of my life working to grow a number of technology startups. Some of which I've founded, some I've worked for others, some have been successful, a few have gone no where, but I’ve taken away a lot lessons from each experience.

These are my observations, my experiences and it's unlikely that everybody comes to the same conclusions, so I'd like to hear your thoughts. I'm going to skip over all those cliches, like writing a thorough business plan, and being conservatives in projects blah, blah, blah, you’ve heard them before...

1. Focus, focus, focus

Sometimes the qualities that lead to people start companies can also lead to their downfall. The typical company founder, is usually that creative, ideas coming out every orifice, adult ADD person (raises hand). Yet, building a successful startup requires amazing focus to complete tasks. A large company with lots of resources can go off chasing multiple business paths, or special projects, but a startup has very limited resources, so can't can't waste them on tangents. My observation is that the lack of focus is maybe the most frequent killer of new startups.

2. Ideas are a dime a dozen, it's about execution

You know that new, revolutionary idea you just had, get over it, chances are a thousand other people have had that exact same idea. It's not the idea that makes a business, it's what you do with it. New entrepreneurs tend to way overvalue their ideas.

3. Build products for your users, not for yourself

This affliction is most pronounced in people, like me that come from a technology, development background and try to build products for a consumer market. Guess what, we don't think like most people, we approach problem solving differently. This can often times lead us to creating solutions that make perfect sense to us, but absolutely no sense to our customer base. You have to learn to put yourself in the shoes of your customer when thinking about product design.

4. Products won't sell themselves, but build marketing into your product

I can think of at least three different times working on the development side of startups that I've been told, the product is so great that it's just going to sell itself. Sorry, I've never seen a product that sells itself, never. You can build lots of hooks into your product to help with marketing, for example giving people a reason to invite others to the the product, or some type of motivational tool like points or credits, but the sales, marketing and promotion is still going to be just as much or more work than building the product.

5. Lots of competitors often is a good thing

It's important to take a close look at your competitive landscape when developing your business plan. If you can't find many competitors that may indicate a lack of need for the product or service. The most useful aspect of competitive analysis, is not to determine what the market looks like, but looking at what makes competitors successful, or what has not worked for them. This information will be invaluable in helping you create a better product or service from the start, and avoid the same pitfalls they may have made.

6. Release early and release often

This doesn't exactly work if your building a product that has to be shipped, but in the case of building an online service, getting something with a limited scope to market fast is optimal. It allows you to get a head-start in building a customer base, while evaluating customer reactions to the product. Many times the best ideas won't be things you thought of in the initial product design, but will come from your user feedback. Releasing, early and often can also be very emotionally satisfying versus, long product development life cycles that can sap moral.

This does not mean it's ok to release a buggy product, just pare down the scope for V1 as much as possible. I'm not sure I've every seen a startup fail because they released a product without a full set of features, but have seen many fail because they can't keep the scope under control and never get it to market.

7. Becoming the master of promotion

By nature I'm one of those shy, introverted people, that likes to sit in the corner at a party and has a hard time approaching others. I sometimes viewed those people constantly pitching their idea, product or business as self serving, and a little annoying. Soon I began noticing those were often the most successful people and that most of the successful startups were run by people that took every opportunity to promote themselves. You have got to learn how to take advantage of all the opportunities to let the world know about what you are doing, yet avoid crossing over that boundary where it becomes and annoyance.

Oh, by the way, a good way to promote your startup for free is to create a profile in BigStartups.com :)

8. Get your legal ducks in a row

This is one item that often gets overlooked by new entrepreneurs. I know when I founded my first startup I had no idea about what was involved with the legal side of things. There is nothing like being at the tail end of due-diligence for a large investment or acquisition, and the other side insists on seeing the intellectual property agreements for everyone that's seen the code base, in the last five years, oh wait they don't exists.

While co-founders may go into a venture with the best intentions, like a marriage, problems and separations often occur. If you don’t have everything documented up front, and no a handshake isn’t documentation, it can get messy fast, possibly destroying a valuable startup.

Another huge benefit of having experienced legal council from the beginning, is that attorney's tend to be some of the most connected people out there. The non legal opportunities and advice they can open up to you, can be invaluable.

9. Strategic partnerships are usually a tactical waste of time

This is probably one of the biggest resource wasters for startups. CEO's, and biz dev guys absolutely love to put notches in their belt developing "strategic partnerships". When I ran ActiveRain, I probably got at least one email a day from another company that had some nebulous, vision for a strategic partnership that would strengthen both companies, but couldn't articulate anything beyond that. Very rarely do these strategic partnerships actually contribute to the growth of the business.

Evaluate partnerships not on some, pie in the sky vision, whether it generates a press release or impresses an investor but whether will it contribute to the companies revenues, or some growth metric in the near term.

10. You're going to have to do the dirty work

Everyone likes to be the battlefield general, but to build a successful startup you need to get down in the trenches and take part in the fight. Your might be the only person to get that task done, that while working at a larger company you would have viewed as "beneath you". Ultimately, you need to build a startup and not a job, so as you add resources, others can take on these tasks, but at the beginning, you are often the only person to get it done.

Why Start A Company In A Bad Economy?

Matt Heaton — Oct, 05, 2009 at 11:59 AM

This question has been in my mind a lot lately. Anybody who reads my blog knows my outlook on the economy over the next several years in pretty bleak. I believe and have believed for some time now that we're not just heading for a protracted recession, but a downturn that will fit the definition of a depression before it's over. I believe the stock market declines are far from over, despite any any short to intermediate term rallies we may get. I believe the biggest asset bubble, the bond bubble has yet to begin it's collapse and I believe we've yet to see the true economic fall out of our credit market issues.

Pretty pessimistic, right? Yet, I left my secure position to start a new company where I don't have a secure paycheck for who knows how long. Doesn't sound like something a pessimistic person would do, does it :)

My belief is the best opportunities to build a business occur in the down times. Today an essay was passed onto me, Why To Start A Startup in A Bad Economy by Paul Graham, that I thought was an interesting read and echo's some of my thoughts.

"When Microsoft and Apple were founded.

As those examples suggest, a recession may not be such a bad time to start a startup. I'm not claiming it's a particularly good time either. The truth is more boring: the state of the economy doesn't matter much either way.

If we've learned one thing from funding so many startups, it's that they succeed or fail based on the qualities of the founders. The economy has some effect, certainly, but as a predictor of success it's rounding error compared to the founders.

Which means that what matters is who you are, not when you do it. If you're the right sort of person, you'll win even in a bad economy. And if you're not, a good economy won't save you. Someone who thinks "I better not start a startup now, because the economy is so bad" is making the same mistake as the people who thought during the Bubble "all I have to do is start a startup, and I'll be rich."

Less Competition

In bad economies only the strong survive while weak companies will often flourish during booming times. Not only will competitors begin dropping like flies but new competition will have problems getting funded or be so scared they go an hide in their bunker. Advertising/Marketing budgets will get slashed by big competitors allowing the smaller, more innovative people to flourish.

Startup/Operational Costs Become Lower

In a sinking economy the pool of potential employees increases significantly, and this will reduce the cost of bringing in talented people, often pretty significantly. Other types of costs such as office space will also be reduced and there is opportunities to buy things much cheaper from companies that didn't make it.

Better Business Plans

Being in a economic downturn forces you to be much more conservative and rational in your business planning. Too many companies built in the upturns, plan around an ever increasing market opportunity and cheap capital, which leads to many unsustainable companies being built. Think back to all the idiotic business plans that turned into well funded companies in the dot com boom and even more recently in the web 2.0 and real estate bubbles.