FREE…It May Cost You Your Startup

First, a quick quiz…For this quiz, time is important as we want your gut instinct so you only have five seconds to answer before the submit button goes away. It’s multiple choice, there are only two options and you simply need to select one.

When you’re ready, go take the quiz and make sure to return here…

Pricing, Business Models and Virtual Goods

The topic of free and freemium pricing models is a regular one in startup land.While I’m sure it comes up on occasion in more traditional businesses, I have a feeling it’s much less the case. I don’t recall Mark pondering the option of offering free drinks and meals for the first six months at OX Restaurant. Or Beth considering just giving sweatshop free clothes away for the first three months at Grey Rock Clothing.

“When something is FREE! we forget the downside….we just can’t resist the gravitational pull of FREE!”

Over in startup land, it’s almost universal that first time founders plan to launch their product initially for free. While the free excuse list is almost infinite, a few samples include….

  • We really want to get people in and using it, get them hooked on the app before we start charging.
  • Because this is such a new innovative way of doing things, we can’t charge them, they just won’t pay until they use it.
  • Once we have enough users, we’ll start monetizing through ads but we can’t sell ads until we have the users.

A FREE image!

To be clear I’m not advocating against free or freemium models. In some cases they make great sense, however those cases are rare. What I am advocating is that you make that decision explicitly and can back up your reasoning. I have yet to speak with a new founder who plans on offering free initially AND has a good reason for it. Someone who’s explicitly thought it through and has clear, sound reasoning why they’re starting with free.

Making an Economic Choice

In new product development, what is much more important than free users are the hard no’s. What’s a hard no?

“Here’s a pink stuffed animal I made, do you like it?”

“Yes, it looks awesome, you’re a lovely human being, let me hug you…”

“Will you buy this pink stuffed animal from me? Will you please give me 20 of your hard earned dollars for this pink stuffed animal I made?”

“You want me to give you 20 bucks for this crappy stuffy you stitched together? Are you mad?”

There, that’s a hard no. It’s someone saying no, I don’t see enough value in this exchange for me. Hard no’s are money in the bank for startups, if you leverage them. You have to chase down every hard no and ask why, why, why? Why don’t you love me anymore? Why doesn’t my value proposition work for you? Would you pay $10? What if I included a lifetime warranty? What if it was $5 plus a lifetime warranty?

Starting with free removes your ability to get to those valuable hard no’s almost entirely. Now rewind the above conversation…..

“You want me to give you 20 bucks for this crappy stuffy you stitched together? Are you mad?”

“I’m just kidding, we’re giving them away for free as part of launching our new company, here it’s yours!”

“Thank you! I love you again, that was a close one”

See the difference? Few people can resist the power of free. You feel great about your pink stuffed animal, love is in the air, everybody happy, happy, happy.

What happens to the pink stuffed animal? The same thing that happens to most free software apps, it’s neglected and dies a slow quiet death in a dusty basement. Dad never says “hey, why aren’t you loving that pink stuffed animal? I paid $20 for that you know?!”

Here’s the thing you must realize, free is a reality distortion field of it’s own. We can’t control ourselves around free. Remember the quiz at the top of this post? I’m quite confident that greater than 75% of you chose the free option even though it’s not a rational choice. A $30 giftcard for $5 offers you $25 in value. A free $20 giftcard offers $20. That doesn’t matter since we go bonkers around free!

“Zero is not just another discount. Zero is a different place. The difference between two cents and one cent is small. But the difference between one cent and zero is huge!”

Clearly the rational choice is the $30 giftcard but free messes with our minds. In the book Predictably Irrational: The Hidden Forces That Shape Our Decisions, the author Dan Ariely digs into the details of how we tend to apply either market norms or social norms in these situations.  Free confuses your customer into applying social norms instead of market norms. This will certainly increase your user count but if you’re building a business you need to iterate to a value proposition that works when customer’s apply market norms to them.

If it makes good sense, free it up! Just be aware how powerful free can be. Depending on how you use it, it can help or hinder you. Offering free prevents your customers from applying market norms to your offering. Having customers applying social norms can distort your offering in ways you may never recover from. Good luck selling those $20 pink stuffed animals six months from now!

Ontario Place @GrowConf

We’re heading to Grow Conference in Vancouver. You should join us at the Portside Pub on August 14, 2013.

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The Portside Pub

With our friends at Communitech, we are hosting Ontario Startup House during Grow Conference. The goals is to build a “house party” that highlights the amazing things that are going on in Ontario.

The details are starting to shape up, but here is the plan as it stands. We’re aiming to bring all things that are amazing and Ontario with us to Vancouver. We’ll be brining amazing startups, amazing founders, and amazing investors with us. We’ve managed to secure an amazing venue, The Portside Pub  Google+, in Gastown.

“On August 14, we’re taking over the hottest bars and restaurants in the historic Gastown area, home to Vancouver’s tech scene, and inviting you to host your very own “House Party” to show off the very best your technology community has to offer. All Houses will be within walking distance so attendees can easily move from House-to-House. Who doesn’t love a good house party?”

We are looking for startups and sponsors. We have great partners in Communitech, OMERS Ventures and we are actively looking for others that want to participate.We have the biggest and best venue for startups and founders to congregate during GrowConf. We’re aiming to bring the best startups, the best founders, the best beer, the best band, the best crowd to celebrate in Vancouver.

The event is open. We’ll have amazing startups, founders and investors hanging out – guarranteed. We’re planning a few surprises that should make for an exciting night.

Details

When: August 14, 2013
Where: Portside Pub, 7 Alexander Street, Vancouver, BC V6A 1E9
What: House party featuring the best startups in Ontario at GrowConf

You can stay in touch  or head to GrowHouse and sign up for details.

We’re looking for startups, sponsors and others to join us to celebrate startups at GrowConf.

 

Courting Advisors – A Guide for Founders

Editor’s Note: This article was written by Danny Robinson and Boris Mann. Danny is a founder of Perch and long-time entrepreneur who has built companies on both sides of the border. Boris Mann is a managing director at Full Stack, a napkin capital investment firm in Vancouver.  Both Danny and Boris are investors in Contractually .

CC-BY-SA-20  Some rights reserved by Orin Zebest
AttributionShare Alike Some rights reserved by Orin Zebest

One of the great things about the tech industry is the generousity of people, who have ‘been there and done that’, to share their time with entrepreneurs. The energy of sharing, connecting, approachability and equality makes startups so attractive.

Lately, there is an increased demand for attention and engagement of advisors and mentors. And, in speaking with other advisors in the community, there is a feeling that some entrepreneurs are exploiting the system and taking advantage of the good will of others. It’s not necessarily intentional or deliberate. Entrepreneurs are trying to get meaningful advice to maximize the outcomes of their companies for the least cost.

There are increasing demands on advisors, and it is partially the role of the advisor to manage their workload and volunteer time. But it is also the responsibility of entrepreneurs to understand the circumstances of when to ask someone to join your advisory board and when not to.

A Quick Guide to Recruiting Advisors

When a founder feels like he/she could use advice from someone experienced in a certain area. Whether it’s getting go to market strategy, product design, fund raising, corporate structure, making introductions, or simply adding credibility to the company (though don’t overplay the advisory board when raising capital – see Mark Suster’s post). Getting an advisor to help you out with skills that you don’t have inside the company is a great way to move forward.

  • One of your early “asks” to anyone you meet is to help introduce you to a potential advisor
  • 1 – 3 official advisors is a good number to aim for initially

Finding an Advisor

It is the responsibility of a founder to source and reaches out to an advisor and asks to meet. There is no obligation for anyone to become an advisor. This is like a dating process. The goal is to build a relationship over time, where there is value for both the advisor and the founder in the role.

  • Leverage your existing personal and professional networks to connect with individuals that have shared interests
  • Use LinkedIn and Clarity.fm to identify and connect with potential advisors.
  • Attending local events, joining an incubator, and working at co-working spaces are additional ways to get introduced to potential advisors

Advisor Expectations

As an advisor:

  • You meet for coffee, get on the phone, and get to know the entrepreneur and how you can help. Maybe your personal skill set isn’t relevant, but you know someone else that would be a great advisor / investor / customer / channel / whatever.
  • You don’t expect compensation up front, you don’t lead with paid consulting offers (this is a huge red flag)
  • You show you can be helpful first in moving the startup forward.

There is no obligation to engage with a startup. You should not expect compensation and you should always create more value than you extract.

Standard Advisory Board Terms

But back on the founder side, here’s where it seems there is a bit of a problem in Canada: no follow through.

After accepting and otherwise being happy with the advisor’s help, you should reward them with an offer to officially join the advisory board.

Our guidelines for standard advisory terms are as follows:

  • 0.1% – 2% depending on the level of advisor.
    • The level depending on the advisors’ stature in the community, but also their level of involvement. 0.5% is a good level to think about starting from, and 2% is extremely rare unless the advisor is directly helping close customer deals or raise money.
  • Do not offer cash.
    • It’s extremely rare that there would be a cash component. If cash is requested from the advisor, walk away, and look for a more sophisticated advisor. For further clairty, if the advisor will be in putting multiple hours per week, they’re not an advisor, they’re a contractor, in which case, cash compensation may be appropriate (see Brad Feld’s Compensation for [Advisory] Board Members).
  • Options vest monthly over 2 year period.
  • Either can terminate upon 30 days written notice.
  • For pre Series A companies, the strike price is set to about 10%-20% that of the last round of financing, or pre-financed companies, the strike price should be about 10% of the estimated value of the company.
  • Advisor agrees to one phone call or in-person meeting per quarter.
    • But no need to dwell on the terms of what they will do for you. Your initial meeting should be representative of what you will get in return, so pay no attention to getting specific on the details here. If it’s not working out, you can both get out of the deal anytime.
  • Generally, you should expect your advisor to follow up on your meeting with thoughts and links and verify that he/she will make the introductions promissed and in general do what they said they would.

Assuming the advisor accepts, entering into an agreement like this will explicitly link your success to theirs, and add their credibility to yours. Vesting them in your company’s success spreads out your champions, and creates more winners for the community at large.

As a startup founder, you’re going on a long arduous journey and you’re going to need a lot of help along the way. Building a strong set of advisors will be one of your first “asks”. These are people that can complement your skillset and fill gaps on your team, and add credibility (sometimes called social proof or traction), especially for first time founders.

If anyone has helped you in a meaningful way, and you have simply not known the proper etiquette, I encourage you to retroactively offer up advisory board options. Let’s make sure that us friendly Canadians are known for our official follow through, as well as our friendliness.


We’ve worked with Contractually to host an Advisory Agreement template that we’ve used for years.

You can sign up for Contractually [Ed. note: Both Boris and Danny are investors in Contracutally] and use it directly with their free plan, or be old-school [Ed. note: at StartupNorth we prefer old skool] and use it manually.

Thanks to Fasken Martineau for making this template available.