August 2011

There were 15 posts published in August 2011 (this is page 1 of 5).

Lean Startup Tools

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Back in May, Nat Friedman wrote about the tools used in setting up Xamarin. They include a great set of basic tools for getting a startup off the ground with very little investment. We have seen a lot of startups using a similar set of tools and I thought that we’d compile a list of the tools that we’re actively using (and some of the others we evaluated). There are the tools and blogs listed by Steve Blank that include many

Landing Pages

We’re big fans of WordPress at StartupNorth. We’ve powered StartupNorth on WP since the beginning. The combination of WordPress, Premise, and the WordPress MU Domain Mapping plugin is a pretty powerful combination for creating mutliple sites and landing pages to test your landing pages. But we’ve also developed a sweet spot for Vancouver’s Unbounce, it took us less than 5 minutes to have 2 landing pages and a domain set up. We’re big believers that you can use Adwords and Facebook Ads to quickly create a landing page to test ideas before writing a single line of code.

Analytics

We primarily use Google Analytics and WordPress Stats for StartupNorth. We’ve been working with startups and using a KISSmetrics and Mixpanel to measure activity on their web properties and applications. Make sure you read Ash Maurya’s 3 Rules to Actionable Metrics to understand how the analytics can be used in combination with split testing and/or cohort analysis to better track your optimization before product/market fit (What do you measure before product/market fit? – check out Ash’s conversion funnel and metrics).

Mailing Lists

We haven’t been as proactive in building a mailing list for the StartupNorth community as we probably should have been. I’ve used have started using MailChimp because of the quick integration to GravityForms and WooFoo, but have had very positive experiences using both Campaign Monitor and Constant Contact.

Billing and Accounting

What is amazing is that both of these companies are local to Toronto. We use WaveAccounting integrated with our bank account and PayPal for tracking expenses, billing, and financial operations. And we use Freshbooks to bill for sponsorships. They are a must have in our back office. What we’re missing is a really easy to use and integrated payroll system (I hear that it might be coming).

Human Resources

For full disclosure, I’m an advisor to TribeHR. It doesn’t change the fact that they rock. It is the easiest way to get an HR system in place. And there is no better way to get feedback and help employees improve than Rypple.

Surveys and Feedback

We are actively using Survey.IO to gather feedback from users about the state of StartupNorth. It helps us figure out the state of our product market-fit, if there is such a thing for a blog about Canadian startups, fill it out and help us be better.

Project Tracking

We use Pivotal Tracker. We like them so much, we actively recruited them as a sponsor for StartupNorth. There are lots of other tools from project tools to issue tracking. Curious at what others are using.

Source Control

We use Github Bronze for our project hosting. Most of the code we work on is PHP against MySQL (see WordPress), though we have additional apps in development like the StartupNorth Index (which will be moving to startupnorth.ca/index shortly) but all are LAMP.

Hosting

Full disclosure: VMFarms is a sponsor of StartupNorth. However, their hosted VMs that are backed up and hot mirrored coupled with the outrageous “white glove” makes them a dead simple choice. We also use Rackspace Startups and EC2 for access to easy Linux and Windows VMs for development and testing environments.

Customer Relationship Management

We don’t have any strong recommendations. There are platforms like Salesforce that are fantastic and sales teams are used to. There is Highrise which is broadly supported with a lot of 3rd party tools. But so far, neither of these has been the clear winner for us. There is a great Quora question about “What is the best CRM for startups” that lists SFDC, SugarCRM and Highrise. There are a lot of choices for CRM including Nimble, Insightly, Woosabi, Capsule, Solve360,AppPlane, Batchbook, PipelineDeals, TactileCRM, ZohoCRM and many others.

Conferencing, Screen Sharing & Telecommunications

I’ve been using Calliflower for conference calling. It’s $5/call for up-to 5 callers, or for $30/month unlimited minutes and >70 participants, it’s a great solution. It is not a replacement for a office phone system.

Google Voice and Skype have been the least expensive way as a Canadian startup to get a US phone number. This is great for me as an individual. However, this does not scale to an enterprise or an organization. I’ve been looking at Grasshopper, RingCentral and Toktumi, but I have yet to settle on a solution.

SEO & SEM Tools

This part of the list is pretty much cribbed from Steve Blank’s list of tools for entrepreneurs. Go read it for a more comprehensive list of tools beyond the SEO/SEM listing included below.

What are we missing?

I’m going to cover in the next post: discounted travel, conferences, business cards, design services, and other tricks for being relentless resourceful as a founder.

There are a lot of online tools that startups are using to make or break their business. And there is a lot missing, monitoring like NewRelic, PagerDuty, Pingdom and Blame Stella for example. But I’m curious what are the indispensable tools being used at iStopOver.com, HighScoreHouse, CommunityLend, Idee/Tineye, Massive Damage, Empire Avenue, Indochino, Lymbix, Hootsuite, AdParlor, Locationary, Chango and others. What are you using? What gives you the edge in quickly and effectively gathering feedback to test your hypotheses?

The Mentor Manifesto by David Cohen

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I am continually amazed at the horror stories I hear from entrepreneurs about finding mentors. About mentors taking large pieces of the company and not providing any value in return. It was great to see David Cohen’s The Mentor Manifesto this morning. It is great to see David take the time from his 11 cohorts at TechStars and try to explain “What does it mean to be a great mentor?”. This is an extension of his tips for entrepreneurs that includes how to Find and Engage Great Mentors as part of his top twelve startup tips.

The Mentor Manifesto

  • Be socratic.
  • Expect nothing in return (you’ll be delighted with what you do get back).
  • Be authentic / practice what you preach.
  • Be direct. Tell the truth, however hard.
  • Listen too.
  • The best mentor relationships eventually become two-way.
  • Be responsive.
  • Adopt at least one company every single year. Experience counts.
  • Clearly separate opinion from fact.
  • Hold information in confidence.
  • Clearly commit to mentor or do not. Either is fine.
  • Know what you don’t know. Say I don’t know when you don’t know. “I don’t know” is preferable to bravado.
  • Guide, don’t control. Teams must make their own decisions. Guide but never tell them what to do. Understand that it’s their company, not yours.
  • Accept and communicate with other mentors that get involved.
  • Be optimistic.
  • Provide specific actionable advice, don’t be vague.
  • Be challenging/robust but never destructive.
  • Have empathy. Remember that startups are hard.

I hope that I can live up to the manifesto for the companies I mentor at UW VeloCity, FounderFuel and those I’ve been working with in Toronto and Waterloo.

Trying to understand incubator math

Editor’s note: This is a guest post by Jesse Rodgers who is currently the Director of Student Innovation at the University of Waterloo responsible for the VeloCity Residence & he is also the cofounder of TribeHR. Jesse specializes in product design, web application development and emerging web technologies in higher education. He has been a key member of the Waterloo startup community hosting StartupCampWaterloo and other events to bring together and engage local entrepreneurs. Follow him on Twitter @jrodgers or WhoYouCallingAJesse.com.

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Incubators are not a new addition to the financing and support for startups and entrepreneurs. On the surface, incubators and accelerators seem like a low cost way for VCs and government support organizations to cluster entrepreneurs and determine the top-notch talent out the accepted cohort. The opportunity to investing in real estate and services that enable companies where the winners are chosen by the merits of the businesses being built. It feels like a straight-forward, relatively safe bet to ensure a crop of companies that are set to require additional growth capital where part of the products and personalities have been derisked through process.

However, its not as simple as putting small amounts of investment into a high potential company. An incubator is a business and it’s sole purpose should be to make money.

What are the basics of an incubator?

The basic variables in setting up an incubator business are:

  • Cost of the expertise, facilities, services and other overhead
  • Amount of $ to be invested/deployed
  • Number of startups
  • Equity being given in exchange for cash
  • Return on the total investment

There are cost of operations: real estate, connectivity, marketing, programs and services for the entrepreneurs, and the salaries of the individuals to find the startups, provide the services and build successes. These costs are often covered by governments, in exchange for the impact in job creation and taxation base. We’ve seen a rise in incubators that are funded on an investment thesis, where an individual or a set of “limited partners” provide the initial investment in exchange for an investment in the companies being incubated.

How much do incubators cost?

The goal is to efficiently deploy capital to produce successful investments. I’m going to explore how incubators make money by making a few assumptions based on the incubator/accelerator models we’ve seen in Toronto, Montreal, Palo Alto and New York.

Basic assumptions:

  • Capital Investments: 10 startups x 20k = 200k invested with an assumed ‘post-money valuation’ of $2.2MM
    • This means you now own 9.1% in 10 startups each with a post-money valuation of $220k
  • Support Costs: 10 startups x $10k = $100k
    • This is the cost of real estate, furniture, telecommunications, internet connectivity, etc.

Alright, we’re planning to deploy $200k and it need to provide approximately $100k in services just to provide the basics for the startups. We’ve spent $300k for the first cohort and and that is before you pay any salaries, host an event, etc.

Additional costs:

  • People:
    • $100k per year salary for one person to rule them all. Call them executive director or dean or something.
    • Assuming you’re not doing this to deploy your own capital, the person or people in charge probably need to collect a salary to pay their mortgages, food, etc.
  • Events – Following the model set forth by YCombinator or TechStars we have 2 main types of events. Mentoring events where the cohort is exposed to the mentors and other industry luminaries to help them make connections and learn from the experience of others. The other event is a Demo Day, designed to bring outside investors and press together to drive investment and attention in the current cohort, plus attract the next cohort of startups.
    • Mentoring event: $1k for food costs with 25 founders
    • Demo Day: approximately $5k
    • Assumption: 10 mentoring events plus a demo day per cohort adds $40k.

The estimated costs are approximately $340,000/cohort. Assuming 2 cohorts/year plus the staffing salary costs, an incubator is looking at $780,000 that includes 40 investments and a total of $4.4MM post-money valuation. If we assume that I’m a little off on the total capital outlay, and we build in a 30% margin of error this brings the annual budget to appromimately $1MM/year to operate.

How do incubators make money?

Incubators make money when the startups they take an equity stake in get big and successful. The best exits for an incubator come when one of their startups is acquired. Why acquired? Because the path to getting acquired path is shorter than the path to going public which would also allow the incubator to divest of their investment.

Let’s do the math. If your running an incubator hoping to get respectable returns on the $1,000,000 you’ve laid out above, let’s say it’s not the mythical 10 bagger but a more conservative 3x, the incubator needs one of the companies to exit at near $30,000,000. It can be one at $30MM or any combination smaller than that totalling $30MM. This needs to happen before any dilution and follow-on funding for your cadre of companies. You have to assuming that they can make it to acquisition on the $10,000 and services you’ve provided. For more on incubator math, check out there’s an incubator bubble and it will pop.

The bad news is that it isn’t as simple as that. Startups are not just something that exist in a vacum. There are a lot of unknown variables that can make or break an incubator.

  • percentage of startups that fail (or turn into zombies) in the first two years after investment
  • time frame return is expected
  • how many startups currently produce that kind of return annually
  • total number of startups that receive investment in any given year
  • total number of acquisitions in any given year
  • avg. number of years a startup takes to get to acquisition (because they aren’t going public)
  • avg. price a startup sells for (I bet those talent acquisitions drag the average way down)
  • what do VC’s currently spend on their deal pipeline?

It is the unknowns that are where the gamble exists. You can tweak the numbers all you would like but assume startups have a no better fail rate then any small business. The common thinking on that is 25% of businesses fail in the first year, 70% in the  first five years? If just more than half of those companies are alive in one year you are doing well. If one out of those 20 is acquired in 5 years and you get 3x return do you succeed? Do you have to run the incubator for the 5 years at $1MM/year to be able to play the odds?

Maybe this is why so many incubators focus on office space, it’s easy to show LPs what they are getting for their $5MM for 5 year investment, plus an impressive number of “new” startups that have been touched by the program (often without an exit, you know the way incubators make money).

What am I missing?

Editor’s note: This is a guest post by Jesse Rodgers who is currently the Director of Student Innovation at the University of Waterloo responsible for the VeloCity Residence & he is also the cofounder of TribeHR. Jesse specializes in product design, web application development and emerging web technologies in higher education. He has been a key member of the Waterloo startup community hosting StartupCampWaterloo and other events to bring together and engage local entrepreneurs. Follow him on Twitter @jrodgers or WhoYouCallingAJesse.com.