Month: September 2011

  • Your Funnel is a Finite State Machine

    Editor’s note: This is a cross post by Joseph Fung (LinkedIn, @josephfung), the CEO of TribeHR (@tribehr). Joseph has recently raised $1MM from David Skok (@bostonVC) at Matrix Partners in Boston, MA. He is building and automating the SaaS metrics for TribeHR. He has a unique engineering view of sales and marketing that allows him to be nimble and correct his efforts based on real customer behaviour data. This post was orignially published on September 23, 2011

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    I’m of the opinion that the startup journey is really just the process of repeated work between “a-ha” moments of key insights. The faster we get to new insights, the better we are at ongoing improvement. I’m writing this post to describe an a-ha moment that happened early on (although earlier would have been better) in the lifecycle of TribeHR.


    Figure 1: Exciting! An Arbitrary State Machine

    To engineers turned entrepreneurs: your customer acquisition funnel is a finite state machine.

    This statement implies three specific premises:

    • your funnel can and should be modeled as a Finite State Machine (FSM)
    • your funnel FSM should map to explicit in-app states
    • investors care about the funnel state as much as (if not more) than anything else in your app

    Your Funnel Should be Modeled

    This point is best described in terms of my experiences with TribeHR:

    When designing features within TribeHR, it was intuitive to think about our software in terms of moving objects through a series of states: a review was “in-progress”, “completed”, then “filed”; a vacation request was “pending review”, then “approved” or “rejected”. Similarly, the users of the system would also be moved through states – “employee”, “manager” or “admin” for example. When I thought about the marketing process, however, I treated “sales and marketing” as the entry point into the state machine – I saw it as the entry arrow rather than a separate series of states.

    Because we didn’t start by planning our marketing and sales states, it was easy to rely on 3rd party services for our definitions. Unfortunately, implementing multiple services led to confusion. Some customers subscribed using PayPal, others paid through our payment gateway, and others found us via third-party app stores – each system had a different way of defining the state of a customer, so simple numbers like “how many customers are active” was a difficult thing to determine. This was compounded by our shift from a freemium model to a free-trial model earlier this year.

    If we had clearly defined and tracked our states from the start (which we have since done) it would have been easier to map third-party terminology to our own, making analyses and improvements much easier. You can see the results of subsequent mapping in the diagram below:


    Figure 2: TribeHR Funnel as a Finite State Machine

    As you can see, our entry state is “trialing”, thus the primary objective of our website is to convert visitors and leads into trialing users (our lead nurturing program is a state-machine still being designed). Once someone is trialling, they have two potential transitions: they can become either a paid “active” customer or an “abandoned” trial. Once someone becomes an active customer (and ideally remain one for a long time) they will exit the state only as a “cancelled” or “suspended” account. By clearly defining our states in the above format, we are now much better equipped to modify our messaging and features to optimize the experience. Before identifying the above state machine, we wasted a lot of time manually analyzing and identifying states, often on a case-by-case basis.

    The “should” part of my assertion follows from my conversations with investors and advisors. I’d frequently be asked for information such as our conversion rate from trials to paid customers or our re-activation rate of suspended accounts – without a clear FSM, we’d have some accounts that occupied more than one state, which made answering these questions impossible. By defining our funnel/FSM we were then able to answer such questions with ease, which made a world of difference to our working relationship with investors and advisors.

    If you haven’t defined your Funnel/FSM yet – do so. If you’re early-on in your startups, ot might not be perfect, but it will save you significant stress, time, and effort as you continue to work with mentors and investors. If it helps, put the model up on the wall at your office – it’ll keep it top of mind with your team.

    Mapping to Explicit In-App States

    Once you finalize your model, it’s critically important that you then track these states explicitly within you app. For example, if you offer a 15-day trial, during which users have to cancel or continue, it might be tempting to calculate “trialing” customers as those who are subscribed and whose date subscribed value is within the last 15 days. While this calculation might yield a correct result, formulating queries becomes significantly more complex when you can’t simply evaluate whether a field “state” is set to “trialing”.

    These queries are important because as your company and customer base grow, you’ll need to generate reports and dashboards that highlight this information in near real-time. You’ll need to answer questions like what percentage of users that sign up for a trial convert to a paid customer, and how is it changing over time? As soon as you can answer that, you’ll then be asked to segment by lead source, user characteristic, or time window. For example how does that conversion rate over time vary according to lead source or engagement level?

    To put it into an example, below are two examples of queries that would generate a summary of states of a single cohort from January 2011, assuming a 15-day trialing period. The first uses explicitly defined states, and the second assumes you calculate a real-time trial period, and simply delete records when they terminate their account.

    Explicitly defined:

    SELECT COUNT(state) AS total_users, state
      FROM users
        WHERE date_registered >= "2011-01-01" AND date_registered < "2011-02-01"
      GROUP BY state;

    Calculated on the fly:

    SELECT SELECT COUNT(state) AS total_users, IF(date_registered >
        DATE_SUB("2011-02-01" , INTERVAL 15 DAY); "TRIAL"; "ACTIVE") AS state
      FROM users
        WHERE date_registered >= "2011-01-01" AND date_registered < "2011-02-01"
      GROUP BY state;

    As you can see, the query in the first is much easier to use and read, and it includes all states, whereas the second is challenging to use (even more challenging to modify if you have more states) and doesn’t track cancelled accounts.

    By structuring your database such that the state is explicitly identifiable, you’ll be able to generate queries much more readily, which will then let you automate standard reports (like conversion and churn rates) for dash boarding, and will allow you to more easily connect business intelligence tools to your database. The ultimate goal is to let your business-oriented team members manipulate the data as readily as you can.

    An added benefit of explicit states is that they act as assertions. Although it’s possible to determine that a customer is active by checking the date of their last successful payment, it’smuch better to have an explicit “active” state as you can then run automated tests to verify that your assertions are true. Having a recurring task that iterates through your customer base to confirm that accounts with a most recent payment made within the last month are correctly identified as “active”, is a good way to follow monitoring-driven-development approaches. Any assertion errors can help identify critical flaws in your system.

    Investors Care About the Funnel State

    Although this may seem obvious, it still needs stating. The platitude what get’s measured gets done has a corollary – what we care about gets measured. Technical founders often measure and know details like server load, traffic metrics, lines of code and number of commits or push requests. Because we innately care about those tasks, we tend to measure and follow them. What can’t be over-emphasized is how much investors, advisors and partners will care about your funnel states. Below is a representative subset of the metrics we’ve been asked to report at our board meetings – you’ll notice that none of them are related to in-app usage or infrastructure performance:

    • Total # Of Customers (overall and by customer segments)
    • Visitor-to-Trial Conversion Rate (overall, and by lead source)
    • Trials-to-Active Conversion Rate (overall, and by lead source and by segment)
    • Churn Rate (overall and by lead source)
    • Customer Acquisition Cost (overall and by lead source)
    • Average Revenue per User (overall and by lead source)
    • Life Time Value (overall and by lead source)

    Most of these numbers depend on measuring our customers’ states as well as various additional segments. Because our segments will vary frequently as we experiment and optimize with marketing campaigns, if we don’t have explicit (and easily determined) states, rapid iterations on our reporting become exceptionally difficult.

    Investors and advisors will assume that you have infrastructure running smoothly – you don’t need to hammer home evidence of it, so skip on reporting the infrastructure stats I mentioned earlier. For them to provide valuable advice, however, they need to be able to understand and trust the business metrics I listed. If you can speak as confidently about your Funnel/FSM as you do your application, and if you can deliver transparency into the funnel by automating reports and dashboards, you’ll build your investors confidence and trust in you as an entrepreneur.

    Bonus Reasons

    As a bonus, here are a few cool things you can then do once you have this funnel modelled and embedded within your software:

    1. More easily build dashboards with tools like Geckoboard
    2. Delegate data-mining and analysis to non-technical staff, by tacking on BI tools like Qlickview
    3. Automate segmentation and lists for automated email campaigns and lead nurturing using MailchimpPerformable, and others
    4. Simplify cohort analyses by customer segment

    If you have a state machine for your funnel or customer base, especially if it deviates significantly from mine above, please share it in a comment or an email to me. It would be interesting to see what approaches others are taking.

    Editor’s note: This is a cross post by Joseph Fung (LinkedIn, @josephfung), the CEO of TribeHR (@tribehr). Joseph has recently raised $1MM from David Skok (@bostonVC) at Matrix Partners in Boston, MA. He is building and automating the SaaS metrics for TribeHR. He has a unique engineering view of sales and marketing that allows him to be nimble and correct his efforts based on real customer behaviour data. This post was orignially published on September 23, 2011

  • Summer’s over, but it feels a little like Spring

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    Editor’s note: This is a cross post from Let the Sparks Fly! written by Mark Skapinker. It is a delightfully positive outlook on the prospects for the Canadian startup union. Mark is Cofounder and Managing Partner at Brightspark, which earlier this week was awarded CVCA’s deal of the year award.

    Normally this is the time of the year that really stresses me out. It is late September in Ontario, summer is over, the leaves are starting to change colour, and while it is still pretty nice out, it’s real clear that it is downhill from here to winter, with warm days more than seven months away.

    But something in the local tech industry feels a little different, and it feels like things are getting better. Some of us have been lamenting the state of the Canadian VC industry for years now, and Rim’s woes should by all rights make the local scene seem even bleaker – but people in the industry don’t seem to be listening. A whole lot of activities that are happening seem to signal an awakening spring and everyone seems just a little more optimistic.

    Of note are more entrepreneurs pitching really interesting offerings. I keep meeting Canadian entrepreneurs with great ideas, great opportunities and a yearning for success.

    Surrounding that are a number of exits from local companies – most notably (for the industry and especially for us at Brightspark, where we saw more than a 23X return on our investment) is the Radian6 sale to Salesforce.com. This exit proved that great, money-making businesses can be hatched in Canada with local talent, local VCs and a positive outcome for the local economy. Add to that a series of other small acquisitions along with some interesting exits.

    And then there are the new micro-funds which are growing despite the stalling of the traditional industry, with experienced and talented managers helping a new series of companies – I am referring to our colleagues – Duncan and Robin at Mantella; Matt at GoldenVP; the teams at Xtreme, bnotions and Real Ventures; Daniel at Klass Capital; Bill Dinardo; and Joel at Trilogy; all who are making a very meaningful difference to our industry. MaRS is expanding, IAF is investing, I hear some traditional Canadian VCs may be finalizing new funds, and the government funds continue their part in providing capital.

    We aren’t out of the woods yet, but it definitely feels like now is a great time to be part of the Internet, software, mobile, Cloud, and payment industries. Markets are growing, and these industries are creating value while the rest of the economy questions itself. If this really is a marathon, now is a great time to be heading out.

    If we can keep up this momentum and deliver a few more winners, we may look back at this time as the period when the new Canadian industry started thriving.

    At Brightspark, we remain thrilled with our VC fund’s performance. Our multiple exits puts our performance way ahead of top quartile funds anywhere in the world. And we think the remaining companies in our portfolio have the potential of taking our fund to new levels. Our focus on investing in great teams, markets we understand, and with an early stage fund of entrepreneurs helping entrepreneurs is paying off really well.

    To those people who have written off our participation in the industry, we continue to focus on remaining a significant part of this industry, and we think the next few years could be very exciting for our funds and the Canadian industry.

  • EmmaActive launches at DEMO

    EmmaActive, based in Abbotsford BC, is bringing to market an in-image ad unit that consumers will love. The platform turns images across the web into interactive units and enables crowd sourced tagging of photos. Publishers just have to drop a couple lines of javascript on their site to activate the untapped inventory.

    In image advertising is heating up with GumGum, Stipple, Luminate, and a few others vying for pole position and racing to deploy with publishers. The other dark horse is Facebook who might syndicate image tagging along with Facebook Connect. Of course, we’re rooting for the home team. Congrats to Nathan Leggatt and the EmmaActive team on the launch.

  • Another Monster Raise – Paymentus Closes Big Round From Accel-KKR

    Yesterday we posted about iLoveRewards closing a big growth round from Sequoia. Well today, another JLA Ventures company did a big round of growth money as well. Paymentus raised a big round from Accel-KKR, rumoured to be at $20mm. That’s $45mm in capital to two Canadian companies in a very short period of time. I imagine John Albright, @johnalbright, has enjoyed a celebratory cocktail or two after seeing two portfolio co’s do big growth rounds. Lets also not forget the story of Dushyant Sharma who looks well on his way to yet another entrepreneurial highlight reel entry. And of course big hats off to GrowthWorks for being the initial funders of this company and providing funds to Canadian companies when many others were not. PR post is here.

    Paymentus Corporation, a leading electronic bill payment, presentment and customer communication technology and services company, today announced that it has received an equity investment provided by Accel-KKR, a technology-focused private equity investment firm. The investment will be used by Paymentus to accelerate development, drive growth, and enhance the footprint of its real-time payment network.

    Paymentus’ unified, SaaS platform delivers enterprise bill payment, presentment and revenue management technology through a self-service model, simplifying, automating and streamlining the bill payment process.

    I found an old post from Rick Segal, @ricksegal, about the initial investment JLA did in Paymentus, which I think is a valuable repetitive lesson for all entrepreneurs about how to build a big successful company (something Dushyant has done a few times now):

    We invested in Paymentus for a number of reasons. Our basic business thesis was that there are a number of places where (surprisingly) automation of paying certain types of bills is still in an evolving state. Paymentus has identified a number of these market segments and came to us with some great traction, proprietary technology, tons of industry knowledge, and an impressive plan for growth.

    Dushyant did all the right things as a start up. Self-funded until he hit milestones that started to prove out the business stood out to the investors as well as a very clear and deep understanding of the bill payment and presentment business.

    We’ve done the list of acquisitions and celebrated, I think next up its time to tally the list of big raises, as I think there are more companies “going big” than we give credit.

  • Kanetix acquired by Monitor Clipper Partners

    Kanetix, Canada’s first online insurance marketplace provides over a million quotes per year to consumers looking for insurance, yesterday announced it has been acquired by Monitor Clipper Partners, a Cambridge based private equity firm that manages $2B in capital.

    Co-founded in 1999 by George Small and Gregory Ellis (who will retain significant stakes in Kanetix), the Toronto based company will now be led by Yousry Bissada who has joined on as CEO and Andrew Lo who has joined as Chief Information Officer.

    Yousry and Andrew previously grew Filogix from $3M to $60M in revenue. Monitor Clipper Partners leveraged recapitalized of Filogix in 2004 successfully exited for $212M to Davis & Henderson in 2006. It is encouraging to see experienced repeat teams growing Canadian companies.

    Here’s to a repeat performance.

     

     

  • 72 Hours Later….

    I loved this infographics from Ken Seto, @kenseto, et al at Massive Damage, who launched Please Stay Calm a few days ago in the Canadian Apple app store. Some very useful comparative info for aspiring game makers on local Canadian app downloads.

    Also I have a new request. From now on all startups should have a picture of a zombies missing an arm beside their ARPU. Especially in really serious board meetings.

    How Zombie Killing Sells.
  • Holy Schmoly – iLoveRewards Rumoured to Raise $25mm Round

    As you know, something like 10 of the past 12 articles on startupnorth have been grumblings either in the article or in the comments about lack of Canadian startups trying to go big and how the ecosystem here can’t really support it.

    Well check out this hot rumour we’ve heard. Apparently, Razor Suleman and the folks at iLoveRewards are doing a MONSTER round from Sequoia sized at $25mm… with none other than Alfred Lin of Zappos fame stepping on to their board. Is that big enough to settle the anti-early-exit crowd? That’s a first class round for any company anywhere.

    More good news – apparently Canada gets to keep a big chunk of the company. Razor and the sales and marketing team are heading down to San Francisco, while our beloved Canadian engineering brains will not get drained.

    Seriously, it had been a while since we last talked about iLoveRewards in 2008 with their also very impressive $4.7m series A round led by JLA . They are one of those companies that have silently dominated their industry, picked up lots of awards but stayed out of the mainstream startup spotlight. Kind of the classic 5 years later you’ve got an overnight success story, like this one.

    I want to ask “Why didn’t iLoveRewards raise this round in Canada?” but really, they just got took a big round from one of the most renowned, deepest pocketed VCs in the world. I just don’t think most Canadian late stage investors are going to beat Sequoia money, so I’m not sure its even a relevant question.

    But it is a perfect example to ask a far more relevant question “should we care about our companies raising money locally?” – shouldn’t CEOs care far more about value than about where it comes from and live with the resultant potential location issues. I’d love to hear the inside story one day on what the bidding looked like on this deal.

  • The Upside Of Canada’s Startup Buying Binge

    Editor’s note: This is a cross post from StartupCFO written by Mark MacLeod, it is a response to Mark Evans’ post The Downside of Canada’s Startup Buying Binge. Mark MacLeod is a Partner at Real Ventures, Canada’s largest seed VC fund. He is also an advisor to some of Canada’s leading startups including Shopify and others. Follow him on Twitter @startupcfo or StartupCFO.ca. This post was originally published on September 14, 2011 on StartupCFO.ca.

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    Mark Evans posted recently about the downside of Canada’s recent startup buying binge. Year-to-date, we have had 22 exits in Canada. But save for outliers like Radian6 and Algorithmics, most have been relatively small. Mark correctly argues that there are long term negative implications to these early exits: losing talent to the US and not building mid to large scale companies that can really bolster our tech scene.

    Can’t argue with that and I have posted in the past about the importance of large tech companies to our ecosystem. But, exits are like pizza, even when they’re bad (small) they’re good. Why?

    Returns to LPs: Returns in the Canadian venture industry since inception are negative. Some funds have delivered returns, but the industry as a whole has not. That won’t work if we want to attract non-government LPs who are motivated by returns vs. policy, job creation. So, any exit that contributes towards fund performance is good.

    Generating repeat entrepreneurs: The reason (I believe) why many of our exits are relatively small is that the founders behind those companies have not had a positive exit before. As an investor, you should not bet against human nature. And I think it’s perfectly natural for an entrepreneur that has the opportunity to sell early and pocket a few million to do that. The trick is to keep that entrepreneur in the system and working on the next company. The next time, that same entrepreneur will set his or her sights much higher.

    Eliminating borders: It used to be an uphill battle to convince US investors to come up here. Now with the elimination of witholding taxes on exit and with our companies doing great things US investors are coming up here more often and earlier in the startup lifecycle.

    So when you think about what’s happening now, my hope is that we are setting the stage for long term success and the creation of some tech giants right here in Canada. To enable that, investors need to do more of the following:

    Give Canadian Startups more capital: This might be ironic coming from a guy at a seed fund, but it’s a well known fact that Canadian startups raise less than their US counterparts. I think it’s fine to operate with small $ before product/ market fit but as soon as you are ready for goto market acceleration you need serious fuel. Canadian investors and entrepreneurs need to continue building strong syndicates that include US investors that can write big cheques.

    We did that at Shopify. The investor group there includes two large tier 1 funds that can help Shopify become a giant in its industry.

    Enable founders to take cash off the table: As a founder you’re more likely to “go for it” if you can sell some shares and not have to worry about cash. This is common practice in the US. We need to do it more up here. It does not make sense early on but series B and up, I think it makes sense.

    Surround our CEOs with mentorship: When you look at the truly giant tech companies, they are almost always founder-led. So that tells me that we have to surround our founders with peers, mentors, coaches, advisors to help them make that transition from founder to CEO.

    We also need tech companies going public here in Canada, but that’s another topic for another time. So, I say bring on these early exits and realize they are setting the stage for great things to come.

    Editor’s note: This is a cross post from StartupCFO written by Mark MacLeod, it is a response to Mark Evans’ post The Downside of Canada’s Startup Buying Binge. Mark MacLeod is a Partner at Real Ventures, Canada’s largest seed VC fund. He is also an advisor to some of Canada’s leading startups including Shopify and others. Follow him on Twitter @startupcfo or StartupCFO.ca. This post was originally published on September 14, 2011 on StartupCFO.ca.

  • GoInstant launching tonight at TechCrunch Disrupt

    You haven’t seen many posts recently from my StartupNorth Cofounder Jevon MacDonald for a very good reason… he has been working on a startup.

    Customers can’t wait to get their hands on it. Robert Scoble had this to say: “It is one of those companies, when you see it, you say wow that is so cool. It should be bought by Facebook or Salesforce.”

    GoInstant has raised seed funding from an impressive syndicate including: Josh Felser (Freestyle Capital), Reid Hoffman (Greylock Partners), Howard Lindzon (Social Leverage), Steve Anderson (Baseline Ventures), Chamath Palihapitiya (Embarcadero Ventures), Patrick Keefe (Innovacorp), Boris Wertz (W Media Ventures), Ed Sim (BOLDstart Ventures), Yuri Milner, Matt Wyndowe, Daniel Debow, and myself.

    The Halifax based company has been in stealth mode for 9 months. By now you are probably wondering… what is GoInstant?

  • The Downside of Canada’s Start-up Buying Binge

    Editor’s note: This is a cross post from Mark Evans Tech written by Mark Evans of ME Consulting. Follow him on Twitter @markevans or MarkEvansTech.comThis post was originally published in September 12, 2011 on MarkEvansTech.com.

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    There has been a lot of euphoria and happy dances recently about the flurry of Canadian start-ups being acquired. The list includes Zite (CNN), Five Mobile (Zynga), PostRank (Google), PushLife (Google) and BackType (Twitter).

    The positive news is that the flurry of deals (22 and counting, according to TechVibes) provide a huge boost to Canada’s start-up ecosystem, which needs all the support it can get. Acquisitions reward start-up founders, encourage venture capitalists and angel investors, embolden entrepreneurs, and provide a healthier landscape for people like myself who provide services to start-ups.

    In short, Canada’s start-up ecosystem is on a roll and, hopefully, these deals will make things even better and more active.

    But there is a downside to these start-ups being snapped up. Many of them are early-stage companies with interesting technology but perhaps not a lot of customers or revenue. Rather than a business being acquired, it is the ideas, intellectual capital and, as important, the people that are being purchased. Many acquisitions are fuelled by the need to add strong talent to jump-start the growth of a business or service. Zynga, for example, was looking to boost its mobile development capabilities so buying Five Mobile was a quick way to do it.

    The problems with many of these deals are two-fold:

    1. Many start-ups are snapped up before they get a chance to gain real traction and evolve into small or medium-size businesses that employ dozens or hundreds of employees. It means the loss of an opportunity to build a high-tech community that features a “middle-class” between start-ups and large players (most of them U.S.-owned) such as Microsoft and IBM. In an ideal world, some of these start-ups would grow into an Open Text or, heck, a RIM.
    2. Many of these deals involve some or all of the start-ups’ employees moving out of Canada. PostRank’s employees, for example, moved to the Mountain View, CA. after the Waterloo-based company was acquired by Google. It’s an M&A-driven brain drain when the best and bright entrepreneurs, developers, etc. get sucked south of the border. Granted, many of them will likely return to Canada with more experience and some dollars in their jeans but, in the short-term, it’s a loss for Canada’s high-tech and start-up community.

    I recognize that, in the scheme of things, these are nice “problems” to have. After all, it is better that start-ups are being acquired and investors rewarded as opposed to no M&A activity, which afflicted the start-up landscape for far too long. My point is it is also important to recognize there is a downside, even though it is something we can happily accept.