StartupNorth

Author: borismann

  • Controlling Burn (Part 2)

    I think helping failing startups is going to be a great business opportunity in the next 12-18 months. In fact, anybody want to do a startup about helping failing startups. All those overvalued frothy companies are in for an interesting surprise when they find out that their angel isn’t going to forever bridge them to nowhere.

    So a few last tactics.  Part 1 is here.

    Pricing

    There is often a fatally flawed line of reasoning , (its probably doubly fatal for subscription business models) that goes something like this “lower price, sales increase, more customers, life is better”.  Its flawed, but not because sales won’t go up, but because you get crappy customers who churn off 3-4 months later and bad mouth your product. And thats probably more expensive than not getting the customer in the first place.

    Photo By Todd Shaffer

    When you do price and offer testing, you need to include usage & churn analytics.  This sucks because you may not have useful data on churn for 3-6 months.  So figure out your key usage metrics and understand how they relate to churn.  Customers give all kinds of warning signs before they churn (such as they stop using the product).  Setup your price tests by cohorts that you can track usage data.

    If anything, in a cash crunch, you want to raise price and have less better-quality (i.e. cheaper to serve) customers.  But not all businesses can raise price without significant relationship repair.  So an alternative is to figure out how to pull cash forward.  For instance give discounts if users prepay for a year.  Give discounts for closing fast to enterprise customers.  Change how you bundle your pricing.

    Don’t Give Up

    I think this is the number one piece of advise I can give.  Keep pushing forward.

    I’d love to see stats on when and how founders & CEOs leave their startups. You hear horror stories about CEOs getting forced out, but from my anecdotal evidence of other startups, I’d wager that more CEOs leave than get forced out and they leave/give up right around this point. Or they get “acquired” in a great nobody benefits acquisition but the team can at least do something new.

    You can’t give up. You have to survive. Smile & enjoy life, you are living to see another day.

  • Surviving The Cash Crunch (Part 1)

    Photo by © 2008 Daniela Hartmann
    Photo by © 2008 Daniela Hartmann

    You are 3-6 months away from running out of cash.  Your current business model & strategy isn’t going to make it happen over that same period.  You are unable to raise a new round.

    This is another classic stage for mid-stage startups I’ve heard nicely referred to as “controlled burn”.  You either need to pivot onto something new or give your current strategy time to break-even, whatever it is you need to do, you don’t have the cash to do it without doing something about costs.  So you need to turn 3 months of money into 12 months of money or more.

    I’m speculating, but the number of start-ups who hit a cash crunch over all-time probably approaches infinity.  Annoyingly though it doesn’t get written about often and there isn’t a lot of useful advice I’ve found.  Having seen this a few times and talked to a many companies with this type of problem, I thought I’d try and touch the topic with some useful tactics.  One key note – all of this needs to be done in advance of running out of cash, not once you have run out of cash.

    Do NOT Raise Too Much Money, Too Early

    My first advice is preventative.  I’ve been part of teams that have raised $0, $80mm and $20mm as the initial round.  So I have some very real world experience with both ends of this argument.

    Photo by Stephen Poff
    Photo by Stephen Poff CC BY-NC-ND 2.0

    There are two problems.  The first is that if you raise a lot of money, your investors expect you to do something with it, not sit on it.  You are expected to get “fat”.  Hire a great mgmt team, hire middle mgmt, hire depth, have project managers, have tons of software firepower, big marketing plans, big markets, etc, etc.  This means that your burn will probably be stupidly high and you’ll probably hit cash flow problems marginally past that of a team that raised much less capital.  It means your cuts are more painful and the “paradigm-shift” is larger.

    On the other side, you eliminate options for handling cash flow issues by raising too much, too early.  Imagine each $5mm increment as chopping off a tier of the investing market for your company.  Somewhere past say $20-$30mm you need to have the financial results to match your valuation to enter into these new “investment markets”.  You can end up pigeon-holed into a tiny corner of the investment world – need lots of money, have a great team/idea, but don’t yet have the results to justify the results…. uh oh.

    This is where founder-killing down-rounds and inside-rounds happen and equity disappears.

    Layoffs

    For most startups, the biggest cost is people.  If you want to control burn, there’s probably no way to get around dealing with this.  So here’s a few ways to actually bring down people cost:

    1. Cross the board pay cuts – CEO goes to $1, mgmt team takes large cuts, staff take smaller cuts.  Keep the team together.  (Usually you talk yourself into this strategy because you have like a half a percent chance at having some big company who you’ve met once buying you)
    2. Big layoff day.
    3. Offer packages, options to furlough or take time off – “anybody want to take 6 months off to travel the world and want to come back to a full paying job?”

    Generally, I’m a fan of cut deep, fast and once.  If you try to be the “nice guy” and retain people for less money, etc – you are screwing everybody.  Many employees will get a new job before your notice period ends and it’ll probably pay more than they made now.   You are not being nice by offering them a chance to stick around at reduced pay.  Others have big enough bank rolls to live without income for a bit and will take time off and deliberate about jobs – e.g. senior mgmt.  For some, layoffs are common territories – for instance accounts and analysts, often the first to go as they are nice to haves, not must haves in a cash conscious company.  Other folks will use this as the impetus to do their own entrepreneurial adventure and will get rich because you laid them off.  So really, don’t get all teary and sad about laying folks off – many will be able to handle it and you aren’t doing them a favour by keeping them around.

    My “nice guy” layoff tactic would look something like this.  Do all your layoffs at once and give a reasonable notice period (4-8 weeks??).  Don’t spend much time deliberating and talking to folks – morale dies quickly and people stop working when waiting for a decision.  Do it and make sure to do it deep enough the first time.  Then, go out and help the people you laid off find new jobs.  Reach out to your vast startup network – for every startup laying off, you can probably find a new one hiring, especially folks with startup experience.  Then, give some time, say 4-6 weeks.  Then and only then, if some folks seem to be in trouble financially and unable to find work – offer them contract work to get them past the hump, a few grand a month, something like that.  Double down in helping them find them new roles.  Ask your VC for help in placing them.

    Partners & Creditors

    Before I write what I am about to write I want to make some things very clear.  Always do honest business and never screw your partners intentionally.  Your name is everything.  When you are starting to get short on cash talk to them and look for options, some will have experienced similar and will be helpful.

    So my first advice is preventative.  When you negotiate every contract, take it from the lens of “what happens if I run out of cash?”.  Can you terminate?  Can you adjust pricing?  Are the terms 30 days or 90 days?  Can they kill my business if I am short on cash?  Don’t bet on a long future and sign-up for 2-3 year deals.  Business flexibility is probably more important than scaling costs downwards off the bat.

    Once you are in the cash crunch situation, here is a golden rule I once heard “Pay your customers, not your creditors”.  I.e. in a world of limited money and limited choice of how to apply it, remember that paying creditors won’t result in your business generating cash,  it will result in your business dying and all your creditors getting $0.  You are helping your creditors by helping yourself (presuming you don’t spend it stupidly).

    The key date to remember when negotiating with any partner is their fiscal year end.  If you are past 90 days due on payments, you have to pay something otherwise your partner is basically forced to write you off as bad debts.  If you pay anything, they can keep it as revenue.  Also remember that if you have global partners that standards of non-payment are very different.  Payables past 90+ days may be more the norm than a “business faux pas” in certain countries.

    No matter what this is going to result in you hating your job for a while.  Negotiating and settling with partners is not fun.  Nor is stringing out payments.  People will not say very nice things to you.

     

    In part 2, I’ll look at customers & pricing, and operating your business once in the cash crunch.

  • Mid-Stage Startup Analytics (or when to pivot)

    I heart mid-stage startup life.  Its dirty, gritty, hard decision making where you really learn your business inside out.  You can turn yourself into a successful business or you can drive your business into a classic brain-eating, zombie company living out its life sucking on SRED claims.

    Its a constant mix of battling short vs long, trying to fundamentally answer two questions:

    1.  Is my initial business model/strategy succeeding?

    2.  Is there a better business model/strategy out there?

    Or… to pivot or not to pivot.  The non-chalance which pivot is thrown out by the startup blog-orati gets me a bit annoyed.  Its really damn hard to tell if you are succeeding or failing at any given point in time for most mid-stage companies.  Unless you are part of the super successful 1% or the super sucky 1%.  But for the rest of the world, you probably have sales & customers – but maybe not enough, or maybe not profitable customers.  Its actually quite challenging to stare at your data, disassociate yourself emotionally and come up with a clear rational answer on if your problem is execution (experiment & learn) or strategic (pivot)… and if its strategic, where do you go next?

    So I thought I’d shed some internal light as to how I’ve seen this process managed.  Lets pretend you have a product, and you’ve done a few releases and made it better.  You have some customers who pay for it.  You’re not yet break-even nor have you landed financing to let you pursue this indefinitely.  I.e. you are the normal typical startup 1-4 years into life.

    Dave McClure’s seminal startup metrics slide deck is a great start for figuring out which data & metrics you need as a company to judge oneself.  In the early days of Peek we coalesced around these metrics:

    -cost of acquisition.. how much do you spend to get a sub

    -customer satisfaction… Net Promoter Score is one of my favourites here (one question survey – would you recommend us to somebody else, lots of bechmarks to compare to)

    -churn… deep dive stats on reasons why people churn

    -segment data… cut this up by demographic, sociographic, psychographic (what needs were filled when they bought it), etc

    Then the basic approach was this.  Take your segments and look for over/under-indexers in each of the above.  Look for patterns:

    -does a certain segment churn faster?  i.e. are some segments better quality customers.  Does this align to a channel?

    -do you out index the standard demographics in a certain category?  For instance do you have 2x more mom’s than you should based on normal demographic distribution.  Are those mom’s also better users?  or do they churn fast?  The over-indexing may look small at first, a proverbial green shoot.  Water and fertilize it!  We over-indexed in some weird segments – like cost-conscious small business owners.

    -are some segments happier than others, do they have better usage patterns and higher customer satisfaction…

    -compare this with channel, you can gain big clues here.  For instance lets say you have partnerships with Yahoo & AOL and have ads on both their sites.  If Yahoo is outperforming AOL, try to understand the demographic, psychographic reason for it.  Cross compare to churn in these cohorts.  Maybe Yahoo is more small business oriented who have a need for your product while AOL is an older, consumer base who do not.

    -also cross compare this to product versions, do things get better as new product changes are introduced?  We always noted that faster performing UI led to happier customers (and so has basically every study out there – see the seminal Microsoft/Google search research on how shaving even 50ms is a big differentiator).

    Use this data to keep aligning product/market/channel fit.  At some point (I’d argue you need to follow a process like this for 12 months +), you’ll have either exhausted a lot of opportunities and improved, or you’ll have not.  I personally like really leaning on cost of acquisition as the telltale signals that strategy is wrong and you’re not going anywhere.  At some point you’ll get product/market fit and word of mouth, virality and referals start to happen and you don’t need to spend as much time, energy, and/or money on marketing to a specific segment.  If this doesn’t happen, if the only way for you to move your product is to always be juicing marketing in a way that is not affordable, then you probably need a new product/business model.

    And at that point, after working tactics for a good period of time and tracking how it impacts metrics, then I’d “pivot”.

    One last note, this is far more art than science.  Picking metrics, finding tactics to improve them, reading trends, and moving on them – this is where the team (esp the CEO & marketing folks) earns its money as relentless executioners of the day to day business.

    One last, last note, pivoting is really expensive & hard.  Depending on how big your pivot is, you probably have to lay off staff (e.g. if you have expert consumer marketing staff and you are pivoting to enterprise… wooops), get board members and advisory board members who understand this space, re-brand yourself to the market, go get introduced to a whole new set of strategic potential partners, discover the industrial eco-system around your new pivot, maybe find new investors who invest in the space, and so on and so forth.  And thats why you need to fight like mad to make your current strategy work.

  • The Tech Bubble IS the Recovery

    I keep hearing nonsense about tech bubbles recently. I think people are losing sight of the opportunity in front of them right now.

    There are something like 500mm broadband customers in the world right now. There are over 5b mobile users in the world right now. Of those only about 500m have 3G (i.e. broadband) access.

    So there is still something like a market of 5b people right now who will over the next 5-10 years start using the internet as part of their daily lives. With new smartphones & new tablets, price points are reaching levels where broadband will be affordable to all these people. And as broadband becomes available, new internet delivered services & products will be used. MASSIVE OPPORTUNITY.

    But thats only part of the story. Basically, still in this day, there are tons of service/industry sectors where the internet is barely used. I’m talking about you health care! There are major major industry changes coming in sectors like government, health care, real estate, law, delivery, etc. Many government services still require paper for submission. Anybody done taxes or applied for a visa – think neither of those two could be done better? Many doctors still rely heavily on pen and paper (prescription pad anybody?). Many legal & financial transactions are still quagmired in a world of yesteryore, completely non-digitized. Anybody bought a house recently? There are multi-billion dollar opportunities here.

    On top of riding disruption in many service & industrial sectors, there are still major changes coming in the way we consumers use the internet. Last year e-commerce accounted for 4% of all commerce, and online advertisting was only 13% of all advertisting. Meanwhile the average person is spending more and more time online and consuming more and more internet services, meaning that commerce, advertising & media production will all explode online. MORE BIG OPPORTUNITY.

    And, more so, most infrastructure still hasn’t even been hooked up to the internet! Can you turn lights on/off over the internet in your house? Is your car on the internet (driving as a service – DaaS??)? Are large buildings on the internet, can we remotely control them? Are local bridges on the internet throwing off readings from sensors, cameras, etc? How many more devices, buildings, cars, etc can be added to the internet? A few billion++?

    And, with 5B people now having access to GSM phones, you think the world of communication isn’t still evolving fast? Want to know why Kik, Color, GroupMe, Beluga, etc are all getting massive amounts of money and its no joke??? When was the last time you sent a text? Was the experience kind of lame (you had to remember a weird 9 digit number that represents that person , type in T9, etc)? Did you pay some stupid amount of money for it – like $20/month for unlimited texting? Were roughly 5 TRILLION texts sent last year globally at revenue of something like 5-7 cents per text – wow a $250B market!!! Has MMS been a total failure with a horrible user experience that nobody outside of Germany ever used to share photos? Did it still generate $31.5B in global revenue last year??? You think its not worth giving a company like Color $41mm to take a crack at that revenue??? If I were a mobile carrier right now I would crap my pants every time I read about one of these companies raising big money. Entrepreneurs & VCs have started a mobile messaging WAR against the carriers – because its a big opportunity, not because they are being stupid.

    And hasn’t it gotten cheaper and less riskier to launch new web products & services, like cheaper by several factors. Shouldn’t people invest in big market/low risk opportunities?

    And doesn’t Silicon Valley have massive leverage and far more competitive advantage over EVERY WHERE ELSE IN THE WORLD (and maybe New York.. and maybe the collective geographical diaspora known as University of Waterloo graduates). Can China, India, Europe, blah, blah, anywhere really, truly come close to competing with Silicon Valley head to head in making money out of the future of the internet?

    So there are BIG massive billion dollar global opportunities. And there are unique advantages in the US globally. And its cheaper and less riskier than ever to invest in these companies.

    Isn’t this EXACTLY the policy the people, the government, the investors, the entrepreneurs, the hackers, the inventors and everybody should be endorsing? Is it bad that easy fed printed money/gov’t stimulus cash has trickled down into the valley and created a surge in investment in high-tech? Don’t Americans want to kick ass and win and have most of the new billion dollar companies built here? And isn’t this a true legitimate chance for the country to recover in the long-run? Isn’t it less risky and a better idea than Friedman telling us to invest in better solar panels every day in the New York Times? Where else would you put this money? Building bridges???

    I’m not even American, I wish you guys would blow this chance so up here in Canada we’d build the best tech companies! But at least some of the funding will flow to the hands of the our University of Waterloo students who will eventually move home when they have babies.

    But in all seriousness, I think every startup who got funded recently, should realize they have a civic responsibility to bust their asses off with HUSTLE AND HACK. These are tough economic times for many, and you have the opportunity to do something about it and make a difference. I don’t want to read articles about the 4 monitors on your desk, or the ipad you got when you joined, blah blah blah. Don’t act like over-privileged, whiny, little bitches spoiled rich kids. Get out there and help re-build.