Category: Startups

Where’s Waldo?
I’ve written about CIX Top 20 Follow @CIXCommunity in 2008, 2009, 2010, 2011 and 2012. To follow my pattern here is my post for 2013. Full disclosure: I sit on the Advisory Board for CIX.

There are 3 core events in the Canadian startup calendar:
- Canadian Innovation eXchange (Toronto)
- GrowConf (Vancouver)
- StartupFest (Montreal)
There are other happenings and gatherings ranging from NxNE to HPX Digital to Mesh to the C100 events. If you need a reminder about the state of the Toronto startup ecosystem, make sure you check out my now 14 month old but still relevant post, Don’t Panic.

Each of the above events is optimized for different audience needs. CIX brings the viewpoint of Canadian investors (if you care). The advisory board is primarily venture capitalists (a few lawyers, a couple of CEOs and one evangelist):
- Roger Chabra, Rho Ventures
- Boris Wertz, Version One Ventures
- Mark MacLeod, Freshbooks (recovering VC)
- Barry Gekiere, IAF
- Joe Catalfamo, Summerhill VP
- Justin LaFayette, Georgian Partners
The advisory board is 44 people big. And approximately 30 are doing some form of investment. It’s almost 70% are actively making investments in technology companies. There is very strong Canadian VC and investor representation in the group that advise and plan the conference content.

And it shows in the content, of the 67 scheduled speakers (as of Nov 14), 19 of the speakers are from the advisory board – that’s 28% of the content. (It’s even higher if you include partners and others from firms of advisory board members). If you want to know what Canadian VCs and investors are thinking, this is the best way to see what is important. They define this conference. They provide the content and the voices at the conference.

So why go?

CIX gives you insight in to the types of companies, IP and traction that Canadian investors are currently looking for. It is the barometer of the “high potential growth technology companies” in Canada. It will be interesting to see what everyone thinks are the hot companies and trends. The panels and policy discussions are the things that Canadian investors are grasping and struggling with. It will be interesting to hear the conversations.

You might argue that as an entrepreneur you don’t care about these conversations. They don’t help you grow your business, build your product, or acquire customers. But they do provide you insight into the mind set of the people you are trying to raise money from. That might be the thing that gives you an unfair advantage in understanding their decision making process this year.

I love that 2 of my personal investments Upverter and OpenCare made the Top 20. Full disclosure: My employer, OMERS Ventures, is an investor in 360 incentives. I’m also excited to check in on Breather, Bionym, Axonify, Hubba and others. The CIX Top 20 has turned out some of the best companies in the past 5 years.

It is possible to make your luck at CIX (just remember the preferred method of connecting).

Photo Credits

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November 14, 2013
The Odds are You’re Going to Fail

Stay focused! We have this on the wall at GoInstant. Source Mike Mitchell

I mean that in the most constructive way possible!

You’re unlikely to recruit founders, raise money, gain traction, earn revenue, get acquired or go public. You’re very likely to fail.

Here’s How Bad Your Odds Of Success Are

To beat these odds, you need to be doing everything you can to find an edge, especially pre-funding or pre-revenue.

Here are 3 of the most common questions I disappointingly ask early stage startups:

1. You’re not full-time?

It’s insulting to ask an investor for money if you’re not full-time on your startup.

You need to be way beyond the one-foot-in stage before raising a round. If you don’t believe in the idea enough to go all-in, why should investors, customers or your team believe it?

Full-time is the bare minimum. Large companies are working 40 hours a week, with way more resources. How can you accomplish more each day than them? You need to work longer. You can’t expect balance in your life, especially when the team is small. You need complete obsession over work.

Assume there is competition working on the exact same idea. Even if you don’t know about them, imagine them. They are small startups, medium sized companies, and large enterprises. They are working relentlessly. They could launch faster. They could launch bigger. Let the threat drive you forward.

Work weekends, work evenings, pull all nighters. Obsess over it.

2. Where’s your demo?

You need a demo, and it needs to be amazing.

If you get feedback on that demo, consider it then implement it right away. Stay up all night and work on it. There should be at least two of you; the CEO demoing during the day and the CTO working all night to implement. Iterate, iterate, iterate, as fast as possible.

The important thing here is momentum. You need serious momentum. You need an unstoppable train. Your momentum will attract your team, investors, and customers.

3. You have side projects?

Side projects will distract and kill your startup.

You should be working with obsessive focus on one idea and one idea only. Facebook was almost killed by Zuckerberg’s side project.

Side-projects are great for creativity. Many developers have side projects that they use to keep their skills sharp. Many companies have R&D labs or a percentage of hack time. Early stage startups are not the place for side projects.

Write all your ideas down, then get back to focus. Constantly consider priority. What is the most important thing you could be doing right now to move customer or investor relationships forward? Your entire company should be thinking this way.

You need every edge you can get

Your only edge is to find an edge everywhere. Long hours, momentum, focus.

It’s not sustainable, and that’s a good thing. If you can’t make it work then you fail fast. Pivot or fold and try again! If you CAN make it work you can hire enough people to bring back a healthy work-life balance.

Set goals for your team in short intervals. We will achieve X by Y date or we will [pivot, fold, etc].

Remember, beating the odds isn’t easy, but there are many ways to find an edge.

October 9, 2013
Fireside Chat with Albert Wenger – Oct. 23rd

We’re very excited to host Albert Wenger of Union Square Ventures on Wednesday October 23rd 2013 in Toronto, at the spanking new OneEleven Accelerator, from 5:30pm to 8:00pm.

William Mougayar, founder of Startup Management will interview Albert on stage, and there will be a Q&A period with the audience. We will talk Network Effects, the changing landscape in venture capital, advice to entrepreneurs, government and technology, privacy and security, raising money from U.S. VCs, and anything you’ll be asking him. This is a unique event, not to be missed by any one involved in a Tech Startup or ecosystem.

Albert Wenger is a partner at Union Square Ventures (USV), a New York-based early stage VC firm focused on investing in disruptive networks. USV portfolio companies include:Twitter, Tumblr, Foursquare, Etsy, Kickstarter, Wattpad,Kik and Shapeways
Before joining USV, Albert was the president of del.icio.us through the company’s sale to Yahoo. He previously founded or co-founded five companies, including a management consulting firm (in Germany), a hosted data analytics company, a technology subsidiary for Telebanc (now E*Tradebank), an early stage investment firm, and most recently (with his wife), DailyLit, a service for reading books by email or RSS. His wife is also the co-founder of Ziggeo.

Albert is on the Board of Edmodo, Shapeways, Heyzap, Twillio, Foursquare, AMEE, Covestor, 10gen, Wattpad,
Firebase, Sift Science and Tumblr (prior to its sale to Yahoo). Albert graduated summa cum laude from Harvard College in economics and computer science, and holds a Ph.D. in Information Technology from MIT.

Location

OneEleven, 111 Richmond Street West, 5th Floor, Toronto. OneEleven is Toronto’s newest accelerator. It’s your chance to visit this brand new 15,000 square feet facility, dedicated to accelerate the commercialization of cutting edge research and development for the economic prosperity of the region.

Buy your ticket

This event is organized by Startup Management and hosted by OneEleven. It was made possible due to the generous Patronage of Wattpad, Sponsorship of OMERS Ventures, and Support of Ryerson Futures.

Startup Management is a knowledge resource for growing, scaling-up and managing startups.

Wattpad is the world’s largest community for reading and sharing stories.

OMERS Ventures invests in companies with significant growth potential and market opportunities, seeking partners with a shared vision of building a vibrant knowledge economy.

Ryerson Futures is an accelerator for early stage companies connected to the Digital Media Zone at Ryerson University, and manages a seed fund.

OneEleven is a unique centre for commercialization that will create the talent and technologies that shape our future in ‘Big Data’.

September 26, 2013
Make stuff
I’m really looking forward to Maker Faire Toronto. It is happening Saturday and Sunday, September 21-22, 2013 at the Wychwood Barns. This is an amazing opportunity to celebrate the Maker Movement. I’m excited to see the inventions, the creativity, the resourcefulness of people to solve problems, to inspire. To be proud of the things they’ve built.

“That is, no matter what the thing is you’re building, it’s deeply gratifying and incredibly educational to perform the act of creating something, anything.” — Christopher O’Brien

I am really excited about the opportunity to bring my kids. I’m excited to teach them about entrepreneurship. But even more importantly, I’m excited to provide them access to learn and to explore technology. My friends Tara Brown and Sean Bonner opened LA Makerspace focused on providing a kid-friendly space. My kids have asked me about building robots, making candy and taking apart their toys. The eldest is now 6 years old, and her problem solving skills and attention are developing where this will be a transformational experience.
- 3D Chocolateering
- Toy Hacking with MakerKids
- Hot Pop Factory
- See a full list of makers attending
“We are making the tools for passion. When I look around, I don’t see any apathy here.” — Nolan Bushnell

Much of the DIY culture emerged out of the Homebrew Computer Club in Silicon Valley. And while not directly responsible for the success of many of the companies that emerged, it seeded a culture and the connections between folks that started Apple Computer, Osbourne Computer and others. This is the ground floor, the Mechatronics department at UWaterloo accepted their first class in 2003. Bufferbox was started in 2011 and sold to Google in 2012. This is a very interesting space if you look at the emergence of other area startups like InteraXon, Thalmic Labs , Upverter, Matterform, Bionym and others.

Bring your kids. These are very interesting times indeed.

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September 10, 2013
Risk Tolerance

If there is one thing in Canadian startup land I have heard repeatedly since moving back from California it is in regards to the lack of ‘risk tolerance’ of VCs here. When I was on the operational side of things I didn’t know many Canadian VCs so I couldn’t really comment, but I heard the stories. In fact, I will be completely honest that the idea of joining a Canadian VC fund was the furthest thing from my mind.

Before I share my thoughts on risk tolerance let me start with a few points. First, I think that we can all agree the landscape is improving. There is a new generation of entrepreneurs, investors and community leaders emerging. I am blown away at how different things are now compared to five years ago.

Second, we need to once again state that Canada is NOT the Silicon Valley. It is a silly comparison even from a geographical perspective as comparing a small region with critical mass to one of the largest countries in the world is insane. Vancouver, Toronto and Montréal are not the Silicon Valley in the same way that Boston, Austin, New York and Des Moines are not either. Anyone who sees Canada as its own insulated eco-system is completely out-of-tune with reality. Capital and technology knows no borders. Mark nailed this earlier this week.

Lastly, there is a level of talent, experience and excellence in the Silicon Valley that can’t be found anywhere else. There is a reason Facebook moved to Palo Alto in its early days. There were entrepreneurs and investors who had been exploring the potential of a social web for almost a decade beforehand. No where else in North America could you find this. Pinterest moved from Kansas City to San Francisco for the same reason. One of iNovia’s portfolio companies, AppDirect, started in the Silicon Valley as the founders (Canadian btw!) knew that the talent they needed to build a large-scale enterprise platform was there.

So what can Canada, or anywhere outside of the Silicon Valley for that matter, do well. I can both observe and predict to answer this question. In recent years it has become apparent that B2B SaaS companies can be built anywhere. Look at the thriving companies across Canada – HootSuite, Shopify, Freshbooks, Lightspeed, etc. All SaaS companies. This is not unique to Canada either. ExactTarget was built in Indianapolis. MailChimp in Atlanta. eCommerce companies have similar characteristics. Amazon is in Seattle. Wayfair is in Boston. Groupon is in Chicago. Beyond the Rack is in Montréal. However, it is hard to name large consumer Internet, enterprise platform, networking or hardware companies outside of the Silicon Valley. Of course, there are a few outliers – Tumblr in NYC for example.

The other thing that Canada, or any region, can do well is build critical mass in a brand new and emerging market. RIM (BlackBerry) did this in the Waterloo region by leading the emergence of smartphones. Calgary has been the hub of most stock photography and graphics companies over the last 20 years. Route 128 in Boston dominated the minicomputer industry back in the 70s and 80s.

All of this results in the eco-system we find ourselves in and behaviour of investors. It is less likely that a consumer application with no traction will get funded in Canada because there are not funds big enough to make a long bet on it and there isn’t the talent that improves the chance of success. We also lack senior management talent, especially in sales and marketing, as it generally resides were the majority of customers – in the US. This is why many Canadian startups build its sales and marketing teams in the States. We often proactively syndicate larger Canadian investments with US funds as they bring complimentary resources to the table and can significantly mitigate future financing risk as they have deeper pockets. All of these factors results in the eco-system we find ourselves in. Blame the system, not the players as David Crow would say.

One last factor in determining risk tolerance is rarely discussed and it is simple numbers. Investing very early in a company with no traction does require incredible intelligence, it requires incredible conviction. Savvy entrepreneurs know that to find the investor that has that conviction is going to be tough so the best approach is as a pure numbers game. This means they talk to a ton of funds. Tim Westergren, founder of Pandora, said that he had over 300 VC pitch meetings before getting funding. 300! In Canada there are not a lot of VCs, lets say 10. There are very high odds that you can talk to every fund in Canada and not find the conviction you are looking for in any of them. It is simple math – if you are looking for a needle in a haystack do you have better odds looking in 10 places or 300? Unfortunately, this is then chalked up to an issue with ‘risk tolerance.’ I can’t speak for every VC across the country, but I can report that approximately half of our initial investments are made before there is a dollar of revenue in the company.

My advice to entrepreneurs would be to start local as you may find the investor that has the same convictions you hold. They may be able to connect you to US investors to put a strong syndicate together as well. What you shouldn’t do is talk to the local VCs and then complain about risk tolerance – even if there is truth to it. The successful entrepreneurs get on their horse and find ways to get in front of investors from the Valley, New York and even overseas. Ryan found his first investors in the US. Yona found his first angel investor in Europe! Jack and Rian found their first investor in Germany!

We have seen a ton of US-led investments in Canada recently and this is great news. Often this is perceived as a problem in Canada. I disagree – it is great. In many of those cases local VCs passed or perhaps they lost out as the deal became competitive. That is completely fine as well. In the past Canadian investors were forced to be generalists, but I hope this recent trend drives more domain focus within Canadian VCs. As much as we need world-class entrepreneurs and startups we also need, to a lesser extent, world-class funds and investors. This is why I went against my initial instincts and joined a VC fund in Canada – the team was focused on becoming a leading North American fund and was actively investing in the US. I believed that this was the right approach and the only way we are going to be able to compete in the long run as capital becomes even more fluent across borders. Canada is a small player on the global tech stage and as a friend of mine used to always say “What’s so great about being the best hockey player in Kuwait?”

Lets all aim higher.

[Ed. note: This originally appeared on Kevin Swan’s Once A Beekeeper on August 12, 2013, it is republished with permission.]

August 12, 2013
A Perspective on Investor/Mentor Whiplash
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The other day Fred Wilson posted an opinion and some tips on Investor/Mentor Whiplash. He took the position that that is a big problem for accelerators as well as early stage and seed environments. Brad Feld took this as a bit of a misunderstanding on accelerators, he insists that TechStars creates an environment where early stage companies can learn to manage the whiplash. Brad Feld states:

I disagree with Fred. It’s not a big problem. It’s the essence of one of things an accelerator program is trying to teach the entrepreneurs going through it. Specifically, building muscle around processing data and feedback, and making your own decisions.

On the surface this seems correct. A problem (one of many) new founders face is the overwhelming barrage of mentorship (good and bad) and information mixed with the inability to filter. An accelerator should be able to provide the environment where a strong group of peers with some guidance can help to build the “muscle around processing data and feedback.” In the last 6 years I have noticed that is a common problem founders face and their ability to manage it is important to their success. It wasn’t until I experienced the whiplash myself a 2nd and 3rd time that I fully appreciated the damage it can do even if you are prepared for it.

Generally what I tell early stage founders:
- Only talk to customers once you have something to show them — but that shouldn’t take you a long time, don’t go heads down for months. Asking people what they want and not focusing on something specific they can touch/feel is a path to busy work and infinite sadness.
- Avoid the mentor parties/socialization. Find two (or three) good people with opposing views and bounce specific data off them but only when you have done something that requires fresh eyes to advise you how to interpret the results.
- Focus on what isn’t working when getting feedback from mentors. Founders need to be positive but you need to focus on the bad things when talking to your close mentors that have been through it already. If they can’t help you with the tough stuff why are you spending a lot of time with them?
- Don’t expect a direct answer. Experienced mentors know you are the best person to run your company, not them, and they have developed a way of not telling you what or how to do things but instead challenge you to figure it out in a positive way.
Whiplash from mentors doesn’t just happen in startups, it happens everywhere people are giving you advice or have something to gain by influencing the decisions you are about to make or the opinion you develop on something.

Being prepared and learning to manage the whiplash isn’t just the essence of accelerator programs, it is the essence of education that culminates in the top level you can achieve to filter information – a phd program. At the phd level the filter muscle is almost too strong but that is a topic of a whole other blog post.

The scary thing for entrepreneurs is that accelerator programs are too often run by people that don’t know how to effectively educate people and/or they have something to gain financially by the decisions founders make.

I think this *is* a big problem in accelerators. I wonder if the ability to teach that skill to founders (or select founders that already have that skill) is the difference between a successful accelerator (which is really only TechStars and YC) and one that isn’t (pretty much everyone else)?

[Editor’s note: This post was originally posted on Jesse Rodgers’ Who You Calling a Jesse blog on July 31, 2013.]
August 1, 2013
Music Hack Day – Aug 10-11
Some rights reserved by TonyFelgueiras

“Music is the soundtrack of our lives.” – Dick Clark

There are an amazing set of Toronto based music startups emerging.
- Milq
- Rithm
- Strings.fm
- Smithson Martin
- Tunezy
It should come as no surprise that with a burgeoning community there are events. Paul Osman (LinkedIn) who is now part of the team at SoundCloud and Rdio, The Echo Nest and Unspace are hosting:
- To fast prototype and create brand new music apps (web, mobile or physical) in just 24hrs.
- To bring together the music industry and the developer community.
- To highlight and showcase the platforms and API’s of companies working in and around music tech.
- To foster cross-platform and cross-device innovation.
Looks like a great event for local startups and developers to get access to APIs and hopefully distribution.

Music Hack Day Toronto will be held on August 10th-11th, 2013 at the The Glass Factory, 99 Sudbury St.

If you are interested in participating in the fast prototyping and creation of brand new and innovative music apps, be sure to register (tickets are free) for Music Hack Day Toronto today.
July 25, 2013
Ontario House – Aug 14 @ The Portside Pub
We’re on the official Grow Conference schedule. Together with Communitech, we are hosting a party. You can decide for yourself if these conferences are right for you or your business (need help, check out Kevin Swan’s piece for insight). But we’re going to be there. We are going to be highlighting Ontario startups (and investors). Who is coming so far?
We’re looking for startups to highlight, stories to tell, and connections to make. We need startups. We need sponsors. We need volunteers. If you’re coming to Grow Conference please feel free to join us on August 14 at The Portside Pub.

How about you? Are coming to Grow Conference?

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July 24, 2013
SaaS vs. Traditional Software Licensing Model
Global software vendors are starting to feel the disruptive effects of the software as a service business model (“SaaS”). The SaaS model is growing at an annual rate of 15%-20% and will likely represent approximately 25% of the overall software market in the next 5 years. Although this trend is starting to call into question the viability of the traditional software business model, we are quickly reminded that today 95% of software businesses still earn most of their revenues and profits from traditional perpetual licenses and maintenance revenue streams that continue to experience year-over-year single digit growth.

For the large global vendors, it is difficult to transition from a traditional license to a subscription-based model. If you look at the largest 10 global enterprise software companies including Microsoft, IBM, Oracle, and SAP, less than 2% of their revenues are derived from SaaS.

Global Software Companies With Large Cash Positions Will Be Looking to Increase SaaS Penetration

Here are some of the reasons we believe the transition has been so difficult:
1. It is hard to move away from the significant upfront fees earned through perpetual licenses to a much smaller recurring monthly fee. This would decrease immediate earnings and negatively affect the valuations of the large public vendors.
2. The SaaS business model has not yet proven itself in any meaningful way to be viable given the limited number of software businesses that have achieved scale and profitability.
3. Most in-house development and implementation teams are not structured to build and deliver multi-tenant solutions through the web. This requires significant investment and time.
4. Traditional sales teams have not educated their customers to accept monthly recurring fees and are not structured to facilitate a low touch sales approach.
5. IT departments have been reluctant to share sensitive data through the web for security reasons.
However, the SaaS business model has some clear advantages that are compelling to its customers:
1. There are no significant upfront fees.
2. The client always has the most up-to-date version of the software.
3. The software is easily configurable and takes less time to implement than on-premises solutions.
4. Security has been less of a concern with the introduction of secure data sites and private clouds. Software is being audited to ensure it meets compliance guidelines.
5. Employee workflow is much more efficient, the software is mobile friendly and can be accessed from anywhere.
There is no question that the SaaS delivery model is more efficient and compelling than an on-premises solution. Having said that, businesses have invested significant time and money in legacy software and in the foreseeable future these businesses will be reluctant to make a change.

As businesses gradually adapt to the SaaS model, it is taking a while for SaaS companies to reach meaningful scale. Selling licenses at thousands of dollars a month (and in some cases hundreds of dollars a month) and educating customers along the way is a difficult path. We estimate that there are only 50-100 private companies in Canada that have reached critical mass in excess of $5 million a year in recurring revenues.

We believe that the limited number of SaaS businesses of meaningful scale has created scarcity in the market, driving up valuations. The ten largest global enterprise software companies have in excess of $200 billion in cash and are looking for ways to increase their exposure to the SaaS market. In June 2013 there were two significant acquisitions: SAP acquired Hybris for $1.3 billion and Salesforce.com acquired ExactTarget for $2.6 billion (8.1x LTM revenues). In 2013, seven companies went public and are currently valued in excess of 6x revenues. Additionally, the group of public SaaS businesses that we track currently trades in a range of 5.0-6.0x 2013 sales.

Software Companies Have Looked to Grow Through M&A And Will Continue To Do So

Although venture capital and private equity’s interest in the enterprise software space is at a historic high, the dollars invested in Q1 2013 is at one of the lowest points in the past 5 years. We believe that three factors are likely driving this decrease in activity:
1. There are a limited number of SaaS businesses that have reached scale and are supported by experienced management teams.
2. Most of the venture dollars have been sitting on the sidelines and have been raised by fewer funds that are not readily accessible.
3. Valuation expectations of entrepreneurs are not in line with those of investors.
Enterprise SaaS Valuations Remain High

We are confident that the SaaS business model will continue to gain acceptance throughout the market and that we will see emerging Canadian SaaS businesses gain critical mass. In turn, these businesses will be well funded by both Canadian and US venture capitalists. In addition, there have been over twenty $1 billion strategic SaaS acquisitions since 2011 and we expect this pace to continue or accelerate as the larger enterprise software players seek to participate in this major market transition.
July 9, 2013
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!
July 2, 2013