I don’t know a ton of important people. But as a founder of a venture-backed startup with some amazing investors and advisors, I do know a few.

With Nivi and Naval preaching the gospel of social proof (can I get an “amen”?!) and with fundraising posts and articles espousing the importance of introductions, it’s no surprise that about once a week someone asks me to introduce them to someone else. It’s especially common around Y Combinator Demo Day, where YC groups shift from pure product mania to fundraising mode. I’m pretty sure that YC tells new crops of startups to ask for introductions from the funded companies from previous sessions.

What does surprise me is how people ask for these introductions. Here’s pretty much how they usually read:

“Hey Tony. I’m [insert name] from [company name]. We’re starting our fundraising effort and I was wondering if you’d introduce me to [insert RescueTime investor/advisor].”

I usually will make the introduction, but the person asking for it is certainly not making the most of the opportunity (and asking me to spend my social capital by doing so). So after making a mess of these introductions in varied ways, here is my suggested checklist for making an introduction (it’s pretty much my reply when I get a request like the one above):

• Write the introduction for me. Seriously. You know more about your story than I do. You know the things to say that will make someone light up. I don’t. I might flub it. I can personalize it (“Hey [insert investor name]- hope your trip to [offensively exotic location] was fun. Welcome back! Listen, I wanted to introduce you to…”), but you should make the pitch. Bonus: this saves me a few minutes of writing, which is kind and thoughtful of you!
• Don’t bury the lede. What’s the thing that will get an investor excited? Be concise, but talk about social proof, traction, growth, size of the market, how badass your team is, mainstream press coverage, other investors who are on board, and user passion/joy. Choose whatever distinguishes your startup from the sea of startups that investors read about every single day. Unless your product is revolutionary, spend more time talking about your market (“we’re helping companies in the billion dollar widget maker market sell doodads”) and your team than your product (“we’ve got an ajaxy shopping cart!”). If they investor blogs or has EVER talked about their investment strategy, hopefully you’ve read how they think and tune your pitch to match that.
• Heap on the social proof, man! Getting an email intro from a near-stranger (me) is about the weakest social proof you can get (but it’s better than nothing). Tell us how many other investors you have soft-circled. Give us a link to a list of all of the blog posts praising you. Or all of the users tweeting about you. We’re herd animals. If the investor feels like the herd is leaving him behind, that’s a good thing.
• Think about why it’s an opportunity for investors. If I’m writing to an investor about a company that looks like a credible opportunity, that’s me doing them a favor. If you don’t have any bullet points that many you look like a great opportunity, that’s me doing you a favor and adding noise to their already overflowing inbox.
• Keep it short. All of the above stuff could mean a lot of content. You’ve got to pick and choose what to send and hope it’s enough bait for the investor to dig in and learn more.
• Bonus points: track it. When we were talking to investors, we created custom (private) pages for each investor we were courting giving them a ton more to dig through and get excited about if they wanted. The emails were short and sweet with a “want to learn more” link at the end. We used Google analytics to track which people clicked through and which individual pages they clicked on so we could know what to focus our discussions on when we met them.

All that said, if you’ve got a great investment opportunity (with a launched product and some happy users), don’t be shy about dropping me a line if I can help (with introductions or advice).

(post scriptum: If you are in the market for introductions, you should check out VentureHacks’ StartupList!)

[Timely note! We're hosting a Y Combinator Meetup in Seattle on Thursday Feb 25... details here!]

March 3 is the deadline for YC’s Summer 2010 session. I figured that I ought to throw my thoughts out there on the decisions that lead up to the application, the app itself, and the interview process that follows (if your app makes the cut!).

Making the Decision to Apply

• First off, I think the most important thing to emphasize as an entrepreneur is that you should optimize for your chance of success a meaningful exit, NOT the magnitude of your it should it happen. It may seem like selling for millions to Google is a foregone conclusion given how brilliant you are, but it’s not. Startup success is a tough slog with lots of randomness outside of your control. If you can trade a little bit of equity to nudge up your shot at success by a few percentage points, you should do so. Thankfully, YC from this perspective is a no-brainer. No one can argue that it doesn’t improve your shot (with the amazing mentoring they provide, the investor introductions/credibility, and PR bump), and if you calculate YC’s take is if you sell for $100m (divided by the number of founders), it isn’t too painful.
• Think about what you’re building, what market you’re playing in, and whether it’s appropriate for venture financing. I think I recall reading about someone applying who was proposing to build an app to manage Dungeons and Dragons campaigns. While there’s probably a business there, it’s pretty unlikely that the pen-and-paper RPG market is going to be the next big thing to change the world. Pick a big market– or better yet, pick a small market that can eventually morph into a huge market (like classifieds for San Francisco, selling books online, or an online garage sale).
• Read everything here and make sure you agree with some of it, but don’t be afraid to disagree with some of it either!
• Do something bold. You aren’t going to be thinking to yourself on your deathbed that you really should’ve taken less risks. YC is a blast. You get to meet amazing mentors, other great startup founders, and a few fairly impressive robots.
• Consider how committed you are to your idea/market, your company, and your co-founders. YC has plenty of flips, but the majority of ‘em seem to be going concerns for years. Can you get excited about what you’re doing (and who you’re doing it with) for 7 years?
• Do a gut-check on your team. Do they have the rough ingredients necessary to kick ass? If the better mousetrap you propose to build is going to be better because of an amazing UI, make sure you have a great UI guy. If you’re doing a vertical search/UGC play, make sure someone is at least a little interested in SEO. If you’re going to sell software to businesses, make sure someone is willing to sell stuff. And, of course, if you’re tackling something with big technical challenges (like most of us are) make sure you have some great hackers.

The Application Process

• Read Paul’s essays. It provides good insight into what’s important to him (and YC). Reading Founders at Work is a good idea, too. It’s a great book and shows you some patterns for startup success.
• Remember that the app is a sales pitch and focus your answers on the things that are important to YC. The biggest risks to YC are:
  • That you don’t have the chops to build something good. The best way to deal with this concern is to show them something good that you’ve built. Preferably several things, and preferably things that you’ve built with your co-founders.
  • That you’ll get bored/discouraged and quit. So try to work in examples of times when you’ve persevered despite significant obstacles.
  • That you’ll fail to make something that people want. So do what you can to show that you’re in tune with the market you’re proposing to serve. You can be a badass hacker with unflagging dedication, but if you don’t/can’t understand your users, you’re probably not going to be a big win for YC.
• Don’t be too shy or too arrogant to sell. I remember reading a comment on Hacker News that said, “My code speaks for itself.” No, it doesn’t. At least, not to investors, customers, employees, reporters, and the zillions of other people out there you’re going to have to sell to.
• Get working on your software ASAP. If you apply with a functional product (or even a launched product that people love), you remove a lot of the risks listed above.
• Get working on the YC app ASAP. If you’re unsure, apply! The app takes a few hours and it’ll help focus your thinking if nothing else.
• If possible, make sure that your whole team is ready to dive in whole hog. Starting something up is a commitment to your founders and to your new investors. Having a team member who has other commitments can be a source of contention.
• Hack the system! Every session I get emails from people asking me to review their apps. I usually do. I can’t imagine why you wouldn’t do this… YC founders are people who wrote successful applications and spent at least 3 months getting repeatedly kicked in the junk by Paul Graham and friends. I’m sure we must know something about how YC thinks that might not be obvious. If you can’t bring yourself to ask a stranger for some time, how are you going to raise money after YC? How are you going to hire your first employee?

The Interview

I don’t recall the stats on how many applications make the cut, but if you get asked in for an interview, congratulations! Now get to work building something (hopefully you already have).

• Get started on a demo. If you walk in and start monologuing, you’ll fairly quickly get interrupted and asked to start showing stuff.
• The “demo” will be less like Steve Jobs and more like Guantanamo Bay. You’ll be derailed almost instantly and peppered with questions and objections.
• Have a backup idea that you’re comfortable talking about. I know several founders who were essentially told, “we don’t like that idea. Do you have any others?” This may be a test of how much you love your idea as much as anything else. Founders who refuse to pivot often die from it. It also might be a test of your ability to have good ideas. If they don’t like your idea OR your backup, they might los faith in your ability to grok what people want.
• Practice. Ask 10 smart people to name 10 things that will make your idea fail. Have good responses for those objections. Don’t practice a speech. Don’t practice a 10 minute demo, practice little 1-2 minute chunks of a demo that you can string together if they leave you alone. Practice individual talking points and responses.
• Be willing to be wrong but also be willing to disagree. YC doesn’t want lapdog PG fanboys(and girls!), but they also want people who are coachable and willing to learn. Don’t be afraid to say, “That’s one of the things we’re going to have to figure out, but we have a few ideas.”
• Be dynamic and energetic. You’re a storyteller here. Your job is to get YC excited about your business. Make them believe that it (and YOU) are an investment opportunity. Work on eye contact, not talking to too fast, and thinking on your feet. Have someone role-play an aggressive interviewer.

That’s about all the advice I have. I’d close with this point– very very very few YC founders wouldn’t do it again in a heartbeat. It’s a killer experience and it’s certainly a needle-mover during the most fragile part of your new company’s life. Applying is cheap in terms of time and rewarding even if you don’t get asked in for an interview. Do it!

I admit that I am a bit of a contrarian. For a long time, the contention that “if you’re doing a startup, you HAVE to be in Silicon Valley” didn’t sit well with me. Sure, talent is important– but for many startups you need only a few talented folks to prove that you’ve got something and companies like WordPress have proven that you can build a great team (literally) anywhere and everywhere (they are virtual and across the world). Sure, energy is important– but the biggest source of energy isn’t your peers– it’s the people who are finding value in your product (users and customers). And sure, you need money… Well, the Valley wins hands down here. If you need to raise money, that’s where you need to be. But more and more early stage investors seem willing to invest outside of their little patch of Californian dirt. After our stint at Y Combinator and a bit of fundraising, the decision about our startup (an employee time tracking tool) was pretty clear to us. We headed back to Seattle, where we had a rich network of geeks to work with and talk with and (more importantly) we could live cheaply and not die.

So it was with great glee that Jim Karsten took the gauntlet I threw down in my last post and mined the vaunted CrunchBase for some real live data. Now, CrunchBase is obviously NOT scientific… But it’s the biggest and most consumable dataset that I know of. Without further ado, here is a table showing startups by location and the percentage of startups in that location that have been acquired. Note: Jim has kindly put up the full scrape of data here – there are other interesting bits worth looking at.

Disclaimer: Yes, CrunchBase is flawed for this. No, ~5% isn’t REALLY your chance at getting bought if you start a company tomorrow, etc., etc. Please don’t troll about the quality of this data. It’s still thousands of records, which is better than the alternative.

At first glance, the key number (acquisition RATE) doesn’t seem markedly different. Heck, if you live in Virginia, CrunchBase tells you that you have a 4.3% shot at an exit… Why move to California for a measely 6.9%? But I think it’s better to focus on the fact that you’d be increasing your exit shot by *over 50%* with such a move. With acquisition rate being as vanishingly small as it is, nudging up a few percentage points is a huge deal.

But overall, as a contarian (AND as a resident of Washington State– the big winner by a nice margin), I was pleased by the results. The bottom line? It’s hard to quantify the COST of moving to a startup (months of distraction, expense, stress, loss of social network, etc), but my gut says (as it always has) that if you live in a technology hub like Seattle, NYC, Boston or Austin– hunker down and start building value- your success is based on how much value you can give versus how much you take.

Edit: some interesting insight from John Cook over here.

[Edit: Added the raw data in a table at the end]

Some of the smartest startup brains I’ve ever met have said that if you want to be in the startup game, you MUST be in the Valley. There are plenty of justifications out there for it, and many/most of them make a fair bit of sense. Recently, Paul Graham posted another great essay on the topic, and said:

The second idea is that startups are a type of business that flourishes in certain places that specialize in it—that Silicon Valley specializes in startups in the same way Los Angeles specializes in movies, or New York in finance. [1]

What if both are true? What if startups are both a new economic phase and also a type of business that only flourishes in certain centers?

I don’t know the truth of Silicon Valley’s gravity (or more importantly, how that gravity is trending) but the idea of it doesn’t sit right with me. Emotionally, I found myself wanting to agree with Aaron Swartz and Glenn Kelmann rather than Ron Conway, Mike Arrington, and PG (which is pretty much the only time that’s ever happened).

So as an exercise in digital outsourcing, I took some public lists of technology acquisitions in 2007 and 2008 and paid some nameless person in some nameless town a few dollars to research the locations of those companies when they were acquired. The results surprised me. Here’s the spreadsheet, if anyone wants to fiddle with it (in hindsight, I should’ve used the CrunchBase API– if someone wants to dive in and do this, I’d love to see it).

Highlights, Acquisitions in 2007 / 2008
225 total acquisitions on the list (110 in ‘07 and 115 in ‘08)
175 (77%) were in the USA
63 (28%) were in the Valley
Top states beyond CA were NY (19), WA (14), MA (11), TX (6), IL (5), NJ (5).
Israel and the UK were dominant internationally

Removing Acquisitions with Prices under $20mm or Undisclosed
(This was in response to the thought that the non-valley acquisitions were the small one)
110 total
91 USA (82%)
28 in the Valley (25%)

The Really Frakkin’ Interesting Bit
In 2007, 45 of 110 (41%) acquired companies were in the Valley. In 2008, only 18 of 115 (16%) were.

Now, 1 year does not a trend make. And, this is some pretty amateurish research and number crunching. The numbers that I really want (which is really hard to find) are the denominators. In other words, how many valley startups spun up in these years versus the rest of the world? Does the Valley meaningfully change the chances of startup founders making it? And how have these numbers changed over the past 5-10 years?

My theory?

The core things that REALLY matters to build a v1 software startup are (in order of important):

• having the will to build one
  Silicon Valley used to have a pretty serious monopoly on people who wanted to be technology entrepreneurs. I think that’s changing– the number of people who are getting their feet wet with entrepreneurship outside of the Valley seems to be skyrocketing. People don’t want to be doctors and lawyers any more– they want to own their own companies. And as entrepreneurs in non-Valley locations see exits, it inspires a new crop in their home town.
• building something that people really freakin’ want to have
  The Valley offers no edge here– in fact, some people wonder if the “echo chamber” doesn’t actually get in the way of understanding the rest of the world.
• having the team/resources/cash to get your product to market
  THIS is where the Valley has always dominated. But I think that’s changing. We’ve all seen how cheap it is to start a software company nowadays (though you might still need VCs to GROW it).

  In terms of teams– clearly if you’re going to be recruiting lots of geeks, you want to be in the Valley. Or do you? I’ve heard that WordPress has a virtual team all over the world and they seem to be doing okay. With all of the great information on software development and startups and with the fabulous open-source projects out there, maybe it’s getting easier to get to be a great hacker outside of the Valley. And, just as the cost of building a startup has gone down, the manpower necessary to build a v1 product has gone down as well. So MAYBE you need to move your startup to the Valley when it’s time to ramp up, but I’m not convinced you need the Valley to collect two or three motivated hackers.

• Note: I think distribution magic and TAM (total addressable market) are hugely important for magnitude of startup success… But that’s a different post.

There is no doubt that Silicon Valley wins. Even a paltry 16% of 2008’s acquisitions is a staggering number for a little cluster of cities in northern California. But it’s not as big a monopoly as I might have guessed. Maybe that 1 year trend is starting to show that the institutional dollars in the Valley aren’t as important as they were in years past (or heck, maybe those funds are looking beyond their traditional borders). And maybe all of those great technologies that allow us to connect with people around the world are helping entrepreneurs connect with the energy and relationships that the valley brings the the table.

Again, Big Dislaimer: This is quickly googled data, outsourced research, and quick-n-dirty spreadsheeting. And, of course, acquisitions are an imperfect measure of success. AND, each startup/market/region is different. Bad science all around. Just a conversation starter, really.

Raw Data:

On Friday I spoke at a “Business Bootcamp” in Corvallis, Oregon. The event was fabulous (big thanks to John Sechrest) and I was pretty impressed to see that kind of passion for startups in Corvallis.

I wanted to follow up with that community with a few thoughts (that might be interesting to a broader audience, so I’ll post it here).

Thought #1: The Valley is a Unique Animal

After the Y Combinator experience, we dove into fundraising in the Valley as well as Seattle (where we ended up settling). It didn’t take long to give focus our efforts largely on Silicon Valley. Don’t get me wrong– there are some great Seattle investors. But there just aren’t many of them, and as Paul Graham points out, investors outside of the Valley just aren’t very bold. At the Business Bootcamp, a local angel investor spoke for a bit after I did about what he looks for in a company and he seemed even less “Valley-like” than Seattle investors. The big differences that stuck out to me were:

• A strong emphasis on patents/IP (in 20+ meetings with VCs and angels before we were funded, not a single one asked us for our thoughts on this).
• A strong emphasis on written business plans and financial forecasting (we never were asked for anything beyond an executive summary and never were asked for any financial projections except by a single angel group in Seattle).
• A desire for a big equity stake. The Corvallis angel had a an equity floor that was a third more than the premium “household name” angels in the Valley. Presumably, this is because the Corvallis angels aren’t too plentiful and have a captive audience.
• A desire for a more fully formed team. He wanted a 4-7 person team before he invested.

For the record, I don’t think ANY of this is bad. I just think it’s SAFE. I imagine a methodology likes this results in far fewer failures, but also results in fewer hits and disqualifies all sorts of non-traditional teams. I think many of the startup home-runs in the last decade or two would’ve been shown the door rather quickly in Corvallis. Boldness might not be a virtue from an investor’s perspective (the landscape is littered with the financial corpses of bold early stage investors, I’m sure), but it certainly is from an entrepreneur’s perspective.

Thought #2: Audience Questions

The third presenter gave a fabulous presentation called “Do you have what it takes to be a Startup CEO?”. It was chock full of info and I certainly learned a lot. Unfortunately, there were two questions from the audience that I felt weren’t answered very well, so I’m going to take a shot at ‘em.

“I’m hearing that we need a team of 5-7 people, paying customers, provision patent applications, and mess of other things before we can even begin to ask for money. That seems inherently contradictory with the idea of angel investment.”

It does, doesn’t it? Smart angels seek to mitigate/minimize risk and most angels are pretty smart. There’s nothing more wonderful than a startup with 5-7 great team members, growing revenue numbers, a pile of great patent apps, etc. Unfortunately, angels who are looking for this kind of company are really “later stage” angel investors. Unless you, as an entrepreneur, have a million bucks to get to that point, you have two options. One, find a bolder seed-stage investor (in Corvallis or move the the Valley where bolder investors are more plentiful). Two, get some freakin’ traction. Seriously, dial back your idea to the most basic offering you can manage that people will use/buy and build it with a co-founder or two (in your off-hours if you have to). If you can launch SOMETHING that people really love (and if the TAM is big enough), investors will listen. You’ve reduced two of the main risks that they are worried about; That you are a screw-up who can’t launch a product and that what you build ends up not being particularly interesting to your target audience. The better your traction and the steeper your growth curve (in terms of usage or dollars), the easier fundraising is.

If you don’t have a gold-plated team (read: previously made an investor lots of money), a pre-existing relationship with an investor, or TRACTION, I seriously advise not trying to raise money from anyone but friends and family. Given that most entrepreneurs aren’t gold-plated (I sure as hell wasn’t) and building relationships with investors is a hard to do from scratch, your only option is launching and building traction.

“I’m a college student here. What advice would you give to an aspiring entrepreneur with a notebook full of ideas?”

The speaker quite literally responded with a long answer that amounted to, “Not everyone is CEO material. You should consider that you likely aren’t CEO material.” Really? Is that what we want to tell aspiring entrepreneurs?

The right answer (IMO) is this.

First, pick the idea that you’re going to attack. I’d say, focus on tractability with a strong bias to the ideas you are most passionate about as well as the ideas that have some built in marketing (SEO or viral– relying on word-of-mouth and salespeople is difficult and expensive).

Second, figure out what you’re good at that a startup needs. Hopefully, you can code things, design things, or sell things because the vast majority of the first months of a startup is comprised of that kind of work and precious little else.

Third, read everything here: http://ycombinator.com/lib.html

Fourth, save money or borrow a few bucks from family/friends so you can work on it full-time for 3 months. If you can’t do that, do it half-assed (it can be done!).

And finally, don’t listen to people who tell you that you might not be CEO/startup material until you’ve taken a stab at it. The world is full of unlikely CEOs from Steve Jobs to Bill Gates to Mark Zuckerberg. Roll the dice and dive in– when you’re on your deathbed, I’m betting you won’t be saying, “Gosh, I wish I could go back and take fewer risks.”

In the past two months I’ve been on two different panels with other entrepreneurs. The first was at WTIA in Bellevue, WA (“Cashing in on Web Services“)– the other panelists were very clearly what I’d call “business entrepreneurs”. All of them had relatively successful funded startups, but not a one of them had probably written a line of code, moved a pixel, wrangled a server, or written a line of copy in months or years (some probably never had).

In contrast, the most recent panel I was on (at the O’Reilly Web 2.0 Summit) was with what I’d call “builder entprepreneurs”… All startups with great traction, some funded, but all of the founders were directly engaged with the creation of the product. They designed, coded, played sysadmin, and played all sorts of other production roles for their startups.

The contrast was startling, and it made me think hard about my earlier contention that the “business guy” doesn’t really have a useful role to play in the very earliest stages of a software startup. The first panel had a pile of examples of business guys leading startups to some significant (sometimes dramatic) success.

At one of the other panels at the Web 2.0 conference, Dave McClure (master of 500 hats and 473 font colors– and one of the smartest guys in the game) summed up the life-cycle of a startup in a great way. “There’s the product development phase, the market development phase, and the revenue development– or revenue optimization– phase.” Rings true to me.

So with this in mind, let’s track the value of a “product entrepreneur” over the early life of a company:

Now let’s track the value of a “business entrepreneur” over the early life of a company:

(note: I’m talking about one person’s ability to make a major impact with a startup– I’m not saying that either person is useless at any stage of the startup… And, of course, exceptions abound)

As I’ve said before, the business guy often doesn’t have a lot to do in the early stage of product development– especially if the builders are building something that they actually want themselves. If you’re a bunch of hackers building a simple photo sharing, you don’t need a business guy telling you what the market wants. Of course, if you’re a bunch of hackers building business time management software, you might well need that. Your mileage may vary.

But what I haven’t said before (and what I’m coming to learn) is that the product entrepreneurs have an increasingly marginal role as a startup evolves and becomes more successful. In fact, I’d argue that they are in a rude awakening– they either need to evolve into business entrepreneurs (as Gates and Jobs did, for example– both shrewd business guys) or hire people to play that role (a la Eric Schmidt at Google). Building an asset is the first (and most important) challenge. But finding the customer for that asset and maximizing the revenue/profit is also a challenge (and one that many builders are ill-suited to handle).

It feels like product entrepreneurs are oftentimes “cowboys”. Flying by the seat of their pants, they rally a small team to build a product that people want. It’s no surprise that this is really freakin’ hard and requires a mythical combination of brute force time and effort, insight, customer empathy, and a huge pile of luck. Saddling the product team with a biz guy who chases big customers and locks in the product direction too early can be deadly, as the Wizard points out:

This is one reason I hate to see very early stage companies sign a big customer before the product is baked. You are encumbered by product commitments and customer support before you truly know what the market wanted. You have to be passionate about a customer and the product when you should be laser focused on the product. The customer’s needs and your goals vis a vis the market may diverge. In an effort to show progress, however, the marquee customer is attractive in the belief it will help attract investment (and this may indeed be true). In a previous life before FeedBurner, my founders and I made the mistake of signing a big name customer to a paid monthly contract before we really knew what the product’s place in the market should be. Won’t ever do that again.

The product development phase of company needs product development people and precious little else.

But as the market development phase sets in, builder entrepreneurs are oftentimes increasingly obsolete. It’s no longer time to hurl features willy nilly at your users– you’ve already built something that they like. No you need to measure the hell out of it and turn it into something that they love. You need to iterate on it and turn it into something that confuses 4% of your new users instead of 7%. It means finding a way to tune your viral loop and conquer your SEO enemies to increase the organic flow to your product. And you need to start expoloring the market to figure out who they hell is going to pay for all of this. That means crafted adwords campaigns. That means cold calling. That means price experimentation. That means exploring the world of direct ad sales. Well, it can mean all sorts of things, depending on whether you are a free web service, a freemium product, a pure b2b play or some combination thereof.

But you are firmly out of the world of building products and drifting into the world of iterating a product and exploring a market. And, likely, you’re in the world of sales, marketing, and instrumenting the hell out of your app/site.

As Papa PG says, if you look at the leaders of successful tech companies you see more CS degrees than you see MBAs. That makes sense– geeks are critical to conquer the first (and most important) problem of a startup… Building a badass product. But if you look at these same tech companies, you see CS geeks who’ve actually set aside their geeky roots (though maybe not their geeky instincts) and become very very shrewd business guys. And you also see inferior products kicking the crap out of superior products through better sales/marketing/and distribution.

So to all of you builders out there… Beware! When you reach a challenge in the evolution of your business, the most natural thing in the world is to frame it as a product problem. “If we just build this new feature/product, we’ll be off to the races and we’ll never have to do any of that business crap!”. Keep your eyes peeled for the time when you have to personally evolve and start tackling business problems, or step out of the way and let someone else do it for you.

Last night I spoke at Seattle Tech Startups. Given that lots of people who go to these meetings tend to be wantrepreneurs (aspiring startup folks), I focused on early decisions that need to be be made. Do you shoot for a great lifestyle business or do you aim for a grandslam? Services biz or product biz? Bootstrap it, find angels, or court VCs? And when you answer all that, how do you settle on an idea when you have lots of them bounding around in your head (for this part, I liberally borrowed from Ev Williams’ great post on evaluating startup ideas, which I posted a riff on a while back).

After my short presentation, there were some really fabulous questions. Two of ‘em kept me thinking and I wanted to expand on the answers a bit. Here they are.

Question (paraphrased): “Given that takinghuge piles of VC money both has the dangers you describe and and firmly closes the door on most early acquisition opportunities, why are people still going after big VC?”

My response was two-fold at the time. First, there are some ideas that require a lot of money– as an example, I mentioned a local northwest guy who is working on a really cool electric motorcycle… It’d be hard to imagine getting that business off the ground with $500k of angel money. I also mentioned that some entrepreneurs look at their valuation as a score. Taking $4m on $12m post-money is essentially saying that, on paper, your company is worth $12m. Feels pretty cool, I suppose.

Two more things to add here.

First, I think people chase VC because it’s available. Angels are purposefully elusive– they don’t exactly hang out a shingle saying, “I’ve got $50k burning a hole in my pocket”. VCs, on the other hand, have a web site, and processes to handle/process deal flow. They almost always want to lead the investment by negotiating terms and putting in a big chunk of the money, while angels sometimes shy away from leading/negotiating, but are happy to pile on with other investors.

I think there is a big hole to be filled here by institutional investors who aim at a larger number of smaller deals (something that most VCs can’t handle because they have too much money under management, take too long to do the deals, and have too few people to sit on boards). There are smaller funds out there that are starting to fill the “early/small” niche (with $250k-$1m investments) but they are rare and (from an outsider’s point of view) are buried in interesting startups to invest in. The good news is that they’re seeing great success, so more are popping up every day. If you want to see a good list of folks who are really looking at early-stage/lower-dollar deals, here’s a great article profiling a few. You’ll notice a decided lack of ‘em in the Northwest. Madrona is mentioned but I think they very rarely do a deal less than $1m.

Second, B2B. Despite Web 2.0 hype, there is tremendous money to be made with B2B software. Going the B2B route requires a sales engine or some clever distribution innovation. If you’re spinning up a sales team, that requires LOTS of money flowing out of your business (salary, commissions) before you recognize revenue for their efforts.

Question #2: “Can you talk about how to decide whether a business/idea should fall into the “lifestyle” category or the “get funding a go big” category?

My answer last night centered around overall magnitude of the idea. Could you imagine it being the next Google/Facebook/Salesforce.com? Is it that ambitious? Can you set out milestones where you end up selling for $100 million? I also mentioned that how much you NEED is important. If you can “run the experiment” for $500k to see if your market/team/idea are as good as you think, raising $10m is silly. If you can roll those same dice taking no funding and working on weekends, raising ANY money might be silly.

What I want to add: Think about how you fit into recent investment trends. Investors closely follow trends. Most seem to focus on trends and recent acquisitions that you’re already reading about– the top tier ones often try to anticipate what’s going to be the next trend. Imagine yourself pitching your idea to someone who religiously follows and tries to anticipate trends. Will their eyes light up? To my amateur eye trends that are important out there right now are: Ad networks, widgets, casual gaming, video advertising, iPhone/mobile apps, Facebook/MySpace apps, social aggregation, and (of course) anything that could credibly take a shot at killing Google. Am I missing any? There are a few tired trends that probably still have legs with some investors like niche social networks, social news sites, photosharing, etc.

If you’re outside these trends, that’s okay (we certainly are, though we think that productivity/information overload is a meme that is growing like gangbusters). It just means that you’re going to have a harder time raising money and you’ll need a bit more traction to pique VC interest. We’re just about ready to close our angel round with a fairly platinum-plated group of investors, so it’s certainly do-able. I’m just glad our founders all had hefty personal bank accounts to allow us to grow the business over the 3 months of fundraising. I know plenty of people who’ve needed 6-10 months to raise a round, so be prepared for that if you’re bucking trends.

Remember, Google came to a market that had well-funded mature players at a time when a lot of really smart people were saying that search was a dead business where you couldn’t make any money.

Another thing to consider on this front is this: Do you have some unique aspect of your business that allows you to acquire new users/customers for zero or near-zero cost? SEO, viral marketing, user-generated content are all fabulous ways to get an organic flow of visitors to your product. VCs love clever distribution wrinkles, and most successful startups have a fabulous (if sometimes accidental) story to tell here.

And finally– the best way to decide whether it’s a small biz opportunity or a huge business opportunity is to launch. If you’ve got something big, the market will start dragging you down the growth path. If it’s a big opportunity and you’re growing like gangbusters out in the wild, funding isn’t hard.

Anyhoo– hope folks enjoyed the talk– I’ll post the video if STS puts it up.

Christian Anderson (a former colleague at Jobster) had an interesting (and well-researched) post on his blog called “How to Pitch Robert Scoble — HINT: No Direct Tweets“… , which led to a discussion on FriendFeed (with Robert himself weighing in) that was pretty interesting.

I had a contribution bouncing around in my head but held off responding until I read an absolutely fabulous quote from one of my favorite books on marketing:

““No one ever got anywhere by lavishing calls on Oprah. The only time I’ve succeeded in my career with Oprah was [when] Oprah called us.”

— Barry Krause, in Made to Stick

This advice can be generalized to getting PR, blog coverage, angel and VC interest, and more… And can be summed up in one tight little phrase: “Be worth talking about.”

So how do you get to be worth talking about? Redirect every bit of outgoing energy you’re spending on getting noticed to being worthy of notice. Near as I can tell, this isn’t just a matter of building something great… It seems to be some arcane combination of:

1. Building something people want.
2. Find a parade that’s forming and start walking in front of it. We’ve (by pure luck) done well from PR perspective by diving headfirst into the “information overload” meme that seems to have growing interest and press coverage. Whether you’re building a comfortable lifestyle business or shooting for the moon, it’s great thing to be topical. A great contempory example of this is FriendFeed– they’ve (perhaps accidentally) inserted themselves into the Twitter conversation. If Twitter had never existed, would FriendFeed have gotten a tenth of the organic PR?
3. Figure out the best way to deliver your message– find a way to make it sticky (“Made to Stick” espouses being simple, unexpected, concrete, credible, emotional, a story). Entrepreneurs (especially if they are web geeks) notoriously marginalize this step, but there’s all sorts of great stories about simple messaging shifts making a huge difference. I don’t think we’ve nailed the perfect message for RescueTime, but I’m in a fairly constant state of brainstorming and experimentation… I’ll tell our story with a new permutation just about every day to see if I can find something that resonates just a little better (this is one of the many reasons that “stealth” companies are so often ridiculous).
4. For God’s sake, get some freakin’ traction. Bloggers and reporters are in the business of reporting on the metaphorical parades that I just talked about. The best way to prove that you’re at the front of a parade is to have an army of enthusiastic users who are already using assorted channels (word of mouth, blogs, twitter, etc) to tell the world how important you are to THEM. It doesn’t take MUCH traction– two or three vocal users is often enough to convince a blogger than you’re worth a second look.

I’ll finish with a great quote from Seth Godin on “grand openings“:

“The best time to promote something is after it has raving fans, after you’ve discovered that it works, after it has a groundswell of support, [ed: and after you've figured out how to effectively talk about it]. And more important, the best way to promote something is consistently and persistently and for a long time. Save the bunting for Flag Day.”

A lot of people are damn religious about bootrapping businesses. Especially nowadays when it’s so easy to start a software business– you just need a few hackers, Ruby on Rails, a cheap virtual server and you’re ready to roll, right?

Sure.

But just because it’s cheaper to start a software company, doesn’t mean that it’s that much cheaper to make it from when you launch a product to the point where you’re sitting back, drinking a margarita, and marveling at the recurring revenue machine you’ve created.

The way I look at it, there are three bars that matter to me.

1) Making enough money that the business brings in enough money to pay the overhead. Rent, servers, lawyers, whatever. Hopefully you keep this really lean.
2) Making enough money that the founders get an insultingly low (but still existent) salary.
3) Making enough money that the founders can take home roughly what they’d make if they went and got a real job.

Bootstrappers are woefully bad at guessing how long it’ll take to get over these bars.

Let’s look at everyone’s favorite example of bootstrapping: 37signals (whose products and philosophies I love, by the way). According to a recent post, it took them about 6 months to build Basecamp, with DHH spending 10 hours a week (they don’t mention how much time other folks invested, but let’s assume it’s 2 other people at 10 hours a week). It turns out that with a really popular blog, a very successful consulting firm, and all of the attention that they got with Ruby on Rails, it took them about a year to get to the point where they could give up consulting and work on it full-time. I assume that they were somewhere between the 2nd and 3rd bar (mentioned above) before they made the leap, though they might’ve taken a pay cut as a leap of faith in the growth that Basecamp was experiencing. DHH sez:

“It didn’t turn into a smash hit overnight either. We ran Basecamp for a year alongside our other obligations before it was doing well enough to pay all the bills and afford our full-time attention. Most good businesses didn’t become great ones within the 12-18 months that the poster boys of the startup lottery did.”

Amen!

I’ll give you an example closer to home. RescueTime (my baby) was on TechCrunch 3 times, LifeHacker twice, and add in a few thousand other blogs (of varying flavors and colors). We are a Y Combinator company, which gives us plenty of geek cred. We’ve been [edit for clarity] mentioned in an article on the cover of the New York Times, and have gotten mentions in PC World, US News and World Report, BusinessWeek, and more. More important than that, we’ve got happy users who seem to like telling their friends (the old fashioned kind of viral marketing!). I think most SaaS startups would feel very lucky to get this kind of attention– we certainly do. But for all of this attention, I really don’t expect to clear that second bar for many many months (we’re only a month or two into having an offering that people can pay money for, so give us time!).

Let me be clear about the type of startups I’m talking about– I’m talking about low-cost (or free) product companies with price points low enough that having a human being actually SELL the damn software would be inane. Whether it’s a payout of $.83 for an ad click or $24 bucks a month for BaseCamp– having a human being wandering around selling this stuff doesn’t scale, and chances are your founding team doesn’t consist of anyone who is a motivated (and skilled) software/ad salesperson anyways.

On the other hand, if your price point is high (generally requiring a more complex or premium offering) or if you have a services component (web development consulting, managed hosting, etc)– you’re golden… Or at least you have great potential to ramp up revenue fast (as you can justify a sales effort and fairly easily convert time into money). Of course, there are the obvious downsides– for enterprise software you have to build… enterprise software (capital intensive and damn ugly). And then you should expect to spend 60-70% of your cash on sales and marketing. If you go the services-heavy route, you’re simply selling time for money… You can make a nice business out of this (I ran a consultancy for 7 years which I eventually sold out of) but there’s virtually no equity to be built– no one wants to buy a consulting business.

In my opinion, if you aren’t prepared for 18-24 months before you actually get your first paycheck (either through savings, doing it part-time / half-assed, or seed funding) you’re setting yourself up for disappointment.

Just a short note to let folks know that I’ve switched my commenting system over to Disqus.

Disqus is a hosted commenting system (free) that offers a few clear benefits:

• 2 way communication with people who comment. This is the one I care about. Very often, someone leaves an interesting comment on my blog that I want to respond to. I usually do, but it’s unlikely that that commenter will ever know about it… Disqus allows the commenter to be alerted to any replies to their comment, which can continue an interesting conversation.
• Threaded conversation. No-brainer. No longer will I have to say “@PersonName:” to make it clear who I’m responding to.
• Persistent reputation. The biggest problem (IMO) with conversation on the Internet is that the average Joe has trouble being polite– and some people are being impolite and just cruel. I love the idea that Disqus saves everything you say and you can vote up (and down) any comment. If Disqus gets big enough, you could imagine being able to set rules like “no comments from non-registered users who have an average comment vote of less than 1″.
• SEO Benefit. To be fair, Disqus (right now) hurts your SEO on one front. Given that I don’t really care too much about traffic to this blog, I’m okay with that (they are working on an API version that calls the comment content with their API rather than JavaScript)… It’ll be interesting to see if there is an effect on search engine traffic. But it’s not often mentioned that Disqus drops links to your blog (and each post) on your community page (mine is at http://tonywright.disqus.com/ ), which provides some nice positive SEO juice.

Disqus offers quite a few other benefits– the above are the ones I care most about. If you have a blog, check out their tour or just take it for a spin. It’s a breeze to set up!