I went to an informal Seattle startup CEO dinner a while back and it was an awesome opportunity to talk candidly about the problems that early stage products face. Someone remarked to me afterwards that a lot of people in that room had already “made it” (financially speaking). That’s one of the cool things about being a startup founder. There were plenty of folks in the room who put on their pants one leg at a time. There were some other folks who sip Pinot Noir while they have two pant-assistants dress them. But (with a few runaway exceptions) many of them were facing the same challenges.

I had a lot of takeaways from the dinner, but the biggest came from two comments by CEOs in two unrelated conversations (these are paraphrased with a bit of hyperbole tossed in).

Comment #1: “My biggest concern is that we’re on a long road. And it’s going to be a tough slog. We’re going to be dragging our asses uphill for years with a still uncertain future. With that to look forward to, how can I hold on to my best-and-brightest stars when they could take an offer from [insert megacorp] and double their salary overnight? Or they could hop onto another startup that isn’t at the ’slog’ stage yet?”

Comment #2: “Sure, the downturn has effected our startup. But we’re all working together on stuff that we want to work on and we’re working with people that we really want to work with. If we end up making less money, it really doesn’t matter much.”

The huge challenge is that we are constantly telling ourselves, our teams, and our customers that great stuff is in on the horizon. But the reality is, bad shit is coming. There are going to be huge and gutwrenching bumps in the road and times where the company feels like it’s going to auger in. The thing that can pull a team through these rough spots is belief in SOMETHING.

Something amazing happens, I think, if you can cross the chasm from people getting paid to work for you company and people getting paid SO THEY CAN work at your company (I think that concept came from Tandy way back when– can anyone confirm?). As founders, I think it’s easy to dismiss this possibility. “That might work for people who ooze charisma,” we say, “but it won’t work for me.” Or: “You can only pull off that kind of passion if you have a world-changing product with a runaway growth rate– not for something so mundane as what we’re working on.” Bullshit. Look at companies that actually inspire the founders, employees, and customers– there’s WAY more variety than you might suspect.

So here’s a stab at how startup founders can get creative and (hopefully) inspire.

• a dragonslaying startup (killing inefficient incumbants, like Redfin is trying to do)
• “business religion” startup (like Zappos, FogCreek software or 37signals– where the products isn’t something the team gets THAT excited about building, but the “business religion” and/or lifestyle of working there is magical)
• The “we’re going to change the world” startup. Steve Jobs once said to John Scully (then CEO of PepsiCo), “Do you want to spend the rest of your life selling sugared water or do you want a chance to change the world?”
• “we’re going to get filthy rich” startup (this feels scary to me– seems like people will jump once there’s a bump in the road… and there is almost always a bump in the road).
• A “family” startup. My first company had this– just about everyone in the company was really close to everyone else. We had regular gaming night, fun social events (that everyone WANTED to come to), etc. Loyalty can definitely help folks through the aforementioned “bad shit”. This is the biggest reason why solo founders quit more often. It’s always easier to quit when the only person you’re letting down is yourself.
• Succeed, loudly and publicly. Nothing inspires more than setting tangible business goals (that everyone buys into) and actually knocking them out of the park. Want to see a role model here? Check out Balsamiq’s Blog.

The math of working at a startup rarely works out– people get paid less to do more. You have merely adequate benefits and lousy job security. With VERY few exceptions, the journey to liquidity is long and is by no means a sure thing. So you have to offer piles of intangibles that make your best people say, “Yeah, I could get paid another $50k across the street– but it wouldn’t be worth it.”

Did I miss any motivations? Why do you work at a startup when you could be making way more money elsewhere? Or, if you work at BigCo, what would it take for you to take a 30% pay cut?

One of my biggest frustrations with Twitter is that it’s a pretty clumsy mechanism for 2-way conversation (IM style) as well as “one and a half way” conversation (commenting on a tweet that may or may not elicit discussion). I posted a tweet the other day to see what other people think:

I quickly got two responses from two people whose opinion I really respect (@sacca and @andrewchen).

@Sacca’s Response: “@webwright Speaking for myself, it seems like that could induce some lame behavior in asymmetric networks.”

@andrewchen’s response “@webwright inline replies work best in 2-way friending environments. Otherwise ppl you don’t follow show up in your main feed”

I found myself vehemently disagreeing with them, so I figured I’d blog through it as an product design exercise. Disclaimer note: armchair quarterbacking is easy. The Twitter team (note: @sacca is an investor/advisor) has more brain cells and a helluva lot more time invested in designing Twitter than I do– I have no illusions that a little rumination over Christmas makes me smarter than they are. I also know that there are (were?) some technical hurdles. For a while, Twitter wasn’t TOO good at understanding when an @ tweet was actually a reply, and which tweet it was replying to. Still the case, or no?

So here are some ideas for your consideration. I’d love to hear what folks think in the (delightfully threaded) comments.

1. Twitter would do better to think about their site as a content/microblog network than as a social network.

This is my fundamental disagreement with Andrew and Chris’s response. They’re thinking of Twitter like a social network with asynchronous/2-way friending (maybe it’s because the media is constantly comparing them to Facebook?). It isn’t, IMO. In fact, I think Twitter would have more success if they acted more like Wordpress.com (or LiveJournal?) than like Facebook. Twitter followers aren’t friends. They are subscribers. The people you follow aren’t people you know– they are microblogs that you find interesting. Twitter is a fabulous distillation of blogs and an RSS reader all rolled into one. It’s 10x easier than blogging. Following is 10x easier than subscribing via RSS (and following is a lot more grok-able than RSS to begin with). But they’ve crippled/marginalized one of the key features that make blogging so damn sticky (for bloggers and readers)– comments and discussion.

2. The problems of Chris, Andrew and (to a hugely lesser degree!) me are not the problems that most Twitter users (or bloggers) have.

To many/most Twits/bloggers, they are doing it because they want to be heard. I remember when I first started blogging what an absolute rush it was to get a comment on my blog. Heck, it still is. Similarly, I confess to checking my @replies fairly often. Is anyone listening? Did my breathtakingly insightful/amusing tweets result in anyone replying or retweeting? I think this changes when you get to the follower count that some celebrities enjoy (Chris, who mentioned above that inline comments might result in too much noise, has ~1.3 million followers). Similarly, there are some pretty famous examples of prominent bloggers shutting OFF comments… They’ve transcended the “I just want to be heard” problem of most twits/bloggers and have graduated to the “holy crap, discussion is a nightmare to manage/moderate” problem. My guess is that the higher up you get at Twitter, the less the product managers empathize with people who have less than 100 followers, who often feel like they are talking to an empty room.

3. Regardless of whether you want Twitter to be a social network instead of a content/broadcast network, it’s more VALUABLE as a content network.

First of all, look at Twitter’s big pile of 4th quarter revenue (high five, Twitter!). That’s for content. That content would be more valuable if it was richer. Let’s take Paul Kredosky’s “Dishwasher” scenerio, discussed on Fred Wilson’s blog. He’s looking for a dishwasher and finds that Google’s organic search results are lousy. I empathize– after a 6 month home remodeling effort, I am aghast at how bad Google is once you move outside the realm of the “linkerati“). Paul searches for a dishwasher, and now that Twitter content is featured in Google results, he sees a tweet that says, “Just got a new Bosch ScrubGunner Dishwasher installed today. Amazing!” That tweet would be way more useful if it also had associated with it the three @replies that said stuff like “The ScrubGunner starts off strong, but has a record of exploding about 3 months after you buy it”. Added bonus– this would make Twitter’s permalink pages quite a bit richer in terms of indexable content, which would increase traffic dramatically. Permalink pages with lots of comments could actually be VALUABLE pages.

Even taking the search deals out of the equation, Twitter is a consumer web service and its stock and trade are things like pageviews, # of tweets, retention cohorts, return visits per day, etc. In short, it wants lots of addicted users using it a LOT. Nothing does this better than conversation and Twitter is lousy at conversation. There are very few emails I open more reliably than the Disqus comment notifications for my blog, the WordPress.com notifications for the RescueTime Blog, or Facebook telling me that someone has responded to one of my status updates. Further, nothing brings me BACK to a blog like a reply to my reply. Take a look at Fred Wilson and Neil Patel– they pretty religiously reply to every commenter on their site and it generates return visits, more (valuable) content, and happier “customers”.

In short, if Twitter made conversation easier and noisier, it’d help engagement, retention, and growth (or that’s my guess anyways). New users would graduate from the “empty room” feeling quicker.

4. To keep things simpler, they should consider punting retweets for replies/comments.

Retweets are interesting and certainly help Twitter and API-wranglers understand the value/popularity of a tweet. But they don’t feed the core need that Twitter is filling for most twits… To feel HEARD. Further, the retweet feature is simply too smart and assumes too much understanding of how Twitter works. I’d wager that if you took 10 “newborn” Twitter users and asked them to explain retweets, you’d get a fair bit of confusion (humble hat tip to Twitter though– I can’t imagine retweeting being implemented clearer than it is). Comments/conversations, on the other hand, are as old as the Internet. People grok that right out of the gates.

Beyond just “grokability”, retweets just aren’t as approachable as replies. While Facebook’s “like” feature is the lightest way to endorse a status update, the retweet FEELS heavier. It’s saying, “I like this– and I like it enough to broadcast it to others”. I personally @reply folks about 10x more than I retweet them (and I imagine I’m not alone). If this is true for most people, who not focus on enabling what most of your users are doing more often?

Discussion would also help with user discoverability. @replies are often a source of followers for me (replies to me as well as others when I bother to dive into the clickfest necessary to track a full conversation on Twitter).

5. How I’d implement inline discussion on Twitter.

Obviously, comments/discussion would accelerate the number of tweets dramatically, so I think slamming them all into the main feed might be bad. I’d:

- Add the text “11 replies to this Tweet” as a gray link at the bottom of any applicable Tweet (when shown in a stream) to i
- Add threaded replies on the tweet’s permalink page. So Tweets like THIS ONE would actually be rich/interesting/engaging conversation and clickthrus to tweets from search engines would actually have more meaningful content.
- present @replies that are actually replies to other tweets as part of a conversion. So the “in reply to…” text below reply tweets could be a bit richer/more enticing, like “reply to @username (13 other replies)”.
- Maybe present a “thumbs up” or “like” button (a la facebook) for light endorsements of a tweet (easier and less noisy than “I agree” or “this is awesome” comments). Would this be better than a retweet option?
- Allow people to turn off the above display of @replies if they want.

Twitter is obviously a public IM client/chatroom for some. For others, it’s a microblog broadcast platform. For still others, it may actually be a social network. But I’d contend that serving those first two audiences FIRST (by making conversation easier) would create happier users, gut-punch their early attrition problems, and create a more valuable business. What do you think?

(You should follow @sacca and @andrew_chen and maybe even me on Twitter!)

A friend/contrarian Tweeted the following that I though was worth a discussion (the 140 character limit of Twitter quickly got too painful for me).

“What’s wrong with this world: Twitter is making $4mil per year yet is valued at $1bil. #newmath”

I think this is an important thing to talk about– it’s certainly something that would have resonated with me before I raised money from investors, but now falls pretty flat. I have two quick points to make about it, then I’ll wait for Marina to attack me in the comments.

1. Valuation does NOT equal market value for the company. Founders don’t like to give away a lot of equity when raising money (nor should they!). So, to bring the #s back to earth, let’s pretend that I have a seed stage idea with a little promise/traction that I’d like to raise $1m for. During the fundraising process, there is NO discussion about what the company is WORTH. Instead, the discussion is about how much equity I want to sell (say 25%) and how much I think I can get for it ($1m). This establishes a post money VALUATION of $4m (i.e. 25% of the company is worth $1m, so 100% is worth $4m). No one is saying that anyone who buys companies would even DREAM of buying it at a price of $4m… We just need a mechanism to decide how much equity the founders get to keep if we want to raise $1m. We could fix this offensive math by either selling stock in a company based on the market value (what someone would buy it for), but I think you’d find that good entrepreneurs are not interested in working for free/cheap when they own a tiny percentage of their “fairly” valued company. This model scales all the way up to Twitter. The conversation is more about how much founders and previous investors own after they raise their big rounds than “So, whaddya think we’re worth if we put this puppy on the auction block?”

2. Supply and demand. There are two markets here. One is the scarce (and not always rational) market of GOOD entrepreneurs/startups. If an investor wants a stake in startup that’s growing, they have precious few opportunities to do so. This market has VERY little to do with the current cash value/revenue of the company (at the early stage), but instead is based on the size of the market/opportunity, the entrepreneurs involved, growth patterns, long-term market trends, and how much competition there is for the deal. If Ev Williams punted Twitter tomorrow to start a new startup, he’d get huge valuations if all he had was a sketch on a post-it note, just because there are very few opportunities to work with a guy who has made VCs rich in the past (i.e. had an exit). And because the upside of a successful exit/IPO is so high it makes sense to buy the opportunity at that cost even if Ev’s post-it note probably wouldn’t sell for much on the open market.

Whether you think Twitter is or ever will be worth $1B is immaterial (I think it will, for what it’s worth). The real question is, should an an early stage investor buy stock in a company with a valuation that doesn’t reflect current market value of the company? I think the answer is a resounding yes– if it wasn’t, you’d have a lot fewer startups in the world.

I think the solution for the disconnect is to stop equating the phrase “valuation” (especially when talking about early stage startups) with market-value in your head. We back into those numbers in funding negotiations to make sure that entrepreneurs have the cash resources they need and enough equity to be motivated by the upside at the end of the rainbow.

And, remember: don’t be held back by common sense. There’s a great quote about an insane idea being a necessary but not sufficient requirement for startup success. Early stage investors have been in the business of funding companies without revenue forever, and the smart ones seem to make a lot of money doing it. Monetizing Twitter on a grand scale right now seems insanely hard. But a LOT of smart pundits were saying that the search market was a dead end when Google started spinning up. Markets change, smart people innovate, and magical things happen…

I love games. While I did wear a letterman jacket through most of high school, I surreptitiously played Dungeons and Dragons every week with my brother’s gaming group. I’ve played a wide variety of games on every computer I’ve ever owned. I like board games like Settlers of Catan, and (god help me) I even futzed around with Magic: The Gathering.

Like a lot of software folks, I have a secret wish to punt everything, run into the hills, and make GAMES.

So it’s exciting to see this gaming renaissance. Casual games, social games– whatever you want to call them– there are new ways to make money making games and it’s no longer the big budget hit-driven madness that we’ve grown accustomed to.

But boom times like this can be messy and noisy, and this one is no exception. One of the key elements of this new gaming revolution is the potential to be VIRAL. As a developer, it’s fairly trivial to have your game automagically announce itself to a player’s Twitter followers, Facebook friends, whatever. “[friendname] just found a +11 Sword of Evisceration, but he needs your help to consecrate it in the blood of the Celestial Dragon – click here to join [gamename]“. Or, on Twitter, “I’m now the Mayor of Baskin Robbins. Bask in my benevolence! [insert bitly link here].”

The cost of shooting out these messages periodically as a user plays is trivial and there’s only upside, right? If 1,000 users play to that point and they each have 100 followers on Twitter, well– you just got 100,000 free ads for you game, packed with the kind of social proof that advertisers can only dream of.

But, at the end of the day, it’s SPAM. As a developer, they shouldn’t be asking themselves whether the cost/benefit analysis works. Heck, it costs me a billionth of a penny to send an unsolicited email and I’m sure I could craft an email that would convert more than a billionth of the time. WIN! Instead, they should be asking themselves the following questions:

• Does the player WANT to tweet about this? If they do, encourage them but let them opt-in every time and do it in their own words.
• How many of the players followers gives a rat’s ass? If a game auto-tweets on my account, 99.9% of the people are going to get no value. 99.9% aren’t going to find it interesting. I’m looking at you, Foursquare.
• What percentage of the players would, once they realized that they just blasted their friends with this promotional tweet would say, “Ooooh, I didn’t know it’d do that! That’s GREAT that I just told all 1500 of my followers that I’m the Mayor of Hooters!”

Yes, social game makers, your spammer math WORKS. 99.9% of my followers will consider it noise– if they read the tweet, they’ll want their 10 seconds back. But you’ll get your 0.1% clicking the link, and those clickers will convert (some of them). And THEY’LL make noise too and you’ll have your virus.

But because this works so well, we’re going to have more and more of it. If you’d told the first guy that sent an email that 95% of the world’s email would be spam in 2007, I think he’d be pretty horrified. While I tend to like federated models like Email more than walled gardens like Facebook and Twitter, in this case I’m glad there are some sensible folks at the helm who can shut this stuff down (or at least give users the tools to turn the noise down).

For what it’s worth, if I wasn’t in the weird and wonderful world of time management software, I’d be doing social games. Hell, maybe I’d suck at it because I took the high road. But I think I’d just focus on making really fun games, making it MORE fun if people invited friends, and giving them the tools to tell the world should they want to.

(note: this is modified from a talk I gave at Seattle Tech Startups on Wednesday)

The more I think about it, the more I’m impressed with software businesses that are great businesses (not just great software). There’s a class of entrepreneur that is product focused (like the folks at Twitter), there is a class of entrepreneur that is business focused (the white-toothed stereotypical biz guy), and there is a class of entrepreneur who is PR focused (I won’t name names, but we all know of startups that seem to thrive simply because of the attention they draw). I think good things happen when you create an outstanding product that has a clear path to monetization– add on someone who is also an attention magnet (like Steve Jobs, who is all three flavors rolled into one) and amazing stuff happens.

A couple of examples

• One you might have heard of– Google. Their outstanding product certainly earned them clear leadership in the world of search engines. But it was Adwords and Adsense that got them to the point where they could feed every employee gourmet meals and do their laundry for them.
• One you haven’t heard of– Autotegrity. This tiny company is finding leads for car dealerships via Google Adwords (among other things). They find people who are looking for very specific things (“blue honda accord”) and offer to get them three competing quotes. They take these leads and sell them to car dealerships (3 times, predictably). It’s a win for both sides and they are staggeringly successful.

One thing I increasingly believe is that the idea of just building something great is a game with much higher risks and rewards. Clearly if you build something that captures attention like Twitter and Facebook, you have the luxury of nearly infinite time to figure out how to monetize what you’ve built. But all of the people trying to build the NEXT Twitter end up in much more dire circumstances. A smallish audience of a few million early adopters a month– an audience which is neither big enough nor unique enough to monetize very effectively. This is no joke– I know lots of services out there that are getting tens of millions of page views and millions of uniques per month that can’t manage to get enough ad revenue to pay a single salary.

So step out of the gates with a strong idea of who’s going to be paying your paycheck and how many of those people you’re going to need to pull it off. If “targeted advertising” is your answer, find an audience that PAYS– that means creating a content site for an audience than some subset of marketeers would chew off their own arm to get in front of. That may mean creating software for weird-but-profitable niches like home remodeling (which commands $20 CPMs last I heard). And it certainly means serving audiences who actually SEE and CLICK on ads (which means that your blog about startups is not going to make you any money, natch).

The key here is that owning a business isn’t about building a product any more than owning a car repair shop is about fixing cars. You’ve got to broaden your vision and bring your passion to bear on stuff like marketing, business models, customer service, guerrilla PR, SEO, and more. It’s hard to name any companies that are admirable who don’t excel at things well beyond product development.

So if you’re supposed to work on everything, what do you work on FIRST?

You should look at your business as a funnel (which, incidentally, is how every salesguy on the planet looks at their sales pipeline). Here’s one that’s in my head all the time:

What’s at the top of this funnel varies on what type of business you have. Maybe it’s page views from organic SEO and SEM. Maybe it’s warm leads from a bank of cold-calling lead-gen folks. And maybe your conversion event is a software purchase (like ours is). Maybe it’s an ad-click. Maybe it’s an account signup. But trust me, you have a funnel.

So when trying to figure out what the hell to work on as an entrepreneur, go worship at the alter of the funnel. That means:

• Measure the hell out of everything. If you don’t know many many new visitors are coming to your site, what percentage of them do something, what percentage of THOSE people, click signup, what subset of THOSE people actually successfully signup, and what percentage of THOSE people are paying you a month later, the first thing you should do is work on metrics. Don’t go overboard, but know your funnel.
• Work your way UP the funnel, not down (if you have the financial luxury to do so). Most entrepreneurs ask “how do I get people to come to my site so it can grow?” The answer most often is down the funnel: the product isn’t providing enough value, communicating clearly enough, engendering enough passion, or causing people to want to tell their friends.
• Seek the low hanging fruit in the funnel. That means that you should seek out where people are escaping your funnel. If you get tons of visitors but no one clicks on anything (high bounce rate, low time on site), chances are your value prop is confusing or isn’t very compelling. You might need to improve the product, but chances are you just have to improve how you talk about it.
• Seek leverage. The lower you attack the funnel, the more it helps. If you do something to improve your retention that will help you forever. If you do something that gives you a boost in acquisition (like a SuperBowl ad), the value will be short-lived (unless you have a true viral loop). Two great retention stats (via Andrew Chen):

  “If each month you lose 8% of your existing users (92% retention) from the previous month, the average use will stay for 12 months. If you can hold just 4% more of your users (96% retention), then they will stick around for 2 years. If you can hold only 1.3% more than that (97.3% retention), they will be in for 3 years.”

  And, if you take a cohort of 1000 users from a month an 80% retention rate means that you’ll have 68 of them after 12 months. If you can get that to 90%, you’ll have 282 left. A 300% revenue boost for that single cohort (and every subsequent monthly cohort!).

• Don’t give up on making your product great. It’s easy to get sucked into data, A/B testing, form fields, etc. But at the end of the day, people don’t just abandon signup forms because they are hard and confusing, the abandon them because they don’t care enough about signing up.

Resources Referenced in the Presentation

Bokardo’s “Designing for Social Traction” Presentation
Josh Kopelman’s Cohort Analysis Spreadsheet

Hat Tip to:
Gladwell’s Blink (has the story about likable doctors getting sued less regardless of how good they are at healing)
The Heath Brother’s Made to Stick (best marketing book on the planet, they talk about the “Curse of Knowledge” and the “Tappers and Listeners” study)

Here’s the full presentation:

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:

People are upset about the news industry dying/changing, and with good reason. There’s a lot of great history and romance in journalism, and it’ll be a shame to see them go. There’s a great summary of the issue by Nick Carr and some good thoughts (with a linkbait title) by Scott Karp. Karp says:

Those who argue that Google is a friend to content owners because it sends them traffic overlook the basic law of supply and demand. The value of “traffic” is entirely relative. The more content there is on the web, the less value that content has — because of the surfeit of ad inventory and abundance of free alternatives to paid content — and thus the less value “traffic” has.

He’s right that it’s a supply and demand issue, but he’s wrong that Google isn’t a friend. Newspapers got to be a VERY fat business with a huge expense line because there was a limit of supply. You want written news in your hometown? You’ve got one choice, maybe two if you’re lucky. You want to advertise to people who care about the news? Same choices.

Over the past 50 years, reporting the news SHOULD have gotten cheaper. A flood of journalism grads, word processing and desktop publishing tools, increasingly sophisticated global communication, and cheap syndicate-able news stories when it’s not practical to report it. Over the past 20 years, you’d think it’d have gotten cheaper yet. Why have a press at all? When a story is breaking in Istanbul, why not just find a freelance reporter there rather than fly one of yours over and put ‘em up in a hotel? Need to do some fact checking? Try the internet. Don”t have time to write a deeper article? Link to some content partners in a “learn more” section at the end of your article. Looking around at content startups (like TechCrunch), it’s easy to see imagine cheaply you could run a newspaper. But modern newspapers don’t have that imagination, and if they did they don’t have the agility to get there with huge debt service, huge staffs, and big infrastructure to support distributing dead trees and ink.

The problem with the industry isn’t that Google owns the middleman slot. The problem is that the news industry as we know it is fundamentally inefficient. There were local walls around the supply, and little fiefdoms of news grew fat and happy (and horribly inefficient) inside these walls. Now that innovation has removed those walls, an oversupply of news has spilled into the world and the girth of these news organizations just can’t be supported. This doesn’t mean we should pour the hate on innovation.

Technology innovation is often about making markets smaller/more efficient. It’s taking something that used to cost $50 and making it available for $5, which tends to make innovators rich and incumbents flounder and die. It’s about making music sharing cheap and easy so record-labels can’t get drunk off of the insane profits they’ve been enjoying. It’s about sites like Kayak and Faracast making the market for airline tickets more efficient and less inscrutable.

Google *IS* a friend to the news business. They are giving them a free/huge distribution channel that they don’t have to pay for. There are plenty of small/nimble news startups from the Huffington Post to the West Seattle Blog (my neighborhood rag) that are happily growing and collecting advertising revenue.

There’s clearly a need/demand for news and a clear path to making money with content on the Internet. There’s not much we can do but sit back and watch most of the dinosaurs die, rot or evolve, and watch the nimble little mammals grow up to fill the niches they leave behind.

As a business with public contact information, we are inundated with sales calls. The process generally runs roughly like this:

1. We get a phone call from a number that is often “blocked” for caller ID. We’ve learned to screen those calls. Some leave a voicemail, some do not. If they aren’t blocked, we’ll answer the call, and we’ll generally get blasted with a run on sentence. If it’s a short introduction, I’ll politely decline. If it’s a long monologue, I’ll hang up.
2. We get a followup email from the caller describing their service. They will ask for a 15-30 minute introductory discussion/presentation. Depending on how good the email is (in terms of grammar and presentation), I’ll drop a reply saying that we’re not interested or ignore it entirely.
3. I’ll often get a 2nd email saying something like, “when would be a good time to follow up with you. How about I drop you a line in 3 months to see how things are going?” Um, no thank you.
4. The really well-trained salesfolks will often also say, “Do you know of anyone else who might be looking for our services?” The answer to this is always no. I’m not going to make an introduction (which is often tantamount to an endorsement).

5. I don’t want to be a jerk to salesfolks. I’m sure they are by and large good folks and are just trying to do their job. But we NEVER BUY ANYTHING THIS WAY. Between a few Google queries and a few “lazyweb tweets or emails”, I can drum up a short list of vendors who are thought well of by SOMEONE, and perhaps can get a list that are actually recommended by people that I know and trust. Why would I ever buy from the salesperson who happens to be calling me? Even if they were introducing me to a class of software/service that I wasn’t aware of and really wanted, the first thing I’d do is thank them for the info and start googling.

   As people get smarter about searching and social networking (and thus social recommendations) go mainstream, I continue to wonder at the future of outbound lead generation via phone/email.

   So, I’ve got a new canned response in Gmail:

   Thanks for your inquiry.

   RescueTime does not respond to unsolicited sales requests and we’d prefer to not receive them.

   When we’re interested in software or services, we prefer to do some combination of searching on the Internet and asking trusted people in our network for their recommendations.

   If you’re interested in earning our business, your best bet is to serve the customers you have well so that when we ARE looking for what you offer, you’ll be highly recommended in our network and across the web.

   Thanks for your understanding.

   Cheers,

   -Tony Wright, founder of http://rescuetime.com

   http://blog.rescuetime.com (company blog)
   http://tonywright.com (personal blog)

I saw Brad Feld speak last night at Beer, Brad, and Boulder (you can see the recorded stream and chat here) and was really struck by something that he said.

In response to the question: "How broken is venture capital?" he said (paraphrasing, among other things): "It's not broken, but it is saturation.  It's absolutely cheaper to build companies nowadays, but it's not necessarily cheaper to build them and scale them.  Venture Capital is still necessary to scale businesses from the prototype stage, but no longer quite so valuable to get to that prototype stage."

(note: this is a test using Posterous to automagically post to this blog– sorry for the brevity!)

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