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$100 Million “Innovator’s Credit Fund” Aims to Ease Startup Cash Crunch

June 12th, 2012 06:30 admin View Comments

Getting funded is the first step toward every startup entrepreneur’s dream. But while receiving an infusion of cash from a venture capitalist or angel investor is certainly a good thing, it doesn’t necessarily mean your company’s money problems are over. Even venture-funded startups can’t afford to divert scarce cash to everyday purchases, so one big tech vendor is trying to step into that credit void.

Startup businesses, particularly those that are growing fast, are in a constant state of acquisition. Hire someone? They’ll need equipment and a place to sit. It costs money to attract customers and clients, and even more to serve and retain them.

So even after a startup gets funded, founders may still need to make tough choices about where to invest scarce capital. To make those choices easier, last week, in what it calls a “first-of-its-kind” move, Dell introduced a $100 million initiative targeted toward newly funded small businesses.

The 10% Solution

A major part of the plan is a credit fund for small businesses. To qualify for the Dell Innovators Credit Fund, a business must have received funding from a pre-selected group of VCs or angel investors (Dell is adding new firms to the initial group) within the last 90 days. Qualified businesses can then access up to 10% of their funded amount (up to $150,000) in credit offered through Dell Financial Services, with what Dell calls “accelerated, limited credit terms.“ The fund is intended to help young businesses spend their investment capital on revenue-generating activities, not on technology purchases. 

The fund was the brain child of serial entrepreneur Ingrid Vanderveldt (left), Dell’s first entrepreneur-in-residence, who noticed that many “entrepreneurs, even when funded, still weren’t getting the credit they needed.”

Further impetus came from a Technology CEO Council (TCC) paper indicating “an outsized share” of new American jobs is generated by high-growth startups. In fact, the TCC reports, most years about 40% of new jobs come from the top-performing 1% of companies. Also cited in the TCC paper was a study from the McKinsey Global Institute, which shows “Web-knowledgeable [SMBs], across a range of industries outpace their less Internet-savvy counterparts in job creation by more than two to one.”

Steve Felice, Dell’s president and chief commercial officer, says the new fund gives new companies “access to technology to help fuel global growth and innovation while helping startups preserve precious equity capital for other business needs.”

Help Going Global

In fact, expanding internationally can be the key to growth for many small businesses. As Karen Mills, the administrator of the Small Business Administration points out, nearly 96% of the world’s consumers live outside the United States. Felice believes technology helps startups go global by “enabling them to get access to more markets, more countries and more supply chains.”

Of course globalization also means small businesses in foreign countries will now be competing with you for customers. But Felice says “small businesses need to realize that the world not only [provides] customers, but can offer partners as well.”

Felice is a big believer in the power of entrepreneurs: “If more of us don’t do something to help entrepreneurs get their ideas to market, economic instability will continue.” The goal of the Dell fund, Felice says, is to help entrepreneurs “fuel their great ideas.” If Dell’s move encourages other lenders to offer credit to startups, it might actually make a difference. 

Disclosure: My company, GrowBiz Media, produces a newsletter for the Dell Women’s Entrepreneur Network, and I will be attending the DWEN meeting in India later this month.

Source: $100 Million “Innovator’s Credit Fund” Aims to Ease Startup Cash Crunch

What to Expect From the 1,000 New Facebook Millionaires

May 22nd, 2012 05:02 admin View Comments

Facebook’s initial public offering is believed to have created as many as 1,000 new millionaires Friday, many of them employees who helped build the world’s largest social network. Now that the company is public, Facebook’s biggest challenge may be making sure it doesn’t have an exodus of talent.

The history of the dot-com bubble is littered with stories about startup founders who became multi-millionaires on paper, only to watch their fortunes and companies disappear. There is also a persistent fear of changing the company’s culture in a way that differs from the fundamentals that built the success story in the first place. A common analogy is parking lots that used to fill up at 7 a.m. and be full until well after sunset now don’t see cars until 9 a.m. and empty out at 5 p.m.

And the cars filling those lots are usually expensive sports cars.

“Buy one thing you’ve always wanted,” Karl Jacobs, a serial entrepreneur and early Facebook advisor, said when asked by CNN what advice he would give to the new millionaires. “A lot of people don’t celebrate the fact that they’ve worked really hard.”

Another fear is that companies will see an exodus of talent: Facebook COO Sheryl Sandberg, who became a billionaire on Friday, famously left Google after helping orchestrate that company’s IPO.

Facebook Could Be Different

By allowing employees to trade shares on private exchanges before Friday’s IPO, Facebook may have inadvertently protected itself from the brain drain that hits a lot of tech companies as soon as they go public. Any employee who wanted to cash out and start over somewhere else has had months to do just that (as an aside, those private exchange trades may also be why Facebook’s shares didn’t take a big first-day jump like other IPOs, which rise an average of 22% on their first day of trading).

“If employees wanted to cash out, they could have sold their shares on the secondary market,” said Jonathan Rick of Levick Strategic Communications LLC in Washington, D.C. “To the contrary, Facebookers love working at Facebook; they enjoy coming in the office of a company that maintains its startup culture while making history,” 

And even as Facebook shares continue to slump further and further below the IPO price in the company’s first week of trading, there is still a buzz of excitement around the company. Rick drew comparisons to Google, which opened at $100 in 2004 and now trades at more than $600 per share.

“Facebookers are true believers: They know that the best is yet to come, that cashing out now would be like selling Google when it opened at $100,” Rick said.

Imitation as the Highest Form of Flattery

Charley Polachi, a recruitment expert, said he expects Facebook’s IPO to have a ripple effect in that it will inspire other people to start their own firms in hopes of becoming the next $100 billion IPO. The IPO also has a more direct impact: It may help companies find seed money from newly minted Facebook millionaires who either want to invest in startups or try their own hand at starting a company.

“I think one of the great things about the Facebook IPO is it inspires more people to get involved with the information economy,” Andrew Rachleff, CEO of the venture capital firm Wealthfront, told CNBC on Friday.

Source: What to Expect From the 1,000 New Facebook Millionaires

Golden Age of Silicon Valley Is Over With Facebook IPO

May 19th, 2012 05:26 admin View Comments

Businesses

Hugh Pickens writes “Steve Blank, a professor at Berkeley and Stanford and serial entrepreneur from Silicon Valley, says that the the Facebook IPO is the beginning of the end for Silicon Valley as we know it. “Silicon Valley historically would invest in science, and technology, and, you know, actual silicon,” says Blank. “If you were a good venture capitalist you could make $100 million.” But there’s a new pattern emerging created by two big ideas that will lead to the demise of Silicon Valley as we know it. The first is putting computer devices, mobile and tablet especially, in the hands of billions of people and the second is that we are moving all the social needs that we used to do face-to-face onto the computer and this trend has just begun. “If you think Facebook is the end, ask MySpace. Art, entertainment, everything you can imagine in life is moving to computers. Companies like Facebook for the first time can get total markets approaching the entire population.” That’s great for Facebook but it means Silicon Valley is screwed as a place for investing in advanced science. “If I have a choice of investing in a blockbuster cancer drug that will pay me nothing for ten years, at best, whereas social media will go big in two years, what do you think I’m going to pick?” concludes Blank. “The headline for me here is that Facebook’s success has the unintended consequence of leading to the demise of Silicon Valley as a place where investors take big risks on advanced science and tech that helps the world. The golden age of Silicon valley is over and we’re dancing on its grave.”"

Source: Golden Age of Silicon Valley Is Over With Facebook IPO

Stop Flying Blind: Use Big Data to Benchmark Your Startup

May 14th, 2012 05:00 admin View Comments

Most startups fail. Nine out of 10 never amount to anything more than fond memories and a forgotten Facebook page. One reason is that they often lack a clear picture of exactly how they’re doing until it’s too late. But there are tools designed to help you assess your startup’s progress compared to similar companies.

The best way for startup founders to improve their chance of success is by learning to make better decisions. But if you want to make better decisions, you need better data. And that’s where Startup Compass comes in: It’s designed to help you benchmark your startup’s performance against thousands of others to identify what you’re doing right and what you need to improve.

Startup Compass collects data from tens of thousands of startups around the world. It collects lots of data, then creates best practices, recommendations and benchmarks to help entrepreneurs make better product and business decisions.

Big Data for Small Companies

“This is a big-data approach to startup success,” says Startup Compass co-founder and serial entrepreneur Bjoern Lasse Herrmann. “Big companies have analysts to make sense of their data, and executives can make decisions based on that data. But startups don’t have any access to that kind of analytics. We wanted to put analysts in the cloud for startups.”

“Startups can learn three key things,” Herrmann says. “First, which key performance indicators actually matter. Most startups don’t even know which KPIs they should track or why they should track them. Second, they learn how their KPIs compare to other companies’ KPIs so they will know if they’re on the right track. See, for example, their customer acquisition costs. The third thing they learn is what actions they need to be taking. We help businesses take the next steps.”

Startup Compass calls its approach “cracking the code of innovation.” We call it “how not to kill your startup.”

The 5 don’ts

The real value of Startup Compass is comparing your company to others like it, but Startup Compass also summarizes its findings in its Startup Genome report. Here are nuggets of wisdom from the first Startup Genome report, five things not to do:

1. Don’t scale too early. This is the No. 1 cause of startup failure. Startup Compass has found that 70% of startups crash because they scale prematurely.

2. Don’t work part time. Sleepy? Get used to it. People who work full time on their startups raise an average of 24 times more funding than those who work part time.

3. Don’t go it alone. Maybe you are the smartest guy in the room. But solo founders raise less than half the money that two to three co-founders raise.

4. Don’t ignore customers. Yes, they’re annoying. (What do they know?) But startups that track customer metrics have 400% more user growth.

5. Don’t forget about the technology. Startups without a tech-oriented co-founder are twice as likely to scale prematurely and have three to five times less user growth.

If you want advice on an ongoing basis, you can join Startup Compass and in exchange for data on your startup, the company will benchmark your startup monthly, comparing you to similar outfits, so you can keep your priorities in line.

Startup Compass has 17,000 companies now using the service for things like checking whether their churn rate is too high or their retention rate is too low – or if they should be spending more money on customer acquisition.

“We have a number of companies that have gone through the process and tell us they used our product and realized they were falling behind on this or that metric and were able to fix those things and adjust accordingly. As a result they were better able to acquire customers in the long run and didn’t waste more money on things that were not productive.”

Images courtesy of Shutterstock.

Source: Stop Flying Blind: Use Big Data to Benchmark Your Startup

Stop Flying Blind: Use Big Data to Benchmark Your Startup

May 14th, 2012 05:00 admin View Comments

Most startups fail. Nine out of 10 never amount to anything more than fond memories and a forgotten Facebook page. One reason is that they often lack a clear picture of exactly how they’re doing until it’s too late. But there are tools designed to help you assess your startup’s progress compared to similar companies.

The best way for startup founders to improve their chance of success is by learning to make better decisions. But if you want to make better decisions, you need better data. And that’s where Startup Compass comes in: It’s designed to help you benchmark your startup’s performance against thousands of others to identify what you’re doing right and what you need to improve.

Startup Compass collects data from tens of thousands of startups around the world. It collects lots of data, then creates best practices, recommendations and benchmarks to help entrepreneurs make better product and business decisions.

Big Data for Small Companies

“This is a big-data approach to startup success,” says Startup Compass co-founder and serial entrepreneur Bjoern Lasse Herrmann. “Big companies have analysts to make sense of their data, and executives can make decisions based on that data. But startups don’t have any access to that kind of analytics. We wanted to put analysts in the cloud for startups.”

“Startups can learn three key things,” Herrmann says. “First, which key performance indicators actually matter. Most startups don’t even know which KPIs they should track or why they should track them. Second, they learn how their KPIs compare to other companies’ KPIs so they will know if they’re on the right track. See, for example, their customer acquisition costs. The third thing they learn is what actions they need to be taking. We help businesses take the next steps.”

Startup Compass calls its approach “cracking the code of innovation.” We call it “how not to kill your startup.”

The 5 don’ts

The real value of Startup Compass is comparing your company to others like it, but Startup Compass also summarizes its findings in its Startup Genome report. Here are nuggets of wisdom from the first Startup Genome report, five things not to do:

1. Don’t scale too early. This is the No. 1 cause of startup failure. Startup Compass has found that 70% of startups crash because they scale prematurely.

2. Don’t work part time. Sleepy? Get used to it. People who work full time on their startups raise an average of 24 times more funding than those who work part time.

3. Don’t go it alone. Maybe you are the smartest guy in the room. But solo founders raise less than half the money that two to three co-founders raise.

4. Don’t ignore customers. Yes, they’re annoying. (What do they know?) But startups that track customer metrics have 400% more user growth.

5. Don’t forget about the technology. Startups without a tech-oriented co-founder are twice as likely to scale prematurely and have three to five times less user growth.

If you want advice on an ongoing basis, you can join Startup Compass and in exchange for data on your startup, the company will benchmark your startup monthly, comparing you to similar outfits, so you can keep your priorities in line.

Startup Compass has 17,000 companies now using the service for things like checking whether their churn rate is too high or their retention rate is too low – or if they should be spending more money on customer acquisition.

“We have a number of companies that have gone through the process and tell us they used our product and realized they were falling behind on this or that metric and were able to fix those things and adjust accordingly. As a result they were better able to acquire customers in the long run and didn’t waste more money on things that were not productive.”

Images courtesy of Shutterstock.

Source: Stop Flying Blind: Use Big Data to Benchmark Your Startup

Is Entrepreneurship for Everyone?

May 10th, 2012 05:30 admin View Comments

Not long ago, serial entrepreneur and founder of the Young Entrepreneur Council Scott Gerber offered his prescription to Fix Young America. In short, Gerber believes entrepreneurship can cure a lot of what’s wrong with the American economy.

Yesterday on Salon.com, those ideas came under attack as an Occupy imposter – instead of representing American’s youth, the post contended, they’re shills for “the most noxious aspects of the bipartisan status quo.” Gerber can defend himself, but in criticizing him, the authors seem to be condemning entrepreneurship. And that needs defending.

To give them their due, Salon authors Daniel Denvir and Adam Goldstein acknowledge, “There is certainly a place for entrepreneurialism,” and that “Research shows that start-up cultures are important for spurring innovation in technological industries.” But they have three problems with focusing on technology startups:

  1. “To think that making cheap capital available to a young entrepreneurial elite will solve youth joblessness is dead wrong.”
  2. “The idea that the jobs crisis in this country can be solved by turning everyone into an entrepreneur is just as wrongheaded as the notion that sending everyone to college will result in widespread gainful employment.”
  3. “It is a big mistake to think that the tech sector is a panacea for the jobs crisis.”

Startups aren’t just tech

I too have a problem with usurping the word “startup” to refer only to new tech businesses. I debated this point last fall with someone from the Startup Weekend organization. The ability to code does not equal the ability to start, run and scale a business.

That said, I don’t think the authors fully understand the promise of entrepreneurship. I don’t believe any rational entrepreneurial advocate believes that everyone should be, or even can be, an entrepreneur. That would call for a vision of millions of solo businesses run by entrepreneurs and staffed by no one. That’s not a sustainable business model by anyone’s measure.

But let’s not dismiss the fact that without startups (of all types), economies stagnate. The authors mention the oft-cited stat that “the majority” of startups fail within five years. This may or may not be true; we do a pretty lousy job of actually tracking business creation and failure in this country. But we do know (this became clear in the 1990s, the decade that many recall as the golden age of entrepreneurship) that new businesses create the vast majority of new American jobs and spark a lot of innovation.

If we all agree there’s a problem with young people finding jobs, wouldn’t it make sense to encourage startups that create jobs as they grow? The authors seems to think that startups are the province of what they term the “young entrepreneurial elite,” as if they believe that only the privileged can start businesses.

Startups do create opportunity

But what’s wrong with showing American’s young people that entrepreneurship can indeed be a way out of poverty? Isn’t it true that more than a few entrepreneurial empires were built by folks armed with nothing but an idea, a goal and a healthy dose of determination?

“Historically,” Gerber says, “startups create opportunities, jobs, innovation and wealth.” Indeed, entrepreneurship has long been the refuge of the disenfranchised. Immigrants, women and minorities have often turned to entrepreneurship because “Main Street” was more welcoming than big business.

Embracing entrepreneurship is not about supporting or rejecting Tea Party or Occupy Wall Street principles. It’s not an inherently political act, nor is it meant to be.

Instead, it’s about encouraging self-determination. It’s about building a path to the American Dream. I can’t quibble with that.

Disclosure: Scott Gerber has written a post for ReadWriteWeb’s Start Channel featuring insights from the Young Entrepreneurs Council: 8 Hard-Earned Insights Into Raising Startup Capital

Image courtesy of Shutterstock.

Source: Is Entrepreneurship for Everyone?

Is Now the Time to Launch Your Social Startup?

May 7th, 2012 05:00 admin View Comments

Fourth in a five-part series.

Right now you can use a service like Ning or GROU.PS to create your own social network. You can develop and launch a customized platform for little money. In short, you can be the next Mark Zuckerberg.

Or maybe not.

“Whether or not a ‘social media bubble’ becomes inflated or pops as a result, now is the time for entrepreneurs to take full advantage of the market conditions to gain access to capital.” – Suki Shah, cofounder and CEO at GetHired.com.

“At the end of the day, social media is simply middleware for connecting people,” said Dean M. Wright, founder of the social data and research company BrandMixer LLC. “The only true competitive advantage Facebook has right now is scale.”

But even if you could compete with Facebook, would you want to? Five years ago, the demand side of the economic equation dropped MySpace like a bad habit in favor of Facebook. Now, increased concerns overs privacy issues have Facebook confronting new challenges, most notably from Twitter, Google+ and 2012′s breakout hit of a social network, Pinterest.

“Social media users are capricious and demanding: the downfall of MySpace, the surge of Google+, the soup du jour of Pinterest,” Wright said. “But the number one driver of the frenzy is that all of these networks are free to the user.”

So you might not want to start a social network. But you don’t have too long to think on it, according to Suki Shah, cofounder and CEO at GetHired.com, who says now is the best – and perhaps last – time to get in the game.

Shah describes himself as a serial entrepreneur. He said Facebook’s acquisition of Instagram showed investors and entrepreneurs that the landscape has shifted in favor of startups that can attract millions of users.

“It’s a great time to be an entrepreneur in Silicon Valley, and Facebook’s acquisition of Instagram has just added fuel to that fire,” Shah said. “Whether or not a ‘social media bubble’ becomes inflated or pops as a result, now is the time for entrepreneurs to take full advantage of the market conditions to gain access to capital. The $1 billion price tag of Instagram definitely piqued the interest of angel and institutional investors, and has made them more open to meetings with early-stage companies.”

The problem for some investors, of course, is that “users” in the social media landscape rarely mean paying customers. The entire industry – and the entire bubble, if you believe we’re in one – relies on a business model where users get online content for free.

Shah expects the end result to be Facebook taking advantage of the current social media frenzy to fill gaps in its overall strategy.

“Small teams of smart, dedicated, entrepreneurial people are creating significant momentum and innovation in niche areas that really appeal to larger companies,” he said. “Regardless of what will happen in the future, serious entrepreneurs need to use this time to set sail.”

Coming Tomorrow: No, We Are Not in a Social Media Bubble

Image courtesy of Facebook.

Source: Is Now the Time to Launch Your Social Startup?

5 Ways to Bootstrap Your Startup

May 3rd, 2012 05:02 admin View Comments

The conflicting (frequently unsolicited) advice startup entrepreneurs too often hear is enough to make you tune it all out. Either you’re told that you need to go big and grab all the angel or VC money you can get your hands on, or that you should start small, do it on your own, and retain control of your company.

But bootstrapping a startup is not easy, requiring discipline and fortitude, as well as ingenuity. But entrepreneurs who have done it have discovered some best practices to increase the odds of success.

Serial entrepreneur Rachel Blankstein is bootstrapping her latest startup, Comparz, the largest independent user review site for businesses seeking Web-based software. Blankstein admits bootstrapping also involves “a lot of ingenuity, trial and error – and an immense amount of hard work.“ But she insists there are benefits to bootstrapping. It enables you to “build something incredible with next to no cash, and to retain significant ownership of your company.” Blankstein offers five ways to operate your startup with minimal cash burn.

Bootstrap 1. Offer Equity Compensation to Team Members: Generate interest in joining your team by giving equity to others with complementary skill sets to yours. With a four-year vesting schedule and a six-month “cliff” or trial period, you can get others to join in on the fun of startup, and make progress without expending cash. This type of equity structure safeguards you, so you won’t have to give away a lot of your company if the person does not produce results. In fact, with the six-month cliff, if they do not work out within that timeframe, you have not given away any equity.

Bootstrap 2. Leverage the Skilled Unemployed: Encourage talented workers who are between jobs to work for you, which benefits them by keeping their resumes fresh, and allows them to build new skills. This is a win-win for the younger segment of the workforce who value building skills and enhancing their resumes. They will be grateful for the opportunity, and you will be grateful for their hard work with no cash expenditure. Just make sure you don’t violate any employment laws.

Bootstrap 3. Barter, barter, barter: You can barter more than you think. It can be as simple as saving money on marketing by promoting someone in a blog post who then promotes your company to their audience. There are a thousand ways to do it, but by providing more favors to others, they will be happy to do favors for you – whether you need expert advice, exposure or someone to test your product, etc. You can also barter for services. Exchange your coding skills with someone who will offer the equivalent value of marketing. Just remember, it’s all accountable to the IRS.

Bootstrap 4. Build Relationships with Key Influencers: A successful entrepreneur often has strong relationships with key influencers in their industries. If you don’t have these relationships at the outset of your venture, build them. This gives your brand more exposure to the “right people,” offers you priceless insights into your industry and snowballs as these contacts introduce you to more “important people” if you prove to be good at what you are doing.

Bootstrap 5. Outsource: Don’t hire people, use independent consultants who come highly recommended from your peers when you need to bring in expertise. That way you can learn from them, and use your low-to-no-cost team to implement their ideas. Blankstein adds, “While these may not be ideal [solutions], this is how you limit cash burn, which is important for a startup or business of any size.“ (See also: 4 Ways to Avoid Hiring Your First Employee.)

Image courtesy of Shutterstock.

Source: 5 Ways to Bootstrap Your Startup

Art of Entrepreneurship: Who to Listen to and Why

February 29th, 2012 02:30 admin View Comments

shutterstock ranch150.jpgThe art of entrepreneurship and the science of customer development is not just getting out of the building and listening to prospective customers. It’s understanding who to listen to and why.

I got a call from Satish, one of my ex-students last week. He got my attention when he said, “following your customer development stuff is making my company fail.” The rest of the conversation sounded too confusing for me to figure out over the phone, so I invited him out to the ranch to chat.

Steve Blank is a retired serial entrepreneur, educator and author of the book, “The Four Steps to the Epiphany.” Blank teaches entrepreneurship at Stanford University and UC Berkeley and blogs at steveblank.com.

When he arrived, Satish sounded like he had 5 cups of coffee. Normally when I have students over, we’d sit in the house and we’d look at the fields trying to catch a glimpse of a bobcat hunting.

But in this case, I suggested we take a hike out to Potato Patch pond.

Potato Patch Pond

We took the trail behind the house down the hill, through the forest, and emerged into the bright sun in the lower valley. (Like many parts of the ranch this valley has its own micro-climate and today was one of those days when it was ten degrees warmer than up at the house.)

As we walked up the valley Satish kept up a running dialog catching me up on six years of family, classmates and how he started his consumer web company. It had recently rained and about every 50 feet we’d see another 3-inch salamander ambling across the trail. When the valley dead-ended in the canyon, we climbed 30-foot up a set of stairs and emerged looking at the water. A “hanging pond” is always a surprise to visitors. All of a sudden Satish’s stream of words slowed to a trickle and just stopped. He stood at the end of the small dock for a while taking it all in. I dragged him away and we followed the trail through the woods, around the pond, through the shadows of the trees.

As we circled the pond I tried to both keep my eyes on the dirt trail while glancing sideways for pond turtles and red-legged frogs. When I’m out here alone it’s quiet enough to hear the wind through the trees, and after awhile the sound of your own heartbeat. We sat on the bench staring across the water, with the only noise coming from ducks tracing patterns on the flat water. Sitting there Satish described his experience.

We Did Everything Customers Asked For

“We did every thing you said, we got out of the building and talked to potential customers. We surveyed a ton of them online, ran A/B tests, brought a segment of those who used the product in-house for face-to-face meetings. ” Yep, sound good.

“Next, we built a minimum viable product.” OK, still sounds good.

“And then we built everything our prospective customers asked for.” That took me aback.

We stopped at the overlook a top of the waterfall, after the recent rain I had to shout over the noise of the rushing water. I offered that it sounded like he had done a great job listening to customers. And better, he had translated what he had heard into experiments and tests to acquire more users and get a higher percentage of those to activate. But he was missing the bigger picture.

Everything? I asked? “Yes, we added all their feature requests and we priced the product just like they requested. We had a ton of people come to our website and a healthy number actually activated.” That’s great I said, “but what’s your pricing model?,’”came the reply. Oh, oh. I bet I knew the answer to the next question, but I asked it anyway. “So, what’s the problem?”

“Well everyone uses the product for awhile, but no one is upgrading to our paid product. We spent all this time building what customers asked for. And now most of the early users have stopped coming back.”

I looked at hard at Satish trying to remember where he had sat in my class. Then I asked, “Satish, what’s your business model?

What’s Your Business Model?

“Business model? I guess I was just trying to get as many people to my site as I could and make them happy. Then I thought I could charge them for something later and sell advertising based on the users I had.”

I pushed a bit harder.

“Your strategy counted on a freemium-to-paid upgrade path. What experiments did you run that convinced you that this was the right pricing tactic? Your attrition numbers mean users weren’t engaged with the product. What did you do about it?

“Did you think you were trying to get large networks of engaged users that can disrupt big markets? ‘Large’ is usually measured in millions of users. What experiments did you run that convinced you could get to that scale?”

Part of customer development is understanding which customers make sense for your business. The goal of listening to customers is not please every one of them. It’s to figure out which customer segment served his needs – both short and long term. And giving your product away, as he was discovering, is often a going out of business strategy.

I realized by the look in his eyes that none of this was making sense. “Well I got out of the building and listened to customers.”

The wind was picking up over the pond so I suggested we start walking.

We stopped at the overlook a top of the waterfall, after the recent rain I had to shout over the noise of the rushing water. I offered that it sounded like he had done a great job listening to customers. And better, he had translated what he had heard into experiments and tests to acquire more users and get a higher percentage of those to activate.

But he was missing the bigger picture. The idea of the tests he ran wasn’t just to get data – it was to get insight. All of those activities – talking to customers, A/B testing, etc. needed to fit into his business model – how his company will find a repeatable and scalable business model and ultimately make money. And this is the step he had missed.

Customer Development = The Pursuit of Customer Understanding

Part of customer development is understanding which customers make sense for your business. The goal of listening to customers is not please every one of them. It’s to figure out which customer segment served his needs – both short and long term. And giving your product away, as he was discovering, is often a going out of business strategy.

The work he had done acquiring and activating customers were just one part of the entire business model.

As we started the long climb up the driveway, I suggested his fix might be simpler than he thought. He needed to start thinking about what a repeatable and scalable business model looked like.

My guess was that he was going to end up firing a bunch of his customers – and that was OK.

I offered that acquiring users and then making money by finding payers assumed a multi-sided market (users/payers). But a freemium model assumed a single-sided market – one where the users became the payers.

He really needed to think through his revenue model (the strategy his company uses to generate cash from each customer segment). And how was he going to use pricing, (the tactics of what he charged in each customer segment) to achieve that revenue model. Freemium was just one of many tactics. Single or multi-sided market? And which customers did he want to help him get there?

My guess was that he was going to end up firing a bunch of his customers – and that was OK.

As we sat back in the living room, I gave him a copy of The Startup Owner’s Manual and we watched a bobcat catch a gopher.

Lessons Learned

  • Getting out of the building is a great first step
  • Listening to potential customers is even better
  • Getting users to visit your site and try your product feels great
  • Your job is not to make every possible customer happy
  • Pick the customer segments and pricing tactics that drive your business model

Source: Art of Entrepreneurship: Who to Listen to and Why

The Movie Industry Can’t Innovate – the Result is SOPA

January 6th, 2012 01:00 admin View Comments

movie camera 150.jpgThis year the movie industry made $30 billion (a third of it in the U.S.) from box-office revenue. But the total movie industry revenue was $87 billion. Where did the other $57 billion come from?

From sources that the studios at one time claimed would put them out of business: Pay-per view TV, cable and satellite channels, video rentals, DVD sales, online subscriptions and digital downloads.

The Movie Industry and Technology Progress

Steve Blank is a retired serial entrepreneur, educator, thought leader and creator of the rigorous “Customer Development” methodology detailed in his book, “The Four Steps to the Epiphany.” Blank teaches entrepreneurship at Stanford University and UC Berkeley and blogs at steveblank.com.

The music and movie business has been consistently wrong in its claims that new platforms and channels would be the end of its businesses. In each case, the new technology produced a new market far larger than the impact it had on the existing market.

  • 1920′s: The record business complained about radio. The argument was because radio is free, you can’t compete with free. No one was ever going to buy music again.
  • 1940′s: Movie studios had to divest their distribution channel – they owned over 50% of the movie theaters in the U.S. “It’s all over,” complained the studios. In fact, the number of screens went from 17,000 in 1948 to 38,000 today.
  • 1950′s: Broadcast television was free; the threat was cable television. Studios argued that their free TV content couldn’t compete with paid.
  • 1970′s: Video Cassette Recorders (VCR’s) were going to be the end of the movie business. The movie businesses and its lobbying arm MPAA fought it with “end of the world” hyperbola. The reality? After the VCR was introduced, studio revenues took off like a rocket. With a new channel of distribution, home movie rentals surpassed movie theater tickets.
  • 1998: The MPAA got congress to pass the Digital Millennium Copyright Act ( DCMA), making it illegal for you to make a digital copy of a DVD that you actually purchased.
  • 2000: Digital Video Recorders (DVR) like TiVo allowing consumer to skip commercials was going to be the end of the TV business. DVR’s reignite interest in TV.
  • 2006: Broadcasters sued Cablevision (and lost) to prevent the launch of a cloud-based DVR to its customers.

Today it’s the Internet that’s going to put the studios out of business. Sound familiar?

Why was the movie industry consistently wrong? And why do they continue to fight new technology?

2012-01-04-studioslackofinnovation.jpg

Technology Innovation

The movie industry was born with a single technical standard – 35mm film, and for decades had a single way to distribute its content – movie theaters (which until 1948 the studios owned.) It was 75 years until studios had to deal with technology changing their platform and distribution channel. And when it happened (cable, VCR’s, DVD’s, DVR’s, the Internet,) it was a relentless onslaught. The studios responded by trying to shut down the new technology and/or distribution channels through legislation and the courts.

Regulation/Legislation

But why does the movie business think their solution is in Washington and legislation? History and success.

In the 1920′s individual states were beginning to censor movies and the federal government was threatening to do so as well. The studios set up their own self-censorship and rating system keeping most sex and politics off the screen for 40 years. Never again wanting to be at the losing side of a political battle they created the movie industry’s lobbying arm, MPAA.

By the 1960′s, the MPPA achieved regulatory capture (where an industry co-opts the very people who are regulating it) when they hired Jack Valenti, who ran the studios’ lobbying efforts for the next 38 years. Ironically, it was Valenti’s skill in hobbling competitive innovation that negated any need for studios to develop agility, vision and technology leadership.

Management of Innovation

The introduction of new technology is always disruptive to existing markets, particularly to content/copyright owners whose sell through well-established distribution channels. The incumbents tend to have short-sighted goals and often fail to recognize that more money can be made on new platforms and distribution channels.

In an industry facing constant technology shifts the exec staff and boards of the studios have lawyers, MBAs and financial managers, but no management skill in dealing with disruption. So they rely on lobbying ($110 million a year), lawsuits, campaign contributions (wonder why the President won’t be vetoing SOPA?) and Public Relations.

Ironically, the six major movie studios have a great technology lab in Silicon Valley with projects in streaming rights, Video On Demand, Ultraviolet, etc. But lacking the support from the studio CEOs or boards, the lab languishes in the backwaters of the studios’ strategy. Instead of leading with new technology, the studios lead with litigation, legislation and lobbying. (Imagine if the $110 million/year spent on lobbying went to disruptive innovation.)

Piracy

One of the claims that studios make is that they need legislation to stop piracy. The fact is piracy is rampant in all forms of commerce. Video games and software have been targets since their inception. Grocery and retail stores euphemistically call it shrinkage. Credit card companies call it fraud. But none use regulation as often as the movie studios to solve a business problem. And none are so willing to do collateral damage to other innovative industries (VCRs, DVRs, cloud storage and now the Internet itself.)

The studios don’t even pretend that this legislation benefits consumers. It’s all about protecting short-term profit.

SOPA

When lawyers, MBAs and financial managers run your industry and your lobbyists are ex-Senators, understanding technology and innovation is not one of your core capabilities. The SOPA bill (and DNS blocking) is what happens when someone with the title of anti-piracy or copyright lawyer has greater clout than your head of new technology. SOPA gives corporations unprecedented power to censor almost any site on the Internet.

History has shown that time and market forces provide equilibrium in balancing interests, whether the new technology is a video recorder, a personal computer, an MP3 player or now the Net. It’s prudent for courts and congress to exercise caution before restructuring liability theories for the purpose of addressing specific market abuses, despite their apparent present magnitude.

What the music and movie industry should be doing in Washington is promoting legislation to adapt copyright law to new technology- and then leading the transition to the new platforms.
The U.S. State Department has been championing the Internet Freedom initiative across the world. Secretary of State Clinton said, “…when ideas are blocked, information deleted, conversations stifled, and people constrained in their choices, the Internet is diminished for all of us.”

It’s too bad the head of the MPAA – an ex Senator – made a mockery of her words when he wondered “why our online censorship can’t be like China?” We wonder, “Why can’t the film industry innovate like Silicon Valley?”

Lessons Learned

  • Studios are run by financial managers who have no corporate DNA to exploit disruptive innovation
  • Studio anti-piracy/copyright lawyers trump their technologists
  • Studios have no concern about collateral damage as long as it optimizes their revenue
  • Studios110M/year lobbying and political donations trump consumer objections
  • Politicians votes will follow the money unless it will cost them an election

Movie camera by Jeremy Burgin

Source: The Movie Industry Can’t Innovate – the Result is SOPA

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