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Building It Is Not Enough: 5 Practical Tips On User Acquisition

Posted by Dharmesh Shah on Wed, May 02, 2012



The following is a guest post by Brian Balfour, Co-Founder and CMO of Boundless. You can read more of his writing on his blog at BrianBalfour.com.

Stories about the growth of "hot" startups such as Facebook, Instagram, AirBNB, and others have created a belief that if you build the right product, customer acquisition will be easy. Don't be fooled. These stories are the exception, not the rule, and don't tell the entire story of the immense effort it took to grow their customer bases. Finding scalable acquisition channels is a time consuming and strategic effort.

If you build it, they may not come.

field of dreams

You probably have a product roadmap and a development process. But do you have a process and plan to discovering your scalable customer acquisition channels? For software development we have well documented processes such as Agile, Waterfall and Kanban. For finding product market fit we have an increasingly defined process in customer development and the lean startup methodology.

Finding scalable customer acquisition channels is as much of a process as software development or finding product market fit. Here are five mistakes to avoid in finding your initial customer acquisition channels.

1. Do Not Test A Lot Of Channels At Once

This is the ol' throw stuff against the wall and see what sticks strategy. Unfortunately this rarely works. Consider this, with Facebook ads you typically need to change your creative every 24-48 hours across 10 - 20 different segmentation combinations, with 4 - 10 ads per combination. That is in addition to all of the landing page testing you'll need to do for those combinations. It is easily a full time role. Think you will have time to focus on another channel at the same time?

Inbound marketing takes an incredible amount of time for content development. SEO requires testing thousands of page combinations, time to build influential links, and plenty of on-page optimization. My point is, properly testing any single customer acquisition channel is extremely time consuming and requires focus.

It is easy to think that the fastest way to find a channel is to test a lot at once. But with limited resources it is the exact opposite. Let's look at it a different way. If you had very limited engineering resources, would you have them try to build 4 different products at once to find one that works? I hope not. You would end up with 4 partially built products with little information on which one is going to to work.

Instead, you would likely evaluate each product idea, strategically choose one, focus, iterate on it for at least a couple months, and only then decide to keep moving forward or move on. Finding scalable customer acquisition requires a similar amount of strategic decisions, focus, and iteration.

The quickest way to finding your first scalable channel with limited resources is to focus on one at a single time and iterate based on feedback (metrics) just like you would with building product. At Boundless, we have been lucky to have enough resources to test two channels at once. But even with close to $10M in funding, we won't go beyond testing and optimizing two channels for awhile. Don't underestimate what it takes to properly test and optimize a single customer acquisition channel.

2. Diversity Of Channels Is Not Important In The Early Stage

Entire companies are typically built on the back of one or two channels. Look how far Zynga has gotten with basically two channels - Facebook Ads and Viral Mechanics. Only now are they starting to diversify with the launch of their new platform. Facebook itself relied completely on viral growth until they had reached millions of users. Only then did they start optimizing for SEO. AirBNB grew their initial user base almost completely on the back of craigslist.

For reasons discussed in number one, diversity of channels actually increases your risk that you never find a scalable channel at all. Remember this - momentum of growth trumps diversity of channels. Once you find a channel that is working at a small scale, don't be tempted to add another channel to the mix. Instead, focus on optimizing, scaling, and milking your initial channel for all its worth.

Your goal in the early stages is to grow as fast as possible with limited resources. Finding further growth in a channel that is already working is typically easier than finding a completely new acquisition channel. When you start to reach the max potential (where the growth curve starts to flatten), only then should you add another channel to the mix.

3. Paying For Users Is Ok

Magical stories of instant viral growth has formed a negative stigma around paying for users especially in the early days of a product. Entrepreneurs almost feel guilty if they pay for users. This leads to startup pitches that often include a slide that says "we've grown to X# of users with out paying for a single one."

Every, and I mean every, acquisition channel costs money. It is just a question of whether the cost is direct or indirect. Channels such as PPC obviously have a direct cost. However channels such as SEO and Viral are commonly seen as "free" channels. They aren't. To properly optimize SEO and Viral mechanics takes significant engineering and other employees' time. That time is costing you money. The cost is indirect, but you are still paying for users.

Those "free" channels are certainly valuable in the long term. But they often come with short term disadvantages. For example, SEO typically takes months of effort before you gain meaningful traffic. In the early stages, speed of learning is the most valuable thing. Do you really want to wait a few months to learn the same thing you could learn in less time with another channel?

Viral growth deserves its own mention here. It is the treasure that most entrepreneurs are seeking. They want to be the next Pinterest or Instagram. Keep in mind a lot of products aren't suited for viral growth. I think a lot of entrepreneurs overestimate whether or not their product is a fit for pure viral growth. If your business isn't suited for viral growth, that doesn't mean you have a bad business. You just need to find a different customer acquisition strategy.

4. You Only Need 3 Tools To Test Your Customer Acquisition Channels

The "measure everything" mantra has lead to a belief that an array of tools is needed to find a scalable channel. Between analytics, A/B testing, ad platforms, feedback, support and a host of other tools it is easy to get lost. If you wanted to learn to play basketball, would you go out and spend $1000 on the latest gear first? Or would you just grab a ball, find a hoop and start playing? Hopefully you answered the latter.

To test any customer acquisition channel all you typically need is Google Analytics, Excel, and some basic SQL skills. Those three things will take you surprisingly far for any channel before you need anything else. Don't get caught up with the tools, just get testing.

5. Avoid The Button Color A/B Testing Rabbit Hole

The rise in A/B testing and other analytics tools have created fairy tale stories of changing a button color, or moving the CTA from the left to the right and suddenly you have game changing improvements. Once again, these stories are the exception, not the rule. It typically takes 10 A/B tests to find one that produces any improvement at all. And when you do have a positive improvement, it is typically incremental instead of game changing.

Being metrics focused is important. But knowing how to properly influence them is even more critical.

In the early stage you should not be focused on incremental improvements. Your initial CPA for any new channel is likely to be a factor off from your target. That means you need to try and make big improvements to understand the viability of the channel. To see big improvements, focus on messaging, targeting and activation methods. Save your color experiments for when you are ready to optimize and scale a channel. Not when you are testing the viability of a channel.  

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What do you think?  Any additional tips on how to acquire users for early-stage product?



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Cult of Product: Marketing Isn't Just For Losers Who Pay For Sex

Posted by Dharmesh Shah on Wed, Nov 30, 2011



The following is a guest post by Mike Troiano. Mike is a former New York ad man turned venture-funded entrepreneur, now a Principal at Boston-based Holland-Mark.  You can follow him on Twitter at @miketrap, and connect with him elsewhere through About Me.

Product, product, product. More focus on product was at the center of Brad Feld's comments at last week's Silicon Valley Bank CEO event, in response to a question about what he'd do differently if he had it to do over. More focus on product is at the core of the Lean Startup Revolution we're all getting behind, and in the spine of the Steve Jobs bio we're all reading, and in the frequent posts of the startup bloggers we all pay attention to.

And it's all true. Product is the key, at the very center of building a viable business from nothing. And by implication, marketing is so 15 minutes ago. Marketing is for products unworthy of passionate advocacy, a crutch for nice-to-have startups who invest in sprawling web sites and launch parties like losers with no choice but to pay for sex.loser

I spend a lot of time fighting this perception, talking about the difference between the kind of strategic marketing that can corrupt your vision with the external reality, marketing communications, which consists largely of the promotional sham-ware of the mid-twentieth century.

But you know what? I'm giving all that up. I'm going to take another approach, one I think will resonate more clearly with the Cult of Product sub-culture which seems to be sucking all of the oxygen out of the shill-o-sphere.

Ready? Here it is: You should focus on the desired response to your product, not just on the product itself.

Why must you focus so intently on your product? Isn't it because you want people to respond to your product in ways that propel your businesses to greatness? Isn't your product, then, a means to an end? Isn't it a stimulus hoping to evoke the right response on the part of the customers who buy it?

In a very real way, I'd argue yes. More than that, I'd argue that the primary dimension of product response that propels businesses to greatness is emotional response.

What do great un-advertised, Billion-dollar brands like Dropbox, Facebook, and even (until recently) Google have in common? We love them. They make us feel respectively Liberated, Connected, and Empowered in ways that enrich our lives. They make us grateful, make us want to share with others. A brand is nothing more than an emotional response out there in the world, but building brands with products instead of print advertising doesn't make them any less important, or any less worthy of early focus, thoughtful strategy, and effective execution.

It's becoming a cliche to say your product is your marketing, in an era where customers trust each other more than they do media. Well if that's true it might be time to bring a little more marketing into your product, in the form of treating the softer science of brand development with the same respect you give the harder sciences of product management and engineering.

What do you think?  Where do you stand on the Cult of Product? Would love to read your comments.



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From Deadpool to Acquisition: Lessons From Sprouter's Almost Fail

Posted by Dharmesh Shah on Tue, Nov 08, 2011

 


The following is a guest post by Erin Bury. Erin is the Director of Content and Communications at Sprouter.com, a site that connects startups with expert advice. She's also a startup columnist for the Financial Post. Find her on her blog at erinbury.com, or on Twitter at @erinbury.

A few months ago I had a brilliant flash of business inspiration, as so often happens when you're in the startup world. Why not start an online marketplace where new startups can buy furniture and office supplies from startups that enter the deadpool? A depressing Craigslist, well at least depressing for the companies liquidating their stuff.

The irony wasn't lost on me when, mere months later, we announced that our startup Sprouter was shutting down (for the record, we did get rid of our furniture, and I do think my business idea has legs). We launched in 2009, and I've been part of the four-person team since the beginning, building the brand from zero users to a vibrant community of entrepreneurs and startup experts.success failure

The reason for the shutdown was simple: we ran out of capital. We were supported by angel investment, and had big plans for how we'd become profitable. But the investment dried up before we could actually execute on those ideas.

The morning we announced we were closing our doors was hard, but it made it easier to see the outpouring of support from the community. Media outlets covered our shutdown, lamenting the fact that the resource for startups would be gone. Community members voiced their dismay on Twitter, our blog, and via email. By the end of the week we were out of our office and all unemployed.

What happened next could be straight out of a Disney movie: think The Mighty Ducks for startups (The Mighty Canucks?). One of Canada's largest media companies Postmedia Network Inc., owners of national newspaper the National Post and countless other newspapers across the country, expressed acquisition interest. They wanted the team back together, and were interested in integrating our content and digital presence with their properties.

So on October 3rd, two months after we announced our shutdown, we announced our acquisition. Being part of the Postmedia family means we have a bigger platform for our startup content, and can continue to expand our offerings. We have a new office in downtown Toronto (yes, with new furniture), and we're almost doubling our team in the next month.

While not the ideal route any startup would take to acquisition, it really is a case of all's well that ends well. But there are some key lessons to take away from the whole ordeal, and not just that making millions of dollars is more advantageous than running out of capital and shutting down. We got that message loud and clear.

Here's what our team has taken away from going from deadpool to acquisition

Lessons Learned

Don't underestimate the power of your community. We figured our shutdown announcement would cause a stir, but we could never have predicted the outpouring of support that resulted. Our community of supporters rallied together, suggesting ways we could stay afloat and even offering to pay for our service to keep it active. Your community is a powerful resource in itself, and don't underestimate how they can support you in times of trouble.

Crisis communications are imperative. The first inclination when you're shutting down is to hide under your desk and not show your face again until SXSW 2012. But we decided that we would respond to user emails, Tweets and media requests the week of the announcement. Being transparent and responsive when you have a crisis seems like a no-brainer, but it can be difficult for founders to face the public during hard times.

Embrace the failure. The startup post-mortem seems to be the latest trend for deadpooled companies. Startups who've failed offer their take on where they went wrong, hopefully steering new entrepreneurs in the right direction. In another ironic twist of fate, our founder Sarah Prevette had agreed to speak at FailCon Paris before we announced we were shutting down. Her presentation there, How I've Failed So You Don't Have To, outlined the major lessons from our growth and failure. Namely, you need focus at a startup. Oh, and sales are important.

Users aren't customers, and brand doesn't equal sales. We built up a big community of startups, and were featured in media outlets around the world. But at the end of the day, our great brand equity and user base wasn't paying our bills. While it's important to focus on marketing and user acquisition, those things don't matter if you're not bringing in revenue.

Strive for success but prepare for failure. This encapsulates how founders should approach their companies. Everyone wants to be the next Dropbox, Zynga or Airbnb, but the stats tell us only a few will actually get there. Be optimistic, but realistic. Prepare for the worst, and always have a contingency plan for times when you aren't hitting your sales goals.

While I hope your team never has to experience what we did, it was truly a learning experience. The path to startup success never does run smooth. Oh, and one last lesson: don't get rid of your furniture until you know you're 100% gone. If you need us, we'll be putting together Ikea desks.



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Raising Money On AngelList: 21 Tips From Two Active Angels

Posted by Dharmesh Shah on Wed, Aug 10, 2011



The following is the result of a collaboration between Ty Danco and Dharmesh Shah. Ty is an angel investor and startup mentor (you should be reading his blog). Dharmesh is founder and CTO of HubSpot, runs OnStartups.com and is an advisor to AngelList. [Note: All the smart useful stuff in the article is Ty, all the feeble attempts at humor are Dharmesh]

AngelList (AL) connects promising startups to a sterling network of early stage investors. AL has been getting a blizzard of well-deserved press of late after Venture Hacks released the networks 18 month statistics. But not a lot has been written for startups on how to best use the service. Here's our take in small, bite-sized pieces.good egg

1. The Fundamentals Still Apply As Time Goes By

AngelList may be a game-changer, but most of the same rules are still in place. Angels still look for the same elements in a startup as always: a strong team; meaningful milestones; a differentiated product in a big potential market; capital efficiency and so on. Therefore, the excellent advice listed in OnStartups, Venture Hacks, AVC, Ask the VC, Both Sides of the Table, and the like still applies. What for now is unique to AngelList is the speed and efficiency with which they can harness an all-star network of active investors in front of a breathtakingly large, qualified stream of startups. Whereas B.A.L. (Before AngelList) you could mess up a presentation in front of an investor group and not worry too much (there's always another potential investor around the corner if you look,) putting in a half-baked effort on AngelList is a cardinal sin. First impressions count, so make sure you crush it!

2. There's a great primer already

"How to Hustle with AngelList", by Brendan Baker is the definitive how-to guide discussing how to make it onto AngelList, how to set up profiles, etc. It covers all the basic mechanics and throws in a few proven tactics. If you have time to read only one article on AngeList, that's the one.

3. Talk to People Who Have Had Success

With over 400 companies having raised money on AngelList in its first 18 months, this is easy. As Alex Cook of Rentabilities mentioned in this Boston Globe article, there's a learning curve involved, so make a point of talking to entrepreneurs who have previously used the site before you list. Who has been successful? Here are a few notable companies.

Quora has many dozens of questions on AngelList, as does OnStartups Answers and of course Venture Hacks, whose founders run AL. By the way, there is a high overlap between people who are active on Quora and the community of investors you want to attract.

4. Get a champion first

The first anchor investor is the hardest. Always has been, always will be. And for Angel List, it is important enough to be ranked #1 in Nathan Beckfords excellent post entitled Hacking Angel List. For instance, Rentabilities already was a winner of the 2010 MassChallenge, but they waited until they had won over Dharmesh as an investor/endorser before tackling Angel List. Nivi of AngelList will argue that it is not necessary to have a champion if one has a great team and traction, and he has several examples of this. But we respectfully disagree: just as your odds of success drop dramatically if you pitch to an angel group without already having a champion in the room, the same applies here. So don't launch prematurely. And, even if Nivi is right that you don't absolutely need a champion if you have enough traction and an awesome team, it can't hurt.

5. Don't wait too late in your rounds fund raise before you apply

Localmind is a company I invested in which had no trouble raising money, but they wanted to attract a few more angels with domain expertise and geographical diversity. Within days of listing on AngelList, they had identified 8 strong, deep-pocketed angels, all of whom could have strengthened the company. With only limited $dollars left in the round space left, they could only squeeze in 2. When I asked Lenny Rachitsky, the CEO about what he learned from the experience, he said he had wished he had started working with AngelList earlier.

Whens the best time? Others may disagree, but Id suggest getting your application in when your round is anywhere from 20% to 40% subscribed. With that head start, it should attract interest pretty quickly. If you get oversubscribed, thats a good problem to have.

6. Before launching on AL, mentally assemble your dream team of investors

If you cant dream it, you cant build it. Your ideal team may be 100% angels, you may wish to have some local micro-VC or it might be as simple as a pair of massive VCs and an industry insider. But rRegardless, the majority of investors should already have complementary holdings in your sector.

More importantly, assess what elements you need besides money, because the AL membership has their tentacles everywhere. Knowing what you need but dont yet have not only helps you get it, but it also sends a strong positive signal to angels that you understand your needs. Approaching investors who clearly dont invest in your sector is the telltale sign of a rookie.

7. Research the network, and target your angels

You can use filters to look for angels who have invested in your sector or in complementary companies. I invested in HealthRally because its CEO did just that and found me. While I don't always monitor the AngelList feed (just as you might not stay current with Facebook traffic or a Twitter stream), I got a very targeted letter from Zach Lynch, the CEO of HealthRally. He noted my investment in GreenGoose and other health tech firms, and then made the connection that one of the other GreenGoose co-investors, Esther Dyson, also had committed to HealthRally. Besides showing excellent progress to date on a shoestring budget, Zach demonstrated to me the type of targeted, "rifle not shotgun" marketing discipline that his company will need to land a few strategic partners and megaclients.

8. Get Personalized Intros

Ask all of the angels who are backing you to endorse you to their own followers. If they are not already on AngelList, ask them to sign on and do so. Helping syndicate a round is what angels do, and AL has found that personalized intros from an AL investor get opened far more than a generic profile. This is the original angel skill, (after all, Howard Lindzon calls his fund "Social Leverage" for a reason,) but now it's so simple it can be done to all of an investors AL followers with one mouse click. Using the Rentabilities example, Dharmesh has many people watching his recommendations, and when he gave the company a thumbs up, more than 100 people followed the company, and over 30 asked for introductions. Clout (and Klout) matters.

9. Spend a few calories (and maybe dollars) a good name.

For many of you, AngelList might be one of the biggest initial exposures your startup will have. And, theyre some very powerful people. Its worth spending a little bit of time and energy getting it right (it gets harder to change it later). This is particularly true if you have a consumer (B2C) startup. I guarantee you that folks like Jason Calacanis care a lot about your brand and domain name. I do too. Here are some quick tips on naming a startup. Dont obsess over the name, but its worth investing a little time on this.

10. A video is worth 1,000 slides

No one can tell your story better than you. Make a short killer, video and include it in your profile. I made my first AngelList investment in UpNext after I saw the link to the companys interview on Untethered.tv. If you can, include one. Especially if it can showcase a quick demo.

11. Get your website right first

This should be obvious. Even if you just have a well-done landing page with a good design and a good URL name, it's a plus. Every angel is going to click through, and most won't go further if your website sucks.

12. Remember Inbound Marketing, baby!

Yeah, I know that going through AngelList qualifies as traditional outbound marketing, but sophisticated angels will check on their own to assess your knowledge of the basics. Do you show up in Google search results at all? Do you have mentions in social media? Do you own the company name on twitter and have you tweeted recently? Do you have followers? Do you have an engaging blog that tells your story and has a point of view? Have you checked out your traffic graph on Compete.com and made sure its pointing in the right direction? Face it: AngelList exists because of the Net. You may be able to get away with a sloppy web presence and strategy at a traditional angel group presentation, but that won't fly with the AngelList crowd.

13. Advisors are huge.

Social proof is hugely important in Angel List. I invested through AngelList in Saygent. Why? Not only did I like the schtick, I really liked that they had sought out and won Sid Viswanathan (co-founder of CardMunch and a master at using Mechanical Turk) as an advisor. Currently Im doing due diligence on a company which landed Jason Calacanis as an advisor. Having an advisor like Jason, who is an indefatigable promoter of his portfolio companies (via his interests in the Launch Conference, Open Angel Forum, and This Week in Startups, he sees a TON of companies), shows instant credibility and is a harbinger of future success.

14. Clearly list your price

If you haven't figured out what you want to raise at what valuation, do so now. If you're going to raise convertible debt (although I'm personally not a fan,) say what your cap is going to be. There's no upside in wasting both your time and that of the investor if you're asking a price where the investor is unwilling to go. If you're unsure and you haven't already figured this out with the anchor investor, the AL team can help point to some comparables. Speaking of comparables, if this is your first startup and you're a rookie, try not to over-reach with respect to terms. Just because everyone you talked to so far thinks you are brilliant and your idea is spectacular, don't push for a really high cap on your convertible note. Going from a $4 million cap to a $8 million cap might seem like a 100% increase in valuation, but the math doesn't work that way. Such a move might decrease the number of investors interested in your deal.

15. Use a standard termsheet

Resist the temptation to introduce clever, non-standard terms into the termsheet — even if you think you can get away with them. Two reasons for this: 1) You'll come off as naive or greedy. 2) Even if you somehow manage to sneak these in now, you'll have issues when you need to do your next round. Save your creativity for your product and keep your termsheet clean. If you need an example, you could do worse than the standard financing docs that Y Combinator provides. But, there are others. Ask around.

16. Be ready to pitch on short notice via videoconferencing

This could be via Skype, Gmail video chat, Go2meeting, etc. But you should have perfected all of the logistics and have accounts and slide share materials ready on quick notice. With investors no longer being local, you need to find ways to let them see you and your pitch. Insider secret: Some investors have found a strong pattern that suggests entrepreneurs that respond to late night emails quickly have an edge over those that don't. Lets save the “but work-life balance is important” debate for another article. Meanwhile, you better be working your butt off.

16. Think one round ahead.

Listing on AL now will give you a giant head-start on your next round, as investors who aren't ready for this round may step up for next round. As Mark Suster says, VCs invest in lines, not in dots. Establish the connection for the next round now, and rethink if there are others you may wish to add to your initial target list.

17. Use the AngelList team

Who is more wired in than Nivi and Naval? Who's seen more pitches and knows what works? Once they accept you, get their advice and give it great weight.

18. Know how investors will use AngelList

Here's a similar list of techniques investors use that work especially well via AngelList.

19. Get your backers to register on AL

You want them to comment on you and endorse you. Any angel should volunteer to do this for the good of the company, and they get to build their brand too.

20. Don't game the system

You're smart and love to hustle. We get that. You should do all manner of hustling to make sure your startup gets the visibility it needs. But, don't abuse the community or take advantage of it. It's a shared resource. Just like you, there are many other entrepreneurs looking to connect with great investors on AngelList. Many of them are just as deserving. It's fine to stand-out, but make sure you are adding value to the group, not taking away from it.

21. The best thing you can do is get traction

You should invest time in your fundraising process — it's important. The basics don't take that long. But, don't get too obsessed. Your primary goal is to build a business not build this phenomenal profile and network on Angel List. The most helpful thing you can do to get the right angels on board is to make measurable, meaningful progress with your business.

I'm sure a few of you that are already in the Angel List process are likely reading this.  What other tips would you like to share with the community?  What questions do you have that haven't quite been answered yet?  



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Building A Startup Marketing Plan: Tips In 3 Words

Posted by Dharmesh Shah on Thu, Sep 09, 2010



The following is a guest post by Ilya Mirman. Ilya has spent the past decade running marketing for software vendors including SolidWorks, Interactive Supercomputing (acquired by Microsoft) and Cilk Arts (acquired by Intel).

I recently published an e-Book, “Building the Marketing Plan: A Blueprint for Startups”  Summarized in it are some considerations – with respect to messaging, infrastructure, demand generation, process, budgets and timelines –  that I’ve found useful across a bunch of markets and companies.  [I was amused that in a couple days, it generated more leads for HubSpot – thousands – than I generated in the first year of each of my two startups.  A lesson for me in market timing and reach.  :)  Build Plan OnStartups  ]  

In the spirit of Dharmesh’s “Startup Triplets: Startup Advice In Exactly 3 Words”, here are some of the take-aways from the e-Book.

1. Nail messaging early
2. Understand your traffic
3. Engineer your marketing
4. Know what converts
5. Map sales process
6. Experiment early, often
7. Eat your dogfood
8. Avoid PPC heroin
9. Free tools rule
10. Talk to prospects

What tips and thoughts do you have on building a marketing plan?  What has worked for you?



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20 Wrenches In The Software Startup Machinery

Posted by Dharmesh Shah on Sat, Jun 28, 2008



The following is a guest post.

I have had the misfortune of personally making every one of these mistakes during my years as a software entrepreneur.  I am currently reviewing a startup that seems to be trying really, really hard to make all of them in one go.  As a result, I decided to put this list together in the hopes of saving as many startups as possible from crashing in to the rocks of false hope and misguided thinking.

20 Ways To Put A Monkey-Wrench In Your Machinery

1.       You think that your product must be awesome because your buddies are telling you it is the greatest thing since sliced bread.  Unless they are willing to hand over cold cash to use your product, they are just being nice.

2.        You are finding that your product is so versatile it could solve just about any problem.  This is a clear sign you don't have anything worthwhile.  

Dharmesh:  This is one of the most insidious problems in software startups.  As developers, we tend to like dealing in higher abstractions.  Writing a simple business application is boring.  But, writing a framework that lets others auto-generate a business application (or any application!) is fun and challenging.  For startups, it is usually unwise to try and build a framework or platform as your flagship offering.  Most people use apps not platforms. 

3.       You have found a client, but in your euphoria you have forgotten to ask yourself if this client is an anomaly.  You need to make sure that the client represents a real market, otherwise you are just building a custom solution.

Dharmesh:  This is what I would call the "you can't build a software company one custom implementation at a time".  It's fine to find big clients that have big problems they're willing to spend some money for.  This is an easy to way to get started and some cash in the door.  However, it's imperative to look for the patterns in the customer's needs and be thinking about future customers.  If you have multiple sets of code running for multiple customers, you're going to be in trouble.

4.       You keep coming up with ideas for all the many different ways you can make money with your product.  You can sell it to Google, ISV's can include it in their products, Adobe for sure will be interested.  If you are not focused on something specific, you are dead.

5.       You choose to work with verticals that don't have a lot of money.  Sure they like your product, but they can't afford to pay you enough for it, so why focus on them?

6.        You choose to work with a small client first instead of one that will be able to help you get more clients later on.  Just because Joe's Fish & Chips is using your product doesn't mean Motorola will be impressed enough to try it.

Dharmesh:  Closing on some smaller clients early isn't particularly a bad thing (in fact, you might be targeting the small business market).  As long as you can find some repeatable pattern so you can build software for many people (and sell it to many people), you're probably ok.

7.        You think you can't work with a "real" client early on because it's too risky.  But you aren't selling them the product - you are selling them the idea of the product.   If you can't sell them the idea, you are never going to be able to sell them the product.

8.       You start building the product before you have a (real) client identified.  Again, if you can't sell the idea, you are definitely not going to be able to sell the product.

9.        You think you can't sell the idea until you have a product.  This is a major killer - you think that as soon as you have feature X or Y, you can start showing people your idea. One more time - if you can't sell the idea, you can't sell the product.

Dharmesh:  I agree.  Reminds me of  "Stealth Mode, Schmealth Mode" posted earlier.

10.    You don't want to stop or throttle development when you aren't really sure you are on the right track.  You just want to keep on going, because you just know that soon the product will be so awesome that it will dazzle everyone with its brilliance.   If people aren't buying the idea, you better stop wasting money now until you have figured things out.

11.   You think that just because your product can solve a generic problem like "collaboration", you have a sure-fire winner.  You have to ask yourself how your product really stacks up against the competition that is already out there and why people would buy yours, and if they would, for how much.  Often, the current solution being used is simply good enough, and even if yours is significantly better, no one is going to buy it.

12.   You underestimate the power of a penny over free.  If something is free and barely does what you need, you will stick with it versus something that's much better but requires you to pull out your credit card.

13.    You think that just because someone says they would definitely use your product that they actually would use it - or that they would pay to use it.  Talk is cheap.

14.    You think that just because people say they would pay for your product (and actually mean it), they would pay enough to keep you off food stamps.

15.   You think that just because there is a company making money in your field, there must be a lucrative market that you too can take advantage of.  But there may not be room for more than one successful product in this particular area.  And the incumbent has a much better chance than you do of succeeding.

16.   You think it's not a big deal for a user to create yet another login to use your product.  But it is.  This is like the penny versus free.  They have to have a really good reason.

17.   You think because your product integrates nicely with a bigger product, you're golden.  But you forget that there is inside-out and outside-in integration.  If I am in Google and there is a tool (like a gadget) that I can easily access (i.e. I don't need another login and password), I am much more willing to try it than if I have to go to another site, sign up, sign in, and then get to my Google application from there.  So if you are going to integrate with an application your target market is already using, it must be inside-out integration, not outside-in.  Facebook applications are a good example of inside-out integration.

18.    You think you can get users to pay a reasonable monthly subscription fee, but you forget that you need a LOT of $19/month subscriptions to make real money.  Do you really understand how many subscriptions you need, and how realistic is it that you are going to get there?

19.    You think that you need to offer an onsite solution to go along with your SaaS solution, but you forget the huge costs involved in supporting on-site software.  Besides, if think your market is both an on-site corporate solution and also a SaaS-based consumer application, chances are one of those assumptions is wrong.

20.   You think you have come this far, you can't possibly stop now.  It's like you are swimming across the lake, and you are more than halfway there.  So you just keep on going, but the shore keeps receding into the distance…

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If you have your own list of "signs of trouble" in a software startup, please leave a comment.  Or, if you've got a great article that you think will help software entrepreneurs, email me to discuss making a guest submission to OnStartups.com. 



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