This Hosted Life

I recently gave at talk at StartPad.org chronicling some of our successes and lessons learned — dare I call them mistakes:) — from my time as co-founder and CTO at Faves.com.  The lessons I shared were:

• Find and/or develop a product lifecycle checklist to keep you grounded and to know where you need help.
• Understand your business drivers.
• Understand (and choose wisely) your target market.
• Refine your positioning until it is a) crisp and b) reinforces what you are best at.
• Segment your user base, and potentially address each segment uniquely.
• With respect to technology, design things in a way that minimizes your “maintenance tax”.

John Cook of TechFlash (as well as some of the commenters) summarized the talk very nicely.

Note: Faves.com is up and running, and it is the company’s plan to keep it that way for the forseeable future.

If you are a Product Manager and/or a startup founder, you undoubtedly have solid instincts about your target market.  But, if you are like myself, you have probably experienced times where it is unclear exactly what to do next.  To that end, I have found the following resources helpful over the years:

• Everything on http://pragmaticmarketing.com.  But, the following are especially worth checking out:
  • The Strategic Role of Product Management - The focus of the free eBook is “how a market-driven focus leads companies to build products people want to buy“.  The chart on page 3 provides a great checklist of strategic and tactical tasks to help achieve this objective.  More broadly, the four keys areas are:
    1. Defining the strategy with a business case and product roadmap
    2. Enabling the technology team with a requirements document
    3. Enabling marketing communications with a positioning statement
    4. Enabling the Salesforce with a sales strategy
  • Archived Webinars
• The Product Manager’s Handbook, especially Chapter 7 that talks about the New Product Project.  It lists specific techniques applicable to both the strategic and technology product management areas.
• The McKinsey Way, especially Chapter 1 that talks about the “Mutually Exclusive, Collectively Exhaustive” method of enumerating all potential solutions to a problem.  This technique is useful across all four of the product management areas.
• A positioning expert who, as an unbiased third-party, can walk you through a process towards identifying:
  • What are the highest value scenarios to your target market?
  • Are these scenarios ones that your users need to accomplish *right now*?
  • Have you identified scenarios where your product is the only, first, best, and/or most used way to accomplish something?
• A weekly post-mortem or case study, preferably with a group!  My favorites:
  • LinkedIn case study by HBS
  • ClayValet in hindsight

I am part of a group of technology entrepreneurs and managers where we periodically discuss case studies.  Of all of them, the LinkedIn study especially stands out in my mind.  Why?

• It gets at the essence of what all ventures (especially start-ups) need to deeply understand:
  • Segmentation: Who are my customers?
  • Positioning: Why do they care about me?
  • Monetization: Do they care enough about me to pay me?
• It shows the importance of addressing the above questions periodically.  In fact, the case study profiles LinkedIn two years into their existence (mid-2005) when they already had over 4.5M members but insufficient revenues.

The segments that LinkedIn ultimately identified were

• Relationship Managers - 90% of the user base who mostly keep up with people they know
• Networkers - 5% of the user base who indiscriminately build relationships and often serve as intermediaries
• Contactors - 5% of the user base who are recruiters, sales, business development folks

LinkedIn used this discovery to update their freemium model.  While Relationship Managers represented the majority of the user base, it was unclear if they would pay for premium services.  But, this large self-qualified 4M user base was an attractive target to the Contactors and unique to LinkedIn.  This motivated LinkedIn to introduce the successful paid service, InMail, which lets Contactors reach the LinkedIn user base:

Have you performed a similar exercise in your company recently?  When I relate this LinkedIn study to various points in the history of Faves.com and exploit the benefit of 20/20 hindsight, certainly a few things emerge that I would have done differently.  But, that’s for another post:)

I recently gave the following talk to the Chinese Institute of Engineers on the Microsoft campus.  The talk is an introduction to Search Engine Marketing (SEM), focusing on Search Advertising and Search Engine Optimization. I also explain the search business model and ranking algorithm to the extent that is needed to effectively implement SEM.

Much of the detail comes from my experience at Faves.com, where we were able to achieve over one million visits originating via organic search each month.

As a side note, the audience was great — asking lots of questions and validating the broad applicability of SEM to a variety of businesses.  Enjoy!

I remember being asked this — with the implication that we should strive to be a “must-have” — when we were doing our initial fundraising round for Blue Dot (now Faves.com).  At first, I thought the distinction between a “must-have” and a “nice-to-have” is somewhat arbitrary.  But, scoping the question to “Are you a “must-have” for a paying customer or would be acquirer?” has helped me get my head around it.

If you are building a straight B2B product, your customers’ ultimate goal is to increase profits.  So, a “must-have” is something that helps your customers either cut costs or increase revenues.  The more convincingly you meet this definition of “must-have”, the easier the sales pitch.  Match this approach with someone in your organization who deeply understands and has relationships with your target customer segment, and you have a reasonable shot at success.

What if you’re a B2C company?  Unfortunately, it is harder to identify what it means to be a “must-have” for a consumer.  As I learned in the most recent StartPad talk, many VCs will not fund a consumer Web company unless it is attracting 3 million visitors a month.  Yikes!  These VCs realize it is difficult, if not impossible, to predict what will and will not stick with a mass market audience.

What can you do?  One approach is to stay laser focused on the B2C opportunity, employing trial-and-error, innovative product development, and/or creative marketing (e.g. Facebook, MySpace) to cross the 3 million visitor mark.  The thinking is that a) 3M is enough penetration to make money even on low performing ads and b) you have crossed the chasm and empirically demonstrated you are a “must-have”.

An additional approach is to employ a B2B, and hence “increase profits for the customer”, angle in your B2C business.  Consider the consumer Web site example again.  This is in fact a two-sided market, in which the B2B side is the relationship between your company and the advertiser.  Design your site to offer a high ROI for advertisers, and you become a “must-have” for them.  They will pay you a higher-than-average amount for your pageviews, ultimately reducing the number of pageviews you need to reach positive cash flow.  A good example of such a site is a travel search engine, since a) the site visitor is making a purchase *now* and b) the dollar amount of the transaction is high.

Taking this one step further: by successfully creating such a revenue engine, you become interesting to other businesses.  You can then strike distribution deals with high traffic sites in exchange for access to your “must-have” revenue engine, and so on…

Disclaimer: I am not a lawyer, and I cannot be held responsible for accuracy of the information below. Use at your own risk.

I recently attended a talk by Craig Sherman of Wilson Sonsini Goodrich & Rosati about Corporate Structure and Common Problems.  The event was organized by StartPad, an excellent Seattle-based entrepreneurial organization through which we rent our office space and hence get the opportunity to intermingle with and work alongside other startups.

The talk was great!  I won’t summarize the entire thing, since you can find the deck and video here.  But, I did come away with two high-level points that are arguably applicable even beyond corporate structures:

Keep things “standard”

Your time is at a premium.  You likely want to use that time to innovate in how you serve your customers or how you make money and not in constructing complicated corporate structures.  If you keep things standard, you can use your lawyer’s document templates with minimal changes.  If not, you will be spending time and money on customized documents.  Further, keeping things standard removes a source of potential friction and/or extra due diligence time when you are raising money.

As an example, consider an S-Corporation structure over an LLC structure if you are planning on raising money.  An S-Corporation is less flexible.  But, as a result, it is more of a known quantity.

Hope for the best, but also plan for the worst

The reality is that many startups fail.  Even those that succeed have hiccups along the way.

As an example, consider vesting founder shares.  This way, if a founder leaves, you have a) enough “room” in your capitalization table to find a replacement, and b) you can still raise money because investors are less likely to feel that they are overcompensating a departed founder.  Vesting is something you should consider up front, since readjusting the capitalization table later in the process can have significant tax consequences.

I recently started using Blueprint, a CSS framework “which aims to cut down on your CSS development time”, for a Web development project. I have found I can whip up a nicely laid out site that works across all browsers *much* faster with Blueprint than I could without it. As a result, I spend more time on creating business value and less time dealing with the many obscure bugs in Internet Explorer 6.

Having said that, I’ve had the opposite experience with other frameworks. This got me thinking, “What makes a good framework?”

Note: In the below examples, I compare Blueprint with Microsoft’s ASP.Net. Admittedly, this is sort of an apples-to-oranges comparison: ASP.Net is for server-side Web development whereas Blueprint is for client-side Web development. Nonetheless, they are two frameworks I am actively using and hence enable me to give personal examples.

Note 2: Even though I seem to suggest otherwise below, much of ASP.Net is great. In fact, we use it to power Faves.com. We just stay away from the parts of the framework that violate the following criteria.

With that out of the way, I think a good framework is one that ultimately saves time and/or cuts costs in meeting business objectives because it

• Avoids reinventing the wheel: This is arguably *the* point of choosing a framework instead of coding something directly. For example, the Blueprint framework gives me the following that I would otherwise have to create myself:
  
  • An easily customizable grid
  • Sensible typography
  • Relative font-sizes everywhere
  • A typographic baseline
  • Perfected CSS reset
  • A stylesheet for printing
    
    
• Still lets me do things the “raw” way: All frameworks have their limitations, and I often have to revert to doing something outside the framework. When using Blueprint on a page, I can still mix in my own non-Blueprint CSS styling and layout. On the other hand, if I want to use some of my favorite ASP.Net controls on a page, I am forced to adopt the ASP.Net Web Forms model and its associated evils for the entire page.
  
  
• Takes less time to learn than how much it will ultimately save: Blueprint *is* a subset of XHTML and CSS. ASP.Net, in an effort to make things easy for the novice user, actually makes me understand a completely different model. Ironically, this can make things more difficult for the seasoned developer.
  
  
• Creates consistency across the team: Implicit in using Blueprint is a set of naming conventions. This makes it much easier for a team of developers (or if using a Blueprint with a CMS, the content creators) to specify and read each others’ layouts.
  
  
• Follows best practices: The framework should deliver as is “generally expected”. For example, there are a number of SEO best practices for having your site properly indexed by search engines. But, ASP.Net violates a number of these, including this one. I need to find creative ways to work around each violation, costing me time and money. Ideally, best practices compliance is just included.
  
  
• Lets me view the source code: There are times I need to know what exactly the framework is doing in order to diagnose or prevent bugs.
  
  
• Is high performance: Slow performance is an issue if it *meaningfully* degrades the customer experience or *meaningfully* increases server and support costs as compared to how much time and money I am saving by using the framework.

Disclaimer: I am not a lawyer, and I cannot be held responsible for accuracy of the information below. Use at your own risk.

I get asked from a lot of folks who are considering startup employment if x% is sufficient equity. As with so many things, the answer is, “it depends”. Below is one rough framework for coming to a number. But, you should also seek other methodologies, such as finding averages for comparable roles at similarly sized companies in the same geographic region.

Initial questions

1. How much cash compensation will you be giving up by working at the startup instead of at Large Company? As this number gets higher, your equity compensation becomes more important.
2. What do you think the likelihood is that the company will have a liquidation event (e.g. being sold to Microsoft) before your options expire? Note: Stock options often expire as a result of termination of employment.

If your answer to 1 is a high number *and* your answer to 2 is a low number, then think hard about passing Go.

Note: One thing I have not considered in this post is that the acquiring company (if your company is acquired) will often offer lucrative compensation plans to retain the top employees.

Next step: the math

To *roughly* determine your cash payout on liquidation:

Payout = (company value at liquidation - company value represented by option strike price) * ownership percentage * dilution

Then, to *roughly* value your yearly compensation (Note: You should discount future cash payments, but we’ll leave that out for simplicity):

Comp = salary + bonus + (Payout / number of years to payout)

Note the importance of the company value represented by option strike price in the above equations. If the company value at liquidation is not at least the same, you will receive no payout from your options.

An example

• Marc’s strike price reflects a $1M valuation.
• The company sells for $40M after 3 years. Marc is still working there, and his options have not expired.
• Marc’s option package represents 0.5% of the company, but he is only 3/4 vested.
• There has been an investment round that diluted everybody’s ownership by 30%
• So, we get:
  • Payout = ($40M - $1M) * (.75)(0.005) * (1 - 0.3) = $102,375
  • Yearly Comp = $85,000 + $10,000 + $102,375 / 3 = $129,125
• Marc thinks this 3-year compensation package is better than he will get at Large Company, and he looks forward to the learning experience, so he takes the job!

In the past month or so, I’ve spent some time with two content management systems: Drupal and Wordpress. Both products make it easy to build and edit relatively sophisticated Web sites from within the browser.

However, only Wordpress gave me that “Aha! moment” you get when a product so seamlessly fits your functional needs and is fun-to-use at the same time. In fairness to Drupal, this is not particuarly surprising since:

• Wordpress is designed for a more specific scenario. In Wordpress, you have Blog Posts and Pages. In Drupal, you have a very abstract concept of a Node. While an instance of a Node can be a Blog Post or a Page, it can also be many other things.
• Wordpress comes pre-packaged with the plugins that meet this scenario. While both products have a robust plugin architecture, Wordpress is good to go out-of-the-box whereas Drupal requires you to install modules (once you figure out what they are) to have a system comparable to Wordpress.

Anyways, the takeaway should *not* be that Drupal sucks. On the contrary, it powers some of the largest sites on the Web, including FastCompany.com. The takeaway here is that there is an opportunity to turn Drupal’s “weakness” into a strength, by leveraging the generic architecture and wide availability of plugins to create Drupal distributions for specific customer scenarios and segments.

One such customer segment is non-profit and volunteer organizations. As an example, I am a fan of Seattle Works‘ Web site. The event planning features of the site are arguably what make the organization so active. For another time, I’d like to see a) if there already is a hosted Drupal distribution that serves this segment as *well* as the Seattle Works site does for its members and b) if not, what it would take to create one.

I am currently reading Scott Berkun’s excellent book on project management, Making Things Happen and am enjoying it for it’s directness. It goes straight to the essence of being an effective project manager and leaves specific methodologies to other books.

His How to figure out what to do chapter is a good refresher, stating that the best project managers are multidisciplinary and able to synthesize business, customer, and technology viewpoints:

To me, this Venn diagram is *the* measuring stick for project-oriented settings, even when you are not the project manager:

• When you’re looking for a job: Is the organization setup for success, with strong representation in all three areas?
• When you’re writing a business plan: Does the plan adequately cover all three areas?  Or more specifically, does it answer the questions that should be asked of each of the three areas?
• When you’re building a project team: Have you allocated sufficient headcount in each of the three areas?
• When you’re a programmer at Microsoft (in an ideal world): Are you making engineering decisions with the key business drivers and customer needs & pain points in mind?

Later on in the chapter, he dives into the customer research component, describing how it is often incomplete or outright invalid — with folks ascribing too much importance to a single research method. Customer research experts make use of multiple methods, including focus groups, surveys, site visits, usability studies, and market research to make up for the limitiations in each individual method.

The entire chapter, containing an analysis of each research method, is available online for free [pdf].