I spent an hour today reading a report by blackbox for the Startup Genome project, which seeks to identify the “genes” of entrepeneurs and startups. If you have never heard of them, I strongly encourage you to check them out at startupgenome.cc, especially if you’re thinking of diving into…
Market Validation. So here come the jumping off point. This is the scarey part. This is my hurdle. I break free of the introvert part of my personality and get out and talk to customers. I have done my due dillegence in the office, sending out some surverys and talking to other entrepreneurs,…no problem. Customers, however, the thought of them saying no, is enough to stall me out. Starting next week though, I am heading out into the cold world of knocking on doors, and making phone calls to set up appts. I need validation for my product before I go any further. The website developmet is coming along. I have enough functional screenshots to show prospective customers, and to tell them about the product. But the real goal will be to listen to, chime into all the things they are not saying to me, and get to the bottom. Is this my customer and are you ready to part with your recession earned cash for my product. Are you an early adopter? Are you one that will jump on board later, once the concept has evolved and taken hold? I need to develop a fan club of sorts…hard core fans of my product. This blog just acted as a bit of therapy. I just took a deep breath and I now feel a little bit inspired to make those calls.
Steve Blank’s blog is awesome but its latest post is very well timed for me: it talks about customer validation. Customer discovery is understanding who has problems that you can solve. But customer validation confirms that these are problems that people could and would pay to solve them. Blank’s four golden questions are:
- Did the customers know they had a problem?
- If so, did they want to change the way they were doing things to solve that problem?
- If so, how much would they pay to solve the problem?
- Would they write us a Purchase Order now before our supercomputer was even complete, to be the first to solve their problems?
These are all questions I asked when considering the lead customers for my start-up, but I did so accidentally. Furthermore, only in retrospect is it clear to me the time I would have saved if I had asked these four questions to all the hospitals we approached. I had also felt irritated when talking to investors who wanted to talk to my early customers. But on reading Blank’s blog post I now understand that they wanted to ask questions like these, and that this was a valuable thing for all of us.
It has begun. I have (gulp) hired an overseas web developer to help me flush out the beta version of my website. We had our initial meet/greet/discussion last night and I just reviewed my first wireframe this morning. So how did I get here?
I had tried to bring on the ever-diffficult-to-find “technical co-founder”. seems people I met were not that technical, they couldnt produce. Granted I learned a lot from them, they turned out to be technical advisors, not somebody who will sit in front of the computer and produce something.
I need production. I need my ideas created. I was afraid of the cost of developing my ideas, and I had tried using joomla and third party extentions…I made some progress, but without a technical background, it would have taken me another few months to create something I would probably only be moderately excited about (at best). When I go to demostrate this site to my customers, do I want to be moderately excited? that would be a hard sell for me.
So I posted my needs on www.elance.com and started to recieving bids. I discussed options with each of the contractors. I kept revising and dialing in my needs as I learned more. I ended up having to re-post the job, as my needs changed. I got a new batch of contractors to discuss things with and I eventually settled on one.
The price is competitive. Won’t go into details on that, but, I am getting more than I thought possible, without giving up equity to a non-producing technical advisor/co-founder. That is one of my goals, take this thing as far as I can without investor help.
The contractor is doing a great job walking me through the process. We had graphic user interface forms to fill out where I share my ideas, inspirations and vision. They asked pointed questions. A couple hours later they produced a wireframe. I commented etc. These guys are really professional. Off to a good start.
•HOWTO: Spend your investors’ money Posted on Sunday, May 8th, 2011 at 3:24 pm in investing, startups I’ve invested in two startups and advise, officially and unofficially, a dozen or so other startups. Recently, a company that I’m involved with, attachments.me, raised $500,000 from Foundry Group. Since their raise, the two cofounders, Ben and Jesse, have been on a tear adding features, solidifying the infrastructure, and ramping things up to a public beta. Attachments.me is a unique consumer service in that a single user could have gigabytes of data to crawl across multiple accounts. As a result of this unique challenge, Ben has been spending a great deal of time working out how the underlying infrastructure is going to scale. This, of course, involves spinning up a decent amount of servers on AWS. In doing so, Ben was extremely worried about keeping costs down. I had to laugh as the numbers he was worrying about was less than 1% of the total amount raised or, as Chris Lea said, “Your investors didn’t give you the money so you could look at the large balance in your bank account.” But, it’s a good question, and I get asked it often. How should you spend all that money your investors just gave you? How should you spend that 15% employee option pool? So I set up a Google Form and asked a dozen or so of my favorite investors what they thought. I got six responses from four seed stage investors and two Series A investors. Here’s what they had to say… ◦If you took total monthly burn and divided it by total number of employees, how much would you expect the per-employee burn be? The average response was $12,000 per employee with the majority saying $15,000 was expected. This means if you have 10 employees you should be comfortable with a total monthly burn of between $120,000 and $150,000 per month.◦What percent of a given round of funding do you expect will be spent on personnel? The average response was 73% of the total round with the majority saying 80% This would indicate that my friends at attachments.me should feel comfortable spending $400,000 on building out the team.◦What percent of a given round of funding do you expect will be spent on servers and infrastructure? The average response was 18% with the vast majority saying they expect a company to spend 15% of their total raise on servers and infrastructure. If you’re burning $150,000 a month, you should try to keep your AWS bills below $22,500 per month.◦How much should rent be, roughly, per employee per month? The average response was $666 with the vast majority of investors saying $500. So a team of 10 shouldn’t be spending more than $5000/mo. on rent.◦How much equity, on average, should early engineers get? Two investors recommended less than 0.5%, which seems extremely low for your first couple of engineers. One said 1.5% to 3%, which I think is fair for your first engineer, but on the high end for your third and fourth engineers. The other three said 0.5% to 1.5%, which seems to be the universal standard when I talk about this topic with other founders in Silicon Valley.◦How much equity, on average, should an early executive hire get? The consensus, with four investors agreeing, was between 2% and 5% The other two investors thought 1% to 2% was appropriate. My personal recommendation, pre-Series A, would be 1% for a Director, 2-3% for VPs, and 6-9% for CEOs. This, of course, depends greatly on salary and other benefits offered. What I tell people is that I have two dials: salary and equity. Dial one up and the other gets dialed down.◦How much, if any, of a premium would you expect there to be on burn for SaaS and PaaS companies? One investor said there should be no premium, one said 10%, one said 30%, and three said 20% The 20% number resonates with me as that’s about the premium SimpleGeo has spent on our per-employee burn. In other words, if an investor expects you to spend $15,000 per employee per month, they most likely will be okay with a platform company spending $18,000 per employee per month in total burn. The thinking here is that SaaS/PaaS companies require more infrastructure, better/higher quality infrastructure, more bandwidth, and more senior/seasoned engineers.These are, of course, rules of thumb, but it should give you a good feeling of where you and your company stands. Your investors put money into your company under the expectation that it’s going to be spent so you shouldn’t feel bad about spending that money. UPDATE: A lot of people have questioned the $12,000 per month, per employee number. Keep in mind that’s 100% of all burn for the entire company and not just their salary. This includes server costs, travel, rent, office supplies, etc. On average, an engineer in Silicon Valley will have a base salary of $100,000 a year. Add roughly 20% for benefits (healthcare, vacation, payroll taxes, etc.), $3k every two years for hardware, rent ($500/mo.), etc. and you’re at $10,800 per month just to pay for them to walk in the door. I doubt it’s too hard to imagine spending $1,200 per employee on travel, servers, office supplies, etc.
Just a checkin to remind myself and whoever catches this post to network. Get away from the computer and go talk to people. I learn and get inspired by talking to smart people with similar interest. There are three groups (probably even more that I havent learned about yet) in my hometown. Catalyst for Thought. 805 Startups, and StartupSB. These groups have mixers and fast pitch sessions all the time. Somoe are more formal, (coat and tie) where others are just casual with beers. It is a good place to bounce ideas, collaborate, stretch your mind, find help and mentors etc. Each time I go to one of these events, I come away uber-inspired about my own project. My mind is spinning for days digesting all of the new ideas I hear about. There are usually a few people whom I always follow up with. I shoot them over an email and a linkedin invite.
For those of you in Ventura and Santa Barbara, check out
I have been thinking about my path of entrepreneurship. In an attempt to analyze mistakes made so I can learn and move forward with experience. Over the years, I have had numerous ideas, and spent countless hours trying to develop each one. It is funny when you can reflect back (hindsight 20/20) and analyze the inherent problems with the business model, or lack thereof. The story I will tell today, goes back 15 years to when I was in Grad School. The startup that I was involved in, worked to develop a computer controlled clutch mechanism that was going to measure the slight differences in drag on a swimmer moving through the water. I came into the business with friends that shared a passion for swimming and water polo. It was an idea, formed out of for love of the sport, and a specific need, to help olympic level swimmers get better my measuring the forces on the body as they move through stationary water. However, what this “product” lacked was a market. Once ankle/knee deep, we ran into funding issues. We realized that we needed either grants from the USOC or some cash from a private investor with a passion for seeing swimmers better their results. This was a hard sell. What was the ROI? Regarding the product, we may have been able to build one at a time, and the software and specialized hardware would have needed to be sold in excess of 100K. How many of these units would we need to sell in order to take a salary, actually run a business? How many swim programs have a 100K to spend on top level research? Outside of a few olympic/national programs and maybe some top US colleges….not many. Could this business model have been sold as a service? Could we have sent high-tech swim coaches out to spend time with athletes on an hourly/weekly basis? The travel expenses would have been really high! Could we set up this swim consultation for a few hundred dollars per hour? What would it take to break even? let alone make a profit? After spending hours wiring chips to stepper motors and programming some rudimentery software to control it, the idea fell of into an abyss. I dont not wonder why. It is quite obvious that this idea was technically solid, and the information it produced would be extremely valuable to the swimmers/coaches that used it. However, without a real analysis of understanding the paying customer, there was absolutely no way to get this idea funded/built.
Another thing that is evolving while we are working on determining the minimal viable product is putting together an advisory board. As I read various blogs about the subject
I thought about what the company needs are, and what the reasons for bringing somebody on. The words that reoccur in the blogs suggest that the advisors are supposed to bring expertise and traction, but more than often bring only dead weight if not choosen wisely. My co-founder and I have put together a short list of candidates and will periodically update it. My mind has started imagining what characteristics the “perfect” advisor would have. Do we need to shape our advisors to balance our lack of product engineering and programming? or find somebody who has experience with expanding sales channels? or do we need an inspirational leader/teacher who has faith in the vision? What about ties to funding? Could this advisor have an extra $500K burning a hole is his pocket? What about a deep rollodex to a legit tech hub like silicon valley?
I had a meeting with KA this last week and we focused the entire discussion on product. We talked about minimal product and then considered the evolution of that into the complete product. While the initial vision I have for this company/startup/product is much closer to the complete product, we need to put that aside for now and focus on scaling back. Why? Well, the full product would take hundreds of thousands of dollars and a huge team of engineers to create. The “build it and they will come” concept of product development and customer accumulation is destined to fail. We need to mitigate risk, we need to get out of the gate without spending a boatload of money we don’t have. That is why we are spending our intital energy into creating the minimum product; easy to build, cheaper to fund, and less risk of resources (time and money) going down the wrong path. My challenge to myself….If I can’t sell this minimal product to customers, we seriously need to rethink this whole concept. We need to use this simple, stripped-down, essential idea to engage and learn from our future customers. So where did we start? We outlined product features on a white board and circled the top 1 or 2 features that would solve the big picture problem of our initial customers. The other remaining features are put aside for the product evolution. We will visit those later after we have talked to customers.
We also used this list of features to help us organize the product development in stages. We started creating the user stories. User stories are list of essential functions the “user” or customer will need to perform on the website. For example, upon arriving on our website for the first time, 1) a user needs to create a login and password 2) the user needs to upload photos 3) the user needs to post comments..etc. Once you flush this out it seems there will be hundreds of individual functions for the site. The complete list of functions/features play an important role in project management and communicating with the web programmers.
We will work on these to fronts for a week and then start to prepare our presentation to customers. We will get this minimal product presented to as many customers that will see us. We will frame questions to learn from our customers. This way we can conform out product to suit their needs/problems. We want to thoroughly test this before any real money is spent on product development. The thought that we may be presenting to our initial customers within a months time is incredibly exciting. The information we gather will set the course this startup will follow.