It’s refreshing to see someone else thinking the same things I am. “Drama 2.0″ (no link, unfortunately) wrote about the Web 2.0 “Summer of Love.” The comment is reproduced in full below:
“Andy, It isn’t about the money, not at all. It’s pretty easy to get money. It’s about the opportunity, the connections, the mentoring, the camaraderie with the other teams and the ability for us to leave our full time jobs to bootstrap for 3 months.”
Andy: how is giving up 2-10% of your company to an angel for $5,000 base plus $5,000 per founder bootstrapping? The typical definition of a boostrapped business is a business that is started without external investors. See:
http://en.wikip…_%28business%29
As I’ve said before, from an investor standpoint, companies whose founders show an ability to make the most of limited resources are very appealing. If a guy comes to you and says that he was able to build his product without taking on any outside investment by using credit cards, home equity loans, creative deals with third parties, etc., that shows some real business savvy and determination. It also shows that he has enough confidence in what he’s doing to put his own arse on the line before asking me to put my money on the line. It doesn’t guarantee success, but if somebody is eager to give me 2-10% of their business for a low five-figure amount, I’m probably a bit underwhelmed. A huge part of success in business is being able to deal with challenges. If a founder is successfully able to deal with the challenge of not initially having easy access to the money he needs to get his product built or business off the ground, he’s proven some ability to deal with a major challenge, and that puts him above founders that can’t scrap together $10-$20K themselves.
I will not argue that the connections, mentoring, camaraderie, etc. you might find with a TechStars or YCombinator have no value whatsoever, but I frankly I think there’s too much back patting and ego-stroking going on with startups these days. In my opinion, when done to the excess we’re seeing today, it’s not healthy and distracts from the real purpose of a legitimate startup: creating a product that a viable business can be built around. Mentoring and camaraderie are fine up to a point, but you don’t build a company for social purposes and it seems like there’s a “Summer of Love” mentality to a lot of the Web 2.0 stuff that’s going on today.
“That is VC’s, angels, people that have made it already… These things cannot be priced. Also on top of that we all know how clique VC’s are and as such when VC’s and angels like those running the start-up schools give your startup some lovin’ then they’re all the more interested in you.”
The question is whether you really want or need loving from VCs. I think the biggest mistake young entrepreneurs make is thinking that VCs will lead them to the promised land. Many young entrepreneurs look at investors who have money and individiuals who have achieved success and are easily hypnotized. These people have one goal when they invest in your company: to make money and maximize their returns. Don’t forget that. If you are only capable of seeing the potential benefits of that and can’t see the potential problems it creates, you shouldn’t take their money.
In addition to capital, investors do supply you with advice, connections, etc., but at the end of the day they cannot guarantee the success of your business. If your business model isn’t solid, you’re not able to execute, etc., all their money, connections and past success are very unlikely to do you any good. As Guy Kawasaki says, everything he touches does NOT turn to gold - “If it’s gold, Guy will touch it.”
Additionally, when it comes to connections, don’t expect that your investors are just going to shower you with introductions to their most trusted contacts. Just because Sequoia invested in your company doesn’t mean that you can get a lunch meeting with Sergey Brin and Larry Page. I think many founders overestimate the extent to which investors can or will provide them with connections, and many investors oversell their “network” and how it will benefit portfolio companies. The bigger truth is that you can develop a network of key contacts on your own. Build a product that really takes off and you’ll find that important people will take your calls and may even call you.
“Your supposed to at the end of 3 months / have something to show for a bigger round of VC funding”
Pallet Jack: therein lies the problem. I think young founders are often seduced by the lure of VC and believe that it’s a requirement for building a successful technology company. Therefore getting locked into subsequent rounds of institutional funding when you participate in a program like TechStars or YCombinator doesn’t seem like a big deal. But it’s probably the biggest decision these founders will make when it comes to their startups. How you decide to finance your company dictates how the company is built, the timeframes for execution, the control founders have, the available exits, etc. Going the equity financing route is almost a requirement for some types of technology businesses, and it’s often a good route, but I think far too many founders think it’s the only route. They don’t realize that it can lead to failure just as often as it can lead to success.
Comments(3) 
April 18th, 2007 at 3:11 pm
Sometimes I wonder if Drama 2.0 is the last sane person standing.
Paul and David - congratulations to you. You sincerely believe in what you’re doing but I don’t think you’re supporting real businesses. There is a lot of talk of Y-Combinator being called Y-Bombinator and time will tell.
Here is what I would ask a young entrepreneur?
If you have so much motivation and energy, why can’t you get friends & family to give you $5000 if you need it that badly? Why move to an expensive part of the world like San Francisco, Boston, or Boulder (it’s not cheap there!) and lose yourself in the echo chamber where you design businesses for TechCrunch readers?
If you’re really so motivated, go pound the pavement and meet people. Sure Y-Combinator and TechStars can give you some contacts, but if you went to a decent university, you should be able to plug into your alumni network. Anyone who went to a good school as a better network from day one than either of these organizations can provide you. 90% of the advice you will get from so called “experts” is wrong. 90% of what VCs say to you is wrong.
That’s one of the toughest things to realize is that just because someone is (a) older and (b) richer, doesn’t mean they have any answers at all. A lot of success in entrepreneurship is about luck.
Do this (assuming you have a web-based business with low overhead and start-up costs - e.g. the kind that Y-Combinator and TechStars invest in):
1. Use your personal network and build on it. Attend events where serious people show up (don’t waste your time at silly Web 2.0 get togethers where everyone is living in la-la land and drinking the Kool Aid)
2. Do your own consumer research. Go use Surveymonkey.com and interview 500 potential customers. Everyone has email - find them and email them to take your survey. Many of these people will be your early adopters.
3. Design your beta product and get it off the ground. Invite people to try it out. Learn form what they tell you. Improve and adapt your product.
4. Figure out a REVENUE model. Aiming to be bought by Google, Yahoo, eBay, et. al is NOT a revenue model. Are you going to provide a subscription based service or generate revenue from advertising? How will you monetize your user-base? How valuable are you to them?
5. Build a board of advisors. If you have a solid beta product, energy, and brains, you will be able to find people with relevant industry experience who will help you for FREE. I’ve found many older entrepreneurs willing to help me because they see me as a younger version of them. They may eventually take a little equity - 1 or 2%, but they will bring a lot more to the table than someone like Y-Combinator or TechStars will bring becuase they are the people with relevant experience. Why “pay” Y-Combinator and TechStars to introduce you to people?
My feeling is that overall Y-Combinator and TechStars will fail for a couple of reasons:
1. Selection issue - the entrepreneurs with real motivation will not go to them. The young entrpereneurs using Y-Combinator or TechStars are the lazier ones.
2. Heavy focus on “hackers” - I know geeks rule the world, but you need people who understand marketing and sales. If you don’t have those people, all you are is an outside hope of being outsourced product development (namely FlickR, Writely, etc.). That’s a terrible model.
3. Typical risk-return profile of a VC firm - the incentive for Y-Combinator and TechStars is to push their porftfolio companies towards a home run scenario. The money for ad-supported/no-revenue models is going to dry up soon. There is a reason that the barriers to entry are so low - it’s easy to do it.
I’m not really sure why Reddit got bought. Congrats to those guys. You seem nice, friendly, and smart. You got lucky, great. That’s not a real business model. Conde Nast is going to lose money on that acquisition.
What’s the model here Paul? Who will buy Justin.tv? It’s going to get sold on eBay again. No revenue models, no barriers to entry, and no real strategy to build on.
There is far too little money involved here. Charles River Ventures program seems a lot more tenable to me. That being said, good luck to all involved.
April 18th, 2007 at 4:02 pm
I appreciate the pontificating by Jay and Drama. In all of your wisdom, why don’t you link to your successful businesses with the soundest of business models and reveal how through pure devotion you knocked on every door in the valley to get where you are. I suspect this isn’t the case and that your advice comes without experience.
If you were thinking correctly, you would notice the leverage that can be created by being a part of a program like this. This saves you from having to knock on all those doors. That isn’t lazy, that is smart. The program is structured to save startups by learning from mistakes others have made without making them ourselves.
The money—that is really not what it is about and to focus on that only reveals you do not fully comprehend the concept. It will really just pay for basic necessities with some left over for strategic operations. They are giving us many things—legal help, hosting, pr firm advising…etc that we would normally pay for; quite the perk.
The equity given up—incredibly worth it. enough said.
Lastly, I would save some of your criticism of SocialThing! until it actually launches. Opining on the merits of it without actually seeing it is juvenile.
April 18th, 2007 at 5:03 pm
In the spirit of Josh’s INTENSE DEBATE:
Josh - there is a reason Drama and I don’t link to our blogs - we don’t have them. I don’t find Web 2.0 to be important enough to require its own blog - I’m happy to comment on TechCrunch. There is also something to be said for anonymity. I’m focused on growing a business that is doing quite well. We have raised some money, but only after we had paying customers and traction.
The leverage? What is that? Pre-packaged legal advice, hosting you could get yourself for $10/month or via Amazon EC2, and PR firms that don’t accomplish anything for you? You can get all of the advice you can get through Y-Combinator and TechStars for free - network a bit, get out there, meet people. You could get the same leverage for FREE by getting strong board members who will eventually take 1 - 2% if you take off. I would much rather have one important person opening doors from me than an ambiguous organization with a hodge podge of people involved.
I’m not saying that this may not make sense for certain start-ups, but you clearly didn’t read my advice above. Learn to make money and don’t waste your time building “cool things” in the hope that a bigger fool will buy them. Yes, there are plenty of bigger fools, but not enough to bank your business on.
And some personal advice there Josh, if you’re opening up a business about intense debate, it may make sense to realize that successful debate avoids name calling. Good luck to your start-up.
April 18th, 2007 at 8:41 pm
Some startups won’t increase their chances much by getting outside help.
Others will increase their chances a great deal with the help of something like TechStars or Y-Combinator.
Obviously the first group should not apply for TechStars or Y-Combinator.
Painting all startups with a single brush is at best naive, at worst blatantly dishonest.
April 18th, 2007 at 9:36 pm
Link to your business, not blog. We are all dying to know. You command respect for your beliefs, yet you hide behind a pen name.
“The leverage? What is that? Pre-packaged legal advice, hosting you could get yourself for $10/month or via Amazon EC2, and PR firms that don’t accomplish anything for you?”
Pretty big assumptions you are making Jay, yet you have zero evidence of any of this.
“And some personal advice there Josh, if you’re opening up a business about intense debate, it may make sense to realize that successful debate avoids name calling.”
Jay, you ought to be a comedian. Oh wait, I just called you a name.
“I would much rather have one important person opening doors from me than an ambiguous organization with a hodge podge of people involved.”
Have you even looked at who is involved in TechStars? Of course, you are just going to reply that they won’t REALLY help us as much as we think. Right? Another grandiose assumption…
“I’m not saying that this may not make sense for certain start-ups, but you clearly didn’t read my advice above. Learn to make money and don’t waste your time building “cool things” in the hope that a bigger fool will buy them. Yes, there are plenty of bigger fools, but not enough to bank your business on.”
When were business models mentioned in the TC article or my comments? Have I explained to you our biz mod? You are clearly assuming the we are building “cool things” just on a whim. Where do you get your information? Don’t tell me your hind end because that is obvious.
Good luck, God Bless, and maybe we can continue this one day on Intense Debate.
April 18th, 2007 at 10:32 pm
Josh,
What is your revenue model? The name of your company suggests that you are looking at a pure advertising play. How else would you monetize online debates?
Just curious. Good luck in Boulder.
April 18th, 2007 at 10:41 pm
David Cohen is doing a wonderful service to the Denver/Boulder/Colorado tech scene through TechStars.
We need more programs like this in Colorado, plain and simple.
If I were to re-wind my startup 3 years I would have applied to tech stars in 5 seconds. The connections and experience would be worth 5%, probably more, esp. in your first startup! For people outside of Silicon Valley meeting the right people is not quite as easy. This is such a cool opportunity for all of these new companies coming to Boulder this summer.
I would give my left arm to meet the CTO of PhotoBucket and talk about building out a world class infrastructure!! You can’t put a price on these kinds of connections. I’m going to try to get up to Boulder this summer and see how receptive they are to a TechStars wannabe
April 18th, 2007 at 11:30 pm
It looks like my long-winded, final comment on this post is being blocked, so I’m going to attempt to break it down into smaller pieces.
Sorry Andy. Did mean to address my comment to Matt.
“In the market we’re in and going against the competitors we’re looking at you have no choice but to believe that what you’re doing will change something. it’s the only way…”
Matt: it’s good to believe in what you’re doing. In fact, if you don’t believe in what you’re doing, you shouldn’t be doing it. But I think it’s good for founders to take a step back and look at the bigger picture. Founders need to be as realistic as they are enthusiastic. Your homepage says:
“socialthing! is a revolution. It’s not your typical social networking site. socialthing! focuses on making it easy to connect to people, listen to new music, and check out events coming up.”
I don’t see what’s revolutionary about those things. MySpace and the thousands of other social networks that have launched and are launching on a daily basis provide that functionality. If your company is trying to aggregate data/content from multiple social networks, there are lots of other companies doing that as well, and some have a lot of funding. Does this mean that you shouldn’t make an attempt? Of course not. You can’t succeed if you don’t try.
But one of the reasons I truly feel that we’re in Bubble 2.0 is that we have so many similar services being launched (and funded). Instead of seeing new models, truly revolutionary functionality, etc., we have startups offering services where the differentiators are so slight (and non-defensible) that the average user is unlikely to see a compelling-enough value proposition to join (or switch) and stay active. VCs are encouraging this behavior because they’re not raising the bar. They’re happy to fund copycats. This is problematic and doesn’t bode well for the market. Fortunately, this time around the public markets won’t be affected. They only have subprime loans and a declining dollar to worry about.
Smart entrepeneurs take risks, and there are many opportunities for new entrants in highly-competitive markets. But I think far too many of the services that we see launched on a daily basis have little chance for success. Their founders, who are often very intelligent people, would be better off focusing on something else. In fact, I would argue that a lot of very smart people are not realizing their full potential because they’re so caught up in the Web 2.0 gravy train that they don’t have any incentive to look at developing something truly useful. Why come up with something really innovative when you can build a YouTube clone and raise $3 million?
April 18th, 2007 at 11:31 pm
If you’re launching a Web 2.0 startup that bears any resemblance to popular existing services, you should ask yourself:
1. What is my value proposition to the end user and is it realistically compelling enough to stand out in a saturated market where many services are competing for a finite amount of people’s time? Don’t just ask your friends and family (who apparently won’t loan you $10,000 to build your product but think it’s the greatest thing since sliced bread) - ask real potential users (and don’t forget to include questions like “Would you still use ______ even if you like this service?”).
2. How am I going to market this? Note to founders: “viral marketing” is not a legitimate answer. Viral growth typically doesn’t just start until you’ve reached some sort of crticial mass. Many of the popular Web 2.0 services got kick-started via other means and launched when the market was less saturated. A few years ago you could have launched a new social networking service and gotten press. It’s a lot tougher now.
3. Is any part of our technology or model defensible? Do our competitors face any barriers to entry? Since most of these new startups are, in reality, simply trying to “enhance” already-popular services, an honest assessment of how difficult it would be for those services to copy your enhancements is in order.
4. Do I have connections that will help grow the business? Note to founders: your Rolodex filled with VCs, angels and other Silicon Valley types may not be worth as much as you think it is. If you’re a B2C/new media startup, which many of these companies are, a Rolodex filled with contacts on Madison Avenue will do you a lot better. If you are targeting a specific niche, having connections to executives and companies already successfully serving that niche is very beneficial. Relationships are crucial to success. Having the right ones will help your business. Having the wrong ones won’t get you anywhere. But I guess at the very least it feels good to be able to call up a Michael Moritz or Tim Draper.
5. What is it going to cost us to compete in a competitive market? As Rahul asked: how do you execute an entire business on $15,000? The answer is that you typically can’t, and most of these startups, if they get off the ground at all, are locked in to future rounds of institutional equity financing. Founders should consider the implications of this. Let’s say you start off with $15,000 and you get things going. Angels put in another $500,000, valuing the company at $1.5 million. You build up some nice growth in usage but revenues aren’t growing at anywhere near the same clip. You take on a $2 million VC round that values the company at $5 million. Obviously the founders are now significantly diluted and have no real control. After another 6 months, it becomes clear that in a highly-competitive market, the company isn’t going to make it (usage growth has slowed and revenues aren’t rising fast enough to support the business). You either have to do a down round (if you can get one) or you’re SOL. Who is going to buy you at anything near the $5 million valuation you received in the last round? If a buyer is found (perhaps at a firesale price), the investors will get their money out first and the founders probably walk away with little to nothing.
Some of the most successful entrepreneurs failed multiple times before they hit it big, so failure is almost always a prerequisite for success. But that doesn’t mean that you should start up a business when an honest, objective analysis reveals that the chances for failure are so great that a trip to Vegas is more likely to be fruitful. Risk is a prerequisite for success, but some common sense risk management principles shouldn’t be eliminated.
April 18th, 2007 at 11:36 pm
A lot of what’s going on right now is being fueled by the myths of Web 2.0, which are:
1. You can build Web 2.0 businesses really, really cheap. The truth is that you can build Web 2.0 products or functionality really, really cheap. Developing a real business, regardless of what industry you’re in, has costs. We are not in a New Economy. Even if your product development is cheap, successfully positioning it in the marketplace may not be, and the lowered cost of developing products probably only means that you’re going to have to deal with lots of competition. In theory this should actually result in an increase in the costs of positioning your product in the marketplace.
2. Viral growth is easy to spark. Lots of people believe that a few founders can launch a product and millions of people around the world can be using it within a month. It can happen, but more often than not it doesn’t happen. Far too many startups think “viral marketing” is a legitimate growth strategy because a handful of companies have taken off in this fashion. The truth is that these companies are the exception, not the rule, and most new businesses require some “real” marketing, which costs money.
3. Advertising is a viable business model. It is, but there are caveats. Although billions upon billions of dollars are spent on online advertising, the
amount is, contrary to popular Web 2.0 opinion, finite. Unless you have a massive audience and/or can provide highly-targeted advertising to lucrative demographics, don’t expect to expect a huge chunk of that online advertising spend to land in your hands. Most of the Web 2.0 services that generate large advertising revenues (MySpace, Facebook, etc.) reportedly have extremely low CPMs but they make up for it with volumes that most startups will not realistically attain. When YouTube, arguably the most talked-about Web 2.0 service in the world last year, only generated $15 million in revenues, it should give startups pause about their revenue projections.
4. There are a ton of potential buyers for Web 2.0 companies. I think it’s fair to say that the number of acquisitions is relatively small compared to the total number of startups, and the majority of the deals are quite cheap. The number of potential buyers isn’t likely as large as many people think, and once a few acquisitions get done, the competing startups that didn’t get aquired really only have one remaining option: find a way to build a self-sustaining business. Many Web 2.0 companies don’t start out with a plan to do that, and once they’re facing well-heeled competition, it becomes harder to develop one.
Also, when it comes to acquisition, I think we’re seeing two trends. First, potential buyers are looking for acquisitions earlier in a startup’s lifecycle. The thought of having to shell out billions for a company like YouTube has forced potential buyers to think more like private equity firms: identify promising startups early on and acquire them early on. Second, more potential buyers are deciding to build their own products. Since there is a
relatively small amount of defensible technology in the general Web 2.0 space, building a Web 2.0 platform internally is not very difficult. It’s cheaper to do that and hire an experienced team than it is to shell out big money to acquire something that only launched 20 months ago. These two trends do not bode well for founders who are quick to take VC funding and a hefty valuation. In fact, these trends probably benefit bootstrap companies. If you can manage to scrap enough together to get your business going, you might be able to flip for a smaller, but still impressive, gain. It’s hard to complain if you can bootstrap a company with, for instance, $100,000, and sell it a year later for $750,000. You have this type of flexibility when you don’t have VCs and their valuations to worry about.
Of course, many posters will point out that not everybody has the ability to bootstrap. That’s true. Which leads us to the next myth…
5. Anybody can be a Web 2.0 success story. Kevin Rose. Mark Zuckerburg. Stephen Chen and Chad Hurley. Their stories inspire a lot of the Web 2.0 buzz/hype. The truth is that their stories are the exception, not the rule. Before leaving your job to create a Web 2.0 startup, it’s worthwhile to be realistic. There’s an interesting irony in life and business. Unfortunately, opportunity often favors the person with the most financial resources. If you have $100,000 of your own that you can invest in building your new business, you have some real advantages. On the other hand, history shows us that some of the biggest success stories in the business world belong to men and women who started with practically nothing. In the Web 2.0 world, Kevin Rose, Mark Zuckerburg, Stephen Chen and Chad Hurley were nobodies a few years ago, and while only two are liquid, they show that opportunity exists (even if it turns out to be fleeting). You don’t necessarily have to be wealthy to take advantage of opportunity. But this apparently common idea that with $15,000 and the right connections, you have a legitimate shot at being the next YouTube is less-than-healthy in my opinion. Maybe YCombinator and TechStars truly do have good intentions, but at the very least I can’t help but thinking that this is the “Summer of Love” in the technology industry. There’s going to be a lot of disappointment.
April 18th, 2007 at 11:41 pm
Jay: you seem pretty sane yourself. Maybe we need to create a social network for sane people! I’m sure YCombinator or TechStars would fund it.
Several of your points are dead on. To elaborate on a few of them:
2, 3, 4. I think it’s worth noting to startups that these basic steps can really make quite a difference. Many startups have actually been able to obtain deals or acquire customers before their product is even finished because they validated that there was a market for their product, involved potential users/customers of it early on in the development and then got commitments from customers who wanted to be involved in the development so that it would truly meet their needs.
5. There are lots of experienced people out there who are willing to join advisory boards, often on a deferred compensation basis. Advice from a VC (many of whom have limited day-to-day experience actually building and operating businesses) or from some entrepreneur who hit the jackpot and sold his first company for a gazillion dollars may not be the advice you need. Advice from people who have experience and knowledge that is specific and relevant to your market is the type of advice that is of value and is worth paying for.
Josh: yes I’m an anonymous poster. What bearing does that have on whether what I’m writing makes any sense or not? Maybe I’m the CEO of a successful Internet company. Maybe I work 9-5 as a janitor. If you think something I post is hogwash, that’s fine. If you there’s some truth to something I post, that’s fine too. One thing I will tell you about my experience: some of the best advice I’ve ever received has been from people who weren’t wealthy or “successful.” Some of the worst advice I’ve received has been from people who were filthy rich. If you only determine that something represents “wisdom” because a rich guy who sold his Internet startup for $500 million in 1999 said it, then you’re going to toss out a lot of good advice because wisdom isn’t owned exclusively by the billionaire’s club. In fact, throughout history, a lot of wisdom has come from people without a penny to their name. I certainly hope that at Intense Debate, users will be encouraged to decide the winners of a debate based upon a logical analysis of the merits of the arguments, not on who the debaters are.
You should note that I’ve never said that there isn’t any value in what YCombinator and TechStars offer founders, I have just stated that I think many founders overestimate its value and underestimate how expensive it really is.
Since I’m not thinking correctly, let me give you my thoughts (and ask a few questions) about the points you’ve made.
1. You mention that TechStars is helping you because they open a lot of doors. What doors you need to be knocking on at this stage of your business? On your company blog, your first entry was made on January 16. It’s now April 18. Obviously, your service hasn’t launched yet. Nothing wrong with that, but it begs the question: if you don’t have a final product out there in the real world, isn’t your time better spent finishing its development instead of knocking on doors? Timing is everything and for many startups, there aren’t many doors that should be knocked on until something tangible is ready. Don’t put the cart before the horse. You don’t need to speak with Garry Kasparov before you’ve learned how to play chess. Additionally, don’t discount the skills that you have to develop when you don’t have “insider” connections. Some of the best salesmen are the best salesmen because they had to learn to sell through trial and error, success and failure. Even with all the best connections in the world, if an important introduction is made and you can’t effectively articulate whatever you’re trying to sell to the person you’re introduced to, don’t count on getting the deal. And don’t count on an unlimited number of introductions if you can’t capitalize on the ones you’re given. Just having connections is worthless if you’re not able to utilize them effectively.
2. When it comes to learning from mistakes, there are tens of thousands of business books, magazine articles and case studies you can read that detail all sorts of mistakes businesses and entrepreneurs have made over the years. This information often doesn’t cost you a thing if you have the willingness to read. Chances are that the information you’ll read will be quite similar to the advice you’re going to get from YCombinator or TechStars. And guess what: you’re still going to make mistakes. You’re not being realistic if you think good advice will prevent it. It’s human nature. No matter how many times somebody tells us something, sometimes we just have to experience it for ourselves to learn. That experience is invaluable.
3. I’m sure TechStars provides you with some ancillary services. Hosting: Mark Zuckerberg started Facebook on a hosting account that cost less than $100/month. I wouldn’t consider an offer for free hosting in a decision to give up equity unless a server farm was included. I’d be more than happy to take a stake of a few percent in lots of early-stage startups in exchange for a dedicated server. Anybody want to deal? Legal: I would be extremely cautious when legal services are being provided by or through one of your investors. PR firm: until you have a product out there, it does you no good to have a PR firm representing you. And once you launch, putting out a press release probably isn’t going to work wonders. Most journalists are looking to write a compelling story and it helps if you actually have one to tell. Having an interesting service might not be that compelling; having 1 million users on it or a big customer probably is. And even getting some press attention doesn’t mean you’ve hit the jackpot. If you think your work is done because TechCrunch profiles you or you get a mention in a Wall Street Journal article, you’re in for a surprise.
4. Just like anything else in life, first impressions typically get made in a flash. Maybe you don’t realize it, but many investors get dozens of business plans a day and most don’t get read in full. Oftentimes the plan is discarded after the first paragraph of the executive summary is read. Does it mean that the company described in the business plan has no chance for success? No, but startups are a numbers game: most will fail. If the founders can’t articulate what their company does and what opportunity exists in a few sentences, it’s not worth taking the time to read further. When buzz words like “revolutionary”, “not your typical _____”, “conservatively estimates”, etc. get used, red flags go up. In Socialthing’s case, nothing on their splash page stands out. Connecting with people, finding new friends, listening to new music, checking events and organizing your “digital life” are things that hundreds of other startups offer or plan to offer. But Socialthing still claims that it’s going to create a revolution by redefining social networking. Sorry, but I guarantee you that a dozen VC firms on Sand Hill Road received business plans today with similar claims. Maybe Socialthing will be the next MySpace, but I’ll take my chances on the roulette wheel in Vegas instead. I’ll have more fun.
April 19th, 2007 at 12:47 am
Drama, we think we’re in love… where do you lunch?
April 19th, 2007 at 12:58 am
Drama 2.0 - let’s go for it! Seriously, we should connect offsite at some point. Any suggestions how we can do this?
Josh - you and everyone else in the Web 2.0 world should understand that the purely advertising driven model has a fundamental issue - supply & demand. All of these sites target 15 - 30 year old males who are technologically savvy. How ad spend do you think Budweiser dedicates to the internet? How much ad spend do you think is dedicated to people who don’t pay attention ads? There are only so many advertising dollars to go around. Nearly every single start-up in this space is aimed at this target market. How much time do you think one person has to visit all of these sites? After TechCrunch spikes traffic, most of these sites fall back to earth quickly and can’t sustain the growth. You have to make something extremely compelling.
What will INTENSE DEBATE do? Seems like we’re having quite an intense debate here.
I know you’re young, but I’m not a lot older than you and have been at multiple start-ups. I shouldn’t have to list them for my words to have credibility. Do you plan to require resumes before someone can use INTENSE DEBATE? Again, ad hominem attacks don’t help an investor gain confidence in your maturity.
My primary concern with Y-Combinator and TechStars is their heavy focus on advertising-supported models. If you create something really valuable, people will pay for it. Figure out how to have premium services and options.
April 19th, 2007 at 6:06 am
I appreciate all of your concerns, but they are ALL based on assumptions.
Much of your advice is spot on, but most of it doesn’t apply to us or the other startups.
Our site will come out in due time. At that point criticize away, I want to hear it, as I am sure the other startups will too.
April 19th, 2007 at 7:10 am
late to the party, but wanted to dole out some respect to jay and drama 2.0 for demonstrating one of the qualities essential to succeeding in business - skepticism.
want to be an entrepreneur? you better be able to take criticism. getting defensive is a quick way to get kicked out of a VC’s office. people will make decisions based on assumptions, and if you can’t present a compelling case, sorry. that’s how it works, fair or not.
that being said, it all comes down to the bottom line. costs of entry in web based apps are very low, so if you have an idea, go for it. if you make money, that’s all that matters.
April 19th, 2007 at 10:13 am
Josht, my name is Michael, nice to meet you. I link to my blog (not my business, sorry). I haven’ been very involved in your debate with Drama 2.0/Jay, but I do have some comments.
You said, wait till you see the site to criticize. No one is criticizing your business. What Drama/Jay are saying is that there are a lot of issues involved with launching a startup. Success stories like Facebook, YouTube, etc. are exceptions, not the rule. That’s not criticism against your business–that’s a fact. Look at the conventional wisdom on failure rates for startups: “Only 20% launch within year following pre-start activities; Close to 30% failure at end of first, 70% failure at end of third, 80% failure at end of five years.” These are realities you have to come to terms with.
Like I’ve said before, I wish you the best of luck. But to hedge your bets, there are a host of issues you should think through. Business model (if advertising doesn’t work, what’s our next move?), cost structure, marketing and sales, target market (young, early-adopting males shouldn’t be your answer to this), risk (more on this later), harvest options, viability and attractiveness, the right team, division of equity, financing options, growth strategy and scaling, product development, user feedback, et cetera, et cetera, et cetera.
When it comes to risk, let’s break it down into venture risk and personal risk. Venture risk can be economic (market, competitive, social, political, regulatory, environmental), operational (non-financial and financial resources, technological, managerial aka your team, relationship) and financial (access to capital, capital structure, terms, reliability of capital providers, ability to exit if venture succeeds, ability to exit if venture fails). On the personal side you have financial (bankruptcy, credit ruined, in debt, 0 net worth), career, relationships (marital and/or familial, friends, other venture/life stakeholders), reputation, confidence and health risk. And I’m just scratching the surface. In my business planning, I think through these issues and have a plan to address each component which affects my venture.
I’m not saying you’re at risk for each of these factors. But you should have thought this all through, made sure you were aware of the facts, and have a plan. Arguing that your time is better spent developing a solid product is nonsense–without thought around the business side of things, you’re setting yourself up for failure (or at the very least driving with your eyes closed). I am confident you and your TechStars colleagues will learn this over the summer (I’m sure most of you have already thought it through though, evidenced by you being selected…)
In the end, the two legs of your business are UVP (unique value proposition) and harvest. UVP is why your customers pay you, it is the perceived value. *Perceived* value is the key difference–no matter how useful or innovative your product is, it’s all about customer perception of your venture, not the venture itself. Harvest is the reason you’re getting into the business. If you want to grow it into a lifestyle business and live off cash flows, that’s one thing. Or you could think about acquisition or an IPO or liquidation. There are a lot of options here but, once again, its something you need to think through.
Honestly, best of luck. Please comment on my blog so we can continue the discussion. I’d like the opportunity to learn more about Intense Debate and your plans. Who knows, you might even like my advice and I could become an asset to you? Everyone is a resource. I hope you look at this opportunity as a potential resource as well.