The Dopamine Effect

Entrepreneurs spend a lot of time building great products. But in today’s competitive startup environment, it’s not enough just to build a great product. You have to build a product that keep users coming back to your site.

I met with an entrepreneur I advise and the question came up–how do we get users to keep coming back to a site?

The answer is dopamine. Dopamine is a chemical in the brain that is associated with rewards. You get a little dopamine rush when you click on the coins in a Zynga game. You get it when you see a news item on Facebook. And, as recent studies have shown, when you tweet.

So the key to getting users to come back to your site is figuring out what is going to give your users the reward–the dopamine rush that will get them to come back to your site.

It could be seeing new faces, a numerical score that tells users how they’re doing relative to others, receiving more storage space for inviting new friends, or simply sending out a short message. The ideal action not only rewards the user’s behavior, it also encourages inviting more people to the site. That creates a network effect.

When it comes to raising money, investors care less about what causes the dopamine rush. They just want to know that you’ve cracked the code on what causes it. Because if you’ve done that, you’ll have millions of users engaging with your site–and millions of dollars wanting to get into your deal.

Feb 8, 2012

Your Acquisition Signature

I was speaking with a Product Manager at a large tech company today. He’s looking for small, local development teams he can plug into his existing projects/teams. In talking about potential acquisitions, he described what he called the acquisition “signature.”

The term signature is an excellent way to characterize how to think about acquisitions, if you are considering being bought.

While a startup, in its early days, is trying a hundred mini-experiments to see what works and what doesn’t, big companies have multi-year plans they’re executing on. They have annual planning and budgeting sessions that require lengthy preparation, lots of slide decks, and no end of meetings.

One big company exec once said to me, “year end is a terrible time at [his company], the budgeting spreadsheets are flying everywhere!” But the planning, budgeting, and roadmapping exercises also give big company execs excellent visibility into what they want to acquire.

The characteristics of a potential acquisition can be summed up as the “signature.” The signature defines the key characteristics the company is looking to purchase: a team, a technology, or revenue.

Revenue acquisitions are a non-organic way for a big company to increase revenue. The company needs to augment the growth it’s getting through its own marketing and sales efforts. One way to do that is to buy revenue through an acquisition.

Technology acquisitions provide big companies with key intellectual property or technology that they can’t build or that they need to build faster than they are. Perhaps a competitor is beating them on a particular feature and they need that feature fast to stay competitive.

Finally, team acquisitions provide a way to hire a fully built out team without having to recruit the individuals one at a time.

Regardless of which one you are, figure out what signature your buyers are looking for and you’ll have a much easier time making your sale–and getting the price you want.

Feb 7, 2012

Hiring Criteria

Last week I got an email from an Interaction Designer at oDesk who wanted to meet with me to understand how oDesk “fits into my life.” oDesk describes itself as changing how the world works. It’s a marketplace for finding outsourced software developers, writers, video producers, and online marketers.

I’ve been using oDesk for product prototyping and software development, so I welcomed the opportunity to meet with the Interaction Designer—Larry—and talk about oDesk. I had some specific usability feedback about the site I wanted to provide. Give me easier access to the things I do regularly, for example. I was also curious to see what questions he would ask.

Larry recorded the interview and we transcribed it at Speechpad. Speechpad is a leader in crowd-sourced audio/video transcription.

Speechpad’s work model is a little different than oDesk’s. Whereas on oDesk buyers and contractors connect and then the buyers are responsible for working directly with the contractors, Speechpad uses a crowd-sourced workforce but takes responsibility for delivering the final product—a great transcription—to the customer.

During the interview, we covered a lot of ground, from how I use the site, to how I work on specific projects. When do I go back to the site? Would it make sense to integrate ticketing and communication tools like chat directly into oDesk or are there external tools that are sufficient?

At the end of the interview, we got to a discussion of how I go about hiring. What filters do I use? Ultimately it came down to one thing, for both Speechpad and oDesk. I’ve included an excerpt of the transcript here:

“We have an interesting thing in our business [Speechpad], which is we have really high-quality people who do great work and we rate them and check their work and lots of other stuff to QC their work but, ultimately, they care about the work that they do. They’re proud of the work they do.”

What do I filter on when I’m hiring, whether directly or through crowd-sourcing? People who are qualified to do the work, of course. But then what? People who don’t view their work as a transaction. People who care about their work.

Feb 2, 2012

My Love-Hate Relationship With Bill.com

And now for a few words on that most painful yet critical of startup topics, billing and payments!

Working on billing and payments feels incredibly far from strategic objectives like product and sales. It’s not something that differentiates one company from another. And yet it’s critical to the ongoing operations and success of a business.

Most recently, a company I’m closely involved with starting using Bill.com.

The company was really looking for was a simple way to pay everyone electronically, which seems straight-forward enough.

First up were the services offered by the bank. Everything had to be manually entered into the bank web site and then sync’d to QuickBooks. Plus, the mechanisms for synchronizing with QuickBooks required a download and… well, that was enough of that.

Soon came Bill.com. Here’s what I love:
- Signup is quick
- The site is fast
- Entering vendors is easy
- Vendors can enter their own info to get paid electronically

Here’s what I hate:
- No way to run payroll right from within Bill.com. This has to be done separately. No problem if you have hundreds of employees, but a real PITA if you only have a few.
- Signup is confusing for vendors because the site is terse on instructions and next steps.
- Roles are limited. Suppose I want to have someone enter bills to be paid, but not have visibility into other bills that have been paid. There’s no easy way to do that. And just finding where to setup new roles is hard to do.
- No easy import function. Can’t upload a CSV or Excel file with items to be paid.
- Every bill has to be entered manually. While a user can forward bills to the system via email, one can’t specify the amount due and have that automatically entered into Bill.com. So someone still has to enter the amounts.

Not really a Bill.com issue, but a more general one—the company still has to work with a number of different web sites and repositories to run the business—from the bank account to QuickBooks to Paypal to Bill.com. But it would be great if it all could just happen in one place.

I never thought I’d find myself writing a passionate blog post about invoicing and payments. But Bill.com is a big step in the right direction—I just hope the company will take a few more steps to make payments, invoicing and accounting much, much easier!

Jan 18, 2012

Why Startups Fail: And How Yours Can Succeed

Most startups fail. That’s why when Jeff Olson at Apress (publishers of Founders at Work) approached me about turning my Why Startups Fail blog post into a full-fledged book, it was too good an opportunity to pass up.

Why Startups Fail: And How Yours Can Succeed is now available in both eBook and paperback editions on Amazon and elsewhere.

Why Startups Fail

By way of background, in May, 2008, I wrote a popular and controversial blog post, Why Startups Fail. Venture capitalist Brad Feld called it a great post. Jason Fried of 37 Signals disagreed with several of my points. Dave McClure and dozens of others provided insightful thoughts and comments.

Over the past 10+ years, I’ve founded five startups, bootstrapped and raised millions in venture capital, had several successful liquidity events, and been a VC. During that time, I’ve gained a unique perspective on what makes startups succeed—and the avoidable mistakes that make them fail.

I hope this book will provide you not only with excellent reading but also with key insights that will help make you, and your startup, a huge success.

Jan 4, 2012

Platform Marketing 101

An entrepreneur and I were discussing AWS, Facebook, iPhone, and Android today. Although I spend the vast majority of my time on startups, I am occasionally reminded of a big company job I once held.

At 16, I was hired at Microsoft to be a Technical Evangelist working in the Developer Relations Group (DRG). My job was to get up on stage at large developer events and talk about building software for Windows. It’s hard to imagine, but one of the key challenges the company faced was getting adoption.

Now just picture it—here’s this kid with aviator glasses and pimples standing in front of a group of 1,000 people talking about how to build apps. Not knowing any better, I’d get up and say stuff like, “If I can build programs for Windows, so can you!” and I’d get a laugh, every time.

Flying from city to city, setting up, getting on stage, walking through code samples, and talking with developers about all the cool apps they were building was a lot of fun. Of course, things didn’t always go as planned.

One of the most memorable moments was showing up at the hotel where an event was to take place only to find out there had been a huge mix up. The hall wasn’t paid for! One of the guys ended up putting the whole thing on his credit card.

Today, a lot of companies want to be successful platform companies. Few are.

Becoming a platform company is hard. It’s hard to start with a platform and have people build on top of it. It’s also hard to start out as an application and become a platform.

Amazon did it with AWS. Facebook did it, first with games, then with other apps. Apple did it with the Mac and then with the iPhone and iPad. Google did it with Android. Microsoft did it with Windows.

And then there are some newcomers, Dropbox and Twilio, to name two. There are many, many more, of course. But I’ve chosen these two because they are highly visible, gaining rapid adoption, and have big disruption potential.

Twilio, whose tag line is, “Build apps that communicate” is a platform. Twilio is a cloud communications company. With Twilio, there’s no need to code up a conferencing platform from scratch, learn Asterisk, or figure out some other PBX system. It’s all cloud based. You can do call tracking for lead generation, build a PBX, or add cool calling features to your web site. Lots of companies are using Twilio to power their communications apps including eBay, Airbnb, 37signals, and SurveyMonkey, among others.

Twilio is not an “app” company. They are a platform, they provide API’s, and other people build stuff on top of them, plain and simple.

Dropbox, of course, is a cloud service that lets you easily access your content. The company recently passed 45M users after just four years in business. Dropbox started out as an “app” company and is becoming a platform, via the Dropbox API. The Dropbox API provides access to all Dropbox capabilities, which means people can build cool add-ons, but they can also build complete applications that leverage Dropbox’s presence on the desktop, mobile, and in the cloud.

What makes great platform marketing?

- The developer conference
- Communication, documentation, and samples
- Promotion and distribution

Platform marketing revolves around The Event. The developer event is the great catalyst for activity inside the company—and outside. It is a date that cannot be moved. It must wow. It must impress. And above all else, it must deliver.

Developer Conferences are where a platform company announces new technologies, gives demos, and highlights partners who are doing leading edge work with the platform. The event gives the company a human face, gives the technology a voice, and enables real, live interaction. There’s nothing like it.

Complementing developer conferences are hackathons, user groups, and labs. Labs are where developers from other companies can come spend time building cool, leading edge apps on the platform. They have access to the technical team at the platform company, and breakthroughs happen in real-time.

Responsive communication. Hand in hand with Developer Conferences goes responsive communication. Responsiveness in online forums and on email, combined with real changes to the platform to address developer needs is a must. Big companies can get developer adoption without this. But ultimately those developers will not be platform advocates. They will adopt, but they won’t evangelize. And the best evangelism gets others evangelizing too.

Responsive Communication also requires great documentation and samples. If you want people to code on your platform, you need to give them clear, up to date examples and documentation on how to do that.

Promotion and distribution. Developers adopt a platform because the platform gives them access to new capabilities and because the platform provides distribution. Facebook is where people are—thus, reason to develop on Facebook.  iPhones, iPads, and Android devices are everywhere—develop for those.

Successful platform companies help their partners by promoting them and facilitating their distribution. Partner showcases, highlighting at events, and quotes in press releases, blogs, and other marketing materials are all of huge help to platform partners.

Promotions significantly impact partners. One iPad app, on becoming the “App of the week” experienced sales 10 times what the company had had on the previous day.

The Platform Promise
Cloud and mobile platforms move fast. At least for cloud platforms, APIs can change day to day, hour to hour. That means partner innovation can move a lot faster. It also means partners and platform companies have to do a lot more work to keep up–docs, samples, and other information may be out of date before they’re even available.

Platform overload is a risk. Platforms that have been around for a long time suffer from bloat. There are too many API’s, too much documentation, too many ways to do things.

Platform availability. Finally, the platform has to stay up. When Amazon suffers an outage, when Twitter is temporarily unavailable, it’s not just users that are impacted–it’s a a huge number of partners that are relying on the platform.

And like Icarus, if you get too close to the sun, you’ll get burned. A few partners, notably Zynga, have been able to stay (enough) out of the path of the platforms on which they rely and become big. Many others, though, die an early death because they’re simply too close to the core.

Conclusion

As a good friend of mine said, for a platform to be successful, “Developers have to be sold on the promise that they can do something with the API that would be more difficult, or impossible, than if they did it themselves, and that the thing that those API’s do is actually worth doing.”

That’s why becoming a popular, widely-adopted platform that not only has evangelists but that others evangelize is a rare accomplishment indeed.

Nov 16, 2011

Leadership Failure Lessons From The Greek Prime Minister

Startup CEO’s can learn a lot about how not to lead from Greek Prime Minister George Papandreou.

1. Don’t surprise your investors. Investors hate surprises. Especially when things are already bad. If you surprise them, you lose credibility. You break trust. You embarrass them and yourself. No one likes being embarrassed, especially not in a large, public forum.

2. In times of crisis, lead. Papandreou agreed he needed a bailout, agreed to take the bailout, and then decided to ask for a referendum. He was right in principle—he needed to get the people to buy in. But he went about it the wrong way.

Similarly, leaders of startups need to get their teams bought in. But people want leadership—especially in times of crisis. When startups face difficult decisions, they look to the leadership to make the right strategic call.

3. Don’t waffle. People don’t mind a pivot, especially if one is obviously needed. But they dislike waffling and uncertainty. Waffling causes a loss in confidence. Make a decision and then go for it.

4. Communicate your intentions. Papandreou failed to tell his Finance Minister he was going to ask for a referendum. Imagine not telling your team about a big decision you were going to announce. They would feel left out, be less likely to buy in, and feel blindsided.

5. If you desperately need money and someone offers it to you, take it. Not much more to say about that. When you need money, you need money.

Of course the moral of the story is, if you neglect to do these things, you’ll most likely lose your job.

Nov 7, 2011

The Groupon Mojo

Create scarcity. Get headlines. Make a billion.

There have been plenty of articles written questioning Groupon’s economics. The company has changed its accounting methods. It restated its revenue for 2010 from $713M down to $313M. The company lost $420 million last year and $117M in the first quarter of this year.

It’s not that the economics aren’t relevant or worth digging into. It’s simply that this deal is about mojo, not economics. People said the IPO would never happen. But it has happened.

Hot consumer deals are scarce, and the number of shares they make publicly available are even more scarce–Groupon floated just 5.5% of the company’s shares.

Back in June I wrote about why consumer companies are worth billions. I described the three M’s: Mass market, Monetization, and Main Street. Those three M’s can be summed up with just one: mojo.

Groupon has the three M’s. It’s applicable to hundreds of millions of consumers. When it comes to revenue, it’s one of the fastest growing companies ever. And nearly everyone has heard of it. It’s a household name.

Investors (through their funds) who have heretofore been unable to own the company–because it was private, now can. Hot, late stage consumer deals are scarce. The publicly available stock created by the small float caused even more scarcity. Add to that a CEO who not only runs a marketing machine but is one himself and you have incredible mojo, despite tons of negative press.

Deals with mojo raise money. They’ve got momentum, they’re well-marketed, and they’re scarce. Love ‘em or hate ‘em, it’s a great lesson in how to market, sell, and raise money.

Nov 4, 2011

The Big Idea

Are you building a big-idea company or a company of ideas?

Marshall Poe, who first brought to light the transformational nature of crowd-sourced publishing with his article The Hive in 2006, poses the above question as it relates to writing books in the October issue of the Atlantic. He might well be talking about startups.

Poe had long dreamt of writing a book of ideas. After he wrote The Hive, about Wikipedia, he was able to get a book deal, because, as he described it, he had two key ingredients.

First, he had a platform. “A platform is something you stand on. It makes you taller than you are.” He had been a professor at a major university (Harvard) and a writer at a major magazine (the Atlantic).

Second, he had a Big Idea. “A big idea is an enthusiastically stated thesis, usually taking the form of ‘This changes everything and will make you rich, happy and beautiful.’ A big idea must be counterintuitive: the this that changes everything must be something everyone thinks is trivial, but in fact matters a great deal.”

Ultimately, his book was not published because instead of being a big-idea book it was “a book of ideas.” His book was based on research, which contradicted much of the basis of the big idea, just as a lot of research “cast[s] doubt on the reality of wise crowds, tipping points, and long tails.”

Building a game-changing startup is all about The Big Idea. When investors say a particular entrepreneur or CEO is missing “the magic” what they’re really saying is that the pitch fails to articulate–and the company is not acting on a big idea. There may be lots of great ideas–lots of great features–articulated in the pitch and implemented in the product, but there’s no Big Idea to fall in love with.

Poe’s article provides incredibly nuanced insight into what makes for a great pitch, what sells, and ultimately, what separates a big-idea book from “a book of ideas.” Many of these insights also hold true for startups. The difference is that it’s the job of the Entrepreneur not only to have The Big Idea, but to make it a reality.

Sep 15, 2011

Why Apple Worked The Second Time

Why did Apple 1.0 fail but Apple 2.0 succeed? That, of course, is the $350B question.

1. Economics. Although Apple is now known for introducing premium priced products, at the time the iMac was introduced, it delivered incredible value for the price point. The iPad has put web surfing, applications, and media consumption in the hands of millions for well under $1,000. Apple 1.0 had to foot all the manufacturing costs, costs which nearly bankrupted the company. Apple 2.0 focused on the design, but created an incredible cash machine by outsourcing the manufacturing.

2. Founder. Soon after Apple got its founder back, Microsoft lost its founder at the helm. As investors have learned time and again, there is simply no substitute for a founder’s product vision. While Apple, the company, faced intense competition, there were few founder visionaries at the helm who could compete with Steve Jobs.

3. Accessibility/design. In the early to mid 80’s, personal computers were a completely new market. The Mac, with its graphical interface, beautiful fonts, and then high resolution display, was way ahead of its time.  Users were looking for function over form.

The second time around, the personal computing market was established. The mass market shifted and was looking for form over function. Over the past decade, design and style moved to the forefront. With consumer machines relatively equal in underlying hardware performance, it was more important to have the best user experience than the one with the most features.

4. Channel. Although Apple did ground-breaking and incredibly disruptive marketing with its 1984 commercial, IBM (and Compaq) owned the channel. They owned the path to businesses and consumers.  It was still very much an era of “you can’t get fired for buying IBM.” With the iPhone, Apple truly changed the game of reaching the consumer. No longer are carriers in control; now they compete for Apple’s latest products.

5. Integration/disruption. In periods of massive disruption, integrated solutions win. In non-disruptive markets, horizontal solutions win. In the last 15 years we have witnessed widespread adoption of broadband; digital media going mainstream; and, of course, the mobile revolution.

Although there were MP3 players well before the iPhone, no other company successfully negotiated the media deals and delivered the end to end experience necessary to make paid media consumption not only the realistic alternative – but the preferred one. In mobile, Apple delivered a smartphone form factor others had failed to achieve. The iPad enabled consumers to consume, quickly, and easily.

6. Lack of a focused competitor. Apple 2.0 lacked a competitor that was purely focused on the consumer. True, there was incredible competition. But there was no other best of breed, integrated product in the market.

The Wintel based product offerings competed on price and performance. The companies who built those products were not focused purely on building great consumer products. The hardware vendors, like Microsoft, were selling to enterprises and consumers, and trying to do so across multiple product lines, from desktop and mobile computing to storage and services.

7. Market share. Windows not only got to take share from the DOS market, but benefited from new market opportunity as well. Apple 1.0 never got to take market share. In contrast, Apple 2.0 took the existing MP3 market, then took share from the existing desktop market, through iPads and iPhones. That in turn has had the added bonus of driving adoption of Macs on the desktop.

8. Applications. Apple 1.0 could not compete with the third party ecosystem created by Microsoft around Windows, not to mention Office itself. With the iPhone and iPad, Apple 2.0 re-energized the application ecosystem. Apple 2.0 won the hearts and minds of developers.

Conclusion
There are numerous lessons from the success of Apple 2.0: how to create new markets while stealing share from existing ones; the virtues of integrated offerings during periods of disruption; the importance of distribution to every business, large or small; and the broad appeal of great design.

No one knows for sure what the future holds for Apple 3.0. But one thing is certain: Steve Jobs and Apple 2.0 will be missed.

Aug 26, 2011
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