Live From The Land of Da Blind

I was asked the other day what I’d learned from my startup experiences. After rattling off a bunch of things, I figured I’d write a few down.

I really wanted to use the David Foster Wallace essay title “A Supposedly Fun Thing I’ll Never Do Again” for this post, but I’ll probably do it again.

Here are 10 non-exhaustive things I’ve learned in no particular order:

1. It’s easy to arm chair QB, it’s hard to execute.
2. It doesn’t matter what people think of your idea, they probably don’t know the space that well, figure out if it’s a good idea yourself.
3. When a good manager meets a bad business, it’s the business that keeps it’s reputation. (Credit: Warren Buffet)
4. Failure isn’t a waste of time, prolonging it is.
5. Businesses are like snowflakes, each is unique. Don’t copy another business expecting the same results. Small particulars can have a huge impact on overall success/failure. 
6. You need to love your space, literally LOVE it, or you’ll get tired of it quickly.
7. Picking partners is the hardest thing to do, be rigorous.
8. You and your partner(s) should really have different skill sets.  
9. Focus.
10. Until you’re visibly successful, nobody cares. Once you’re somewhat visibly successful, people will assume you’re more successful than you really are, which in some ways feels worse.

“So you wanna be a rap superstar and live large? A big house, five cars, you’re in charge”

- “Rap Superstar” by Cypress Hill

I love hip-hop so I’m brazenly stealing Ben Horowitz’s style of using rap lyrics.

The Enterprise, So Hot Right Now:

The idea for this post came from observing the recent “pivot” from consumer startups to enterprise software, particularly among new entrepreneurs.

The shift to the enterprise is a bit of a “tail wagging the dog” situation. The poor performance of a few consumer IPOs coincided with the strong performance of SaaS IPOs, and since IPOs have traditionally been a main way for VCs to find liquidity, they shifted their investment focus. When this happens, entrepreneurs often adopt new passions.

That’s not to say there aren’t great things about the enterprise. Three of my favorite attributes of enterprise SaaS businesses are: 1) There is less business model risk 2) It’s easier to identify pain-points to address (relative to ephemeral tools for fighting boredom) 3) Buyers are sometimes more rational.

In addition, there is a lot of opportunity in the enterprise.

Gartner forecasts that the SaaS market will grow at a CAGR of 19.5% through 2016, from $13.5B in 2011 to $32.8B in 2016. This estimate might be borderline conservative when you consider that Oracle and SAP alone did $58,510,000,000 in revenue last year. Really.

However, enterprise businesses are not easy to build.

The Analysis:

If you’re of the entrepreneurial blog reading crowd, you’re likely familiar with the refrain: “It’s become cheaper to start an enterprise business, but it’s still expensive to scale.” This statement is true.

However, in an effort to create more actionable advice for budding Marc Benioff’s, I decided to analyze 12 recently IPO’d SaaS businesses to tease out more insights about what it takes to build a big enterprise software business.

Yes, you can start a successful enterprise business without an IPO. However, I’m focusing on businesses that have reached an IPO for two reasons: 1) Data availability 2) While a sale to a big company is in the roadmap for many successful SaaS businesses, the IPO is still the deus ex machine in the back of most people’s minds when they start and invest in SaaS businesses.

Here are the companies I looked at:

For this analysis, I used the first S1 filing for these companies, the logic being that it’s when everyone first feels that the company is ready for primetime. The business has reached a point where they’re comfortable sharing the financials with potential public investors.

Here are my takeaways.

Ain’t No Half Steppin:

If you start a SaaS business you will not be Kevin Systrom; you will be Sisyphus.

A SaaS business takes a lot of money and a lot of time.

Time:

The average time between founding and IPO was 9.5 years and the median was 8 years. At a minimum expect to spend 7 years building your business, though it could take 13 years.

Funding:

Raising money is painful for almost everyone. But if you start a SaaS business you should probably learn to love it. Why? Because you’ll be doing it a lot.

On average, these companies raised 4.45 rounds of funding (not including seed rounds) with a median of 4. At a minimum, these companies raised 3 rounds and many raised 6 rounds (that’s a Series F, as in “F***, I need to do this again?!”)

The average amount of money raised by these companies was $109 million, with a median amount raised of $74.2 million. The lowest amount raised, by far, was Bazaarvoice at $19.9 million. The most? Over $300 million.

Hope You Like Sales:

So why does it cost so much to start a SaaS business? Feet on the street.

Enterprise software is competitive, so the need to have smart, savvy sales reps delivering insights face-to-face to potential buyers has not gone away. There’s no click-to-buy.

As a result, on average 35% of the total employees at these companies were in sales and marketing at the time of the S1 filing, with a median of 37.6%.

Given the salaries commanded by talented sales reps, this translated into major expenses. As a percentage of revenue, sales and marketing expense was 45% on average, versus 20% for R&D and 15% for G&A respectively.

You Must Be This Tall:

All of the investments in sales and marketing are to accelerate and get to scale, but what is scale? Or at least enough scale to go public.

Based on the companies I looked at, the average revenue for the most recent FY as of the S1 filing was $73 million with a median of $61 million. The smallest companies were at $36 million, the largest at $134 million.

In terms of employees, the average size was 532 and the median size was 363.  

Only For Real Gs:

For those of you who haven’t perused the beach reading classic Valuation: Measuring and Managing the Value of Companies between Pacificos in Aruba, the central lesson of the book, and any corporate finance textbook, is that value is driven by cash flow, which is driven by return on invested capital (ROIC) and growth. ROIC is simply operating profits adjusted for taxes divided by invested capital.

All of this comes together in a formula subtly titled the Zen of Corporate Finance: Value = (NOPLAT x (1-[growth/ROIC])) / (WACC – g)

Why does this matter? It matters because most SaaS businesses have little or no operating profit as they scale, so they need to grow with a capital “G” to command a good valuation.

For the companies analyzed, the average 1-year revenue CAGR as of their S1 filing was 59% and the average 2-year revenue CAGR was 75% (the medians were 55% 1-year CAGR and 85% 2-year CAGR).

These growth rates may not feel impressive, but keep in mind this growth is in dollars forked over by skepitcal enterprise buyers, not new Twitter accounts.

Generally the more money these companies lost, the faster they were growing.

There is of course some causation at play here.

Round and Round, Round We Go:

As noted above, a SaaS business requires a lot of money to scale because scaling requires a big sales and marketing team, which is needed to achieve the rapid growth expected in the absence of cash flow, due in large part to sales and marketing costs.

So these businesses are in a constant state of raising capital and scaling the sales team, in addition to building an awesome product and supporting it.

The circle looks something like this:

This approach is driven by two realities: 1) These companies are pursuing large markets, with a lot of opportunity 2) They are competing against behemoths, so they can’t show up to a gunfight with a knife.

The Promised Land:

So why go through the effort?

SaaS business are great businesses over the long-term. Why? Potential margins and recurring revenue.

The average gross margin for these companies at their S1 filing date was 65% with a median of 66%.

The implication is that once these businesses have scaled, and more revenue is coming from renewals, the 45% of revenue spent on sales and marketing can be reduced. The result is a high margin business with predictability. The Promised Land.

Conclusion:

If you just spend 9.5 years raising $110 million dollars across 5 rounds of funding, and hire 530 employees, managing a sales and marketing team of 160 people, while building a world-class product that can win in the hyper-competitive enterprise software business, to reach $70 million in annual revenue, you can create a high margin business with predictability.

Sure you don’t want to build a dating app?

The dogs on main street howl ‘cause they understand If I could take one moment into my hands Mister I ain’t a boy, no I’m a man And I believe in a promised land

“The Promised Land” by Bruce Springsteen

Ben Horowitz starts every blog post by quoting a rap song.  I love this.  First, because I love rap.  Second, because there are a lot of amazing lessons in the lyrics.  Much in the same way people pull lessons out of Sun Tzu.

I was listening to Biggie today, and at the same time I was looking at press for a pseudo competitor to a business I’ve been working on.  In the Biggie song I heard a great line that I’ve always loved, and I thought it was really applicable.  The line was:

“The rings and things you sing about bring em out, it’s hard to yell when the barrel’s in ya mouth.”

- Biggie, Rap Phenomenon

The lesson I took away from this line is simple: It’s easy to get wrapped up in every press release, interview, mention, and boast from “competition” when you’re starting a business (and even when you manage a mature business).  Rather than obsessing about it, do the only thing that will shut them up: take it to them.

PR, interviews, and generally talking about your company never wins the game.  Let competitors sing about the rings and things, put your head down, make a better product, put them on the defensive, then see how much yelling they do…

NYU, New York City, and business school in general is becoming a better place to launch into the entrepreneurial ecosystem. 

Below is a cheat sheet for how to take full advantage of 2 years at Stern to pursue a career in entrepreneurship (specifically tech entrepreneurship).  Hopefully this list is useful for students at other business schools as well (especially schools in NYC).

This is not comprehensive, and I’ll be updating it when I think of people, events, and activities I am most certainly forgetting. 

Thanks to everyone who has helped me figure all of this out slowly on my own.  My hope is that this list makes the process more efficient for others.

Summer Reading:

Mandatory

Books

• The Lean Startup
• The Entrepreneurs Guide to Customer Development
• Business Model Generation

Blogs:

• AVC
• Both Sides of the Table
• Ben’s Blog (no, not me, a more accomplished Ben)

Websites:

• Hacker News, TechCrunch, VentureBeat, Wall Street Journal (still need to understand all business trends), SAI, PandoDaily, BetaBeat, ReadWriteWeb

For Non-Technical People

• How the Internet Works
• W3 Schools (website)
• Lynda.com (website, taught myself Illustrator in 1.5 days)
• Codecademy (do at least some of the levels)

Especially for the Aspiring VCs

• Venture Deals

Optional

Books

• Four Steps to the Epiphany
• The Art of the Start
• Getting to Plan B
• Little Bets
• The Entrepreneurial Venture (classic with some good stuff for those new to entrepreneurship, but buy it used because there’s some useless stuff too)

For Non-Technical People

• RailsTutorial.org (lock yourself in a room for 40 hours and learn Ruby on Rails like Nate Westheimer and my good buddy Nate Berkopec)
• Great intro to programming Skillshare class from Kareem Amin of Frame/SailThru

Other blogs I like:

• Chris Dixon, Vinicius Vacanti, Bill Gurley, Jared Hecht, MG Siegler

Other websites if you have time:

• The Economist (no better way to come up with business opportunities than to understand trends globally)

• Industry-specific sites depending on your areas of entrepreneurial interest (e.g., I read Paid Content because I care about media)

People to Follow on Twitter:

• Fred Wilson, Mark Suster, Eric Ries, Vinicius Vacanti, Alex Osterwalder, Peter Sims, Hiten Shah, Steve Case, Chris Dixon, Eric Hippeau, Roger Ehrenberg, All Things D, Brad Feld, PandoDaily, Mike Lazerow, MG Siegler, Mike Arrington, David Tisch, Patrick Vlaskovits, John Borthwick, Nate Westheimer, NYU Entrepreneur, Frank Rimalovski, Alexis Ohanian, Lauren Goode (there are probably 50 additional NYC-based people that could be on this list, I just think this is a good mix)

Newsletters to sign up for:

• Charlie O’Donnell
• Garys Guide
• General Assembly
• PEHub
• Term Sheet from Fortune
• Create Google News alerts for your verticals of interest

Professors to know:

• Evan Korth (computer science professor, co-runs HackNY)
• Glenn Okun (teaches a bunch of the Stern MBA entrepreneurial classes)
• Hilary Gosher (teaching a night class, Partner at IVP, **awesome**)
• Larry Lenihan (teaches “Ready, Fire, Aim” for undergrads, MD of FirstMark Capital, great NYU friend)
• Cynthia Franklin (adjunct professor, helps run the Berkeley Center for Entrepreneurship)
• Luke Williams (newly appointed Executive Director at the Berkeley Center)
• Jeffrey Carr (teaches several courses focused on entrepreneurial marketing)
• Norman White (information science professor at Stern, teaches a web and mobile application development course, has servers students can use)
• Adam Penenberg (he is a freakin editor at PandoDaily…)
• Greg Coleman (seriously missing this class was a MASSIVE blunder on my part)
• ITP professors (I could have done better here)
• NYU-Poly (I really could have done better here)

Other people to meet:

• Frank Rimalovski (runs NYU Innovation Venture Fund)
• Jason Finger (founder of Seamless, super super smart and nice guy)
• David Tisch (you should know who he is)
• Ryan Jacoby (new NYU EIR, just met him, awesome)
• Rob Fassino (the other NYU EIR, co-Founded XO group, probably awesome)
• Trevor Owens (started Lean Startup Machine, kick-started entrepreneurship at NYU for undergraduates before leaving school, works out of AlleyNYC)
• Dawn Barber (founder of NYTM)
• Owen Davis (always around NYU events, runs NYC Seed)
• Brian Cohen (good friend of NYU, Vice Chairman of NY Angels)

Events to go to:

• New York Tech Meetup
• Every single free talk from real entrepreneurs at Stern
• Demo days for every incubator and accelerator you can get into (many take place at General Assembly)
• ITP Winter and Spring Shows
• At least 1 or 2 relevant Meetups in verticals you care about a month
• Lean Startup Machine (at least once go to the New York program, contact @to2 for details and potential student discount)
• HackNY Hackathon
• Tech@NYU DemoDays / Hackdays

Places to hang out:

• Dogpatch Labs
• Courant
• Poly Incubator
• WeWorkLabs
• General Assembly
• Alley NYC (new, cool, but in Midtown…)
• Varick Incubator
• AOL Ventures (if you can figure out a reason you belong there, the office is awesome)
• Ace Hotel Lobby (this may not be where anyone goes anymore, I’ve only actually been there once, wince)

Groups to join at Stern:

• TANG/EMT
• EEX
• Potentially a club that is in a vertical of interest to you
• LABA (for the parties)
• Tech@NYU (do it, do it, do it…)
• ACM (if you write code)

Classes:

• Foundations of Entrepreneurship
• Managing Growing Companies
• Entrepreneurship in the New Economy
• Designing and Developing Web and Mobile Applications
• Competitive Strategy in the Marketplace (tons of work, but will satisfy all your lifelong desires to apply military analogs to business)
• Brand Strategy
• Accounting (multiple accounting classes if possible)
• Venture Financing
• Greg Coleman class if he teaches again

Semester 1:

• Email second year MBAs who have started companies or are involved in entrepreneurship groups, ask them for advice on all the things above (in case they have other suggestions).
• Apply for InSITE, a Fellowship program for graduate school students interested in entrepreneurship, venture capital, and technology.  Not easy to get accepted (still not sure what they were thinking) but one of the best things I’ve done.  Well worth the time and effort. 
• Meet with recent grads working at startups in NYC for coffee, ask them about what they did at Stern, know more about their companies than 99% of people out there, make good suggestions.
• Start hitting all the events listed above.
• Learn the basics of writing code and treat it as an extra and more important class.  You don’t need to be fluent, but you need to speak the language.
• Download Evernote and start storing interesting articles, ideas, and other stuff in one place.  Go back and read it from time to time.
• Join Tech@NYU and get to know non-Stern NYU students (seriously, if you don’t tap into the broader school you might as well have been home schooled for your MBA)

Semester 2:

• Look at the recently funded companies from investors like Lerer Ventures, SV Angel, IA Ventures, RRE, Founder Collective, Thrive Capital, etc. across the first semester.  Figure out the one with the most potential (in your opinion, not according to TechCrunch).  Think of 3-4 ways you can add immediate value to their business and aggressively pursue an unpaid internship for the semester.  (When I was a first year this company was GroupMe, and David Lee told me so.  Whoops, should have done this…)
• Keep up the networking like crazy.  Skip class if you have to, but get out and meet people in NYC tech.
• Pick a few verticals or types of businesses you think are interesting and do some real deep dives.  You can afford to spend time knowing more about certain areas than most of the pundits and bloggers that never get more than Twitter or blog-level deep on this stuff.  Go really deep.  (Forthcoming blog post on this.)
• Rapidly test your business ideas. You can knock out 75-80% by applying a little pressure (e.g., getting out of the building and talking to users/customers and applying the physics/economics of the industries to your mental financial model).
• Go to SXSW or San Francisco.  Or both.  Set up some casual coffee chats with NYU alumni and just people from cool companies.  Go out on the town. 

Summer:

• I’d like to say take a startup internship if you can get it.  But, sometimes you need to pay the rent.  I worked in TMT banking.  Personal decision and depends on whether you can find a paid internship in tech and how many fixed expenses you have (FYI: East Village can be expensive…).  Google and other big tech companies have internships that are paid though.

Semester 3:

• Try to start a business.  (You can also start this in year 1).  Business school offers time and access to unique resources.  No better time to try to launch a venture.  Playing the student card when conducting research goes a long way.
• Enter the business plan competition.  But don’t let it get in the way of real progress, throw your hat in the ring.  $75k with zero dilution can be worth the time if it doesn’t hinder things you would do anyway.
• Good tools for the effort: GoMockingbird or Balsamiq, Unbounce, monthly subscriptions to Adobe Photoshop and Illustrator (30 day free trials), free survey software from Qualtrics from Stern Apps, the NYU business resource library, and classmates (for ideation partners, survey respondents when appropriate, and partners).
• Try to TA an entrepreneurial class for undergraduates.  You will meet some great young entrepreneurs.  One of my better decisions.    

Semester 4:

• Hustle, hustle, hustle.
• Play the “I’m a student and I’d love to learn…” card over and over and over again with potential mentors, customers, users, employers, investors, etc.
• Don’t freak out because you don’t have a job lined up.

That’s all I’ve got so far.

My blog post for the NYU Entrepreneurs Network blog about David Tisch’s talk for the NYU Entrepreneurs Speaker Series.

On January 26^thDavid Tisch, the Managing Director of TechStars New York, kicked of the NYU Entrepreneurs Network Speaker Series with a talk formally titled “How to Talk to Your Investors” and informally titled by David “How to Stop Sucking at Email”.

David, who has invested in over 90 companies through TechStars and personally through The Box Group, such as GroupMe, Fab.com,  Flavors.me, Dispatch, numberFire, and Nestio, was his usual no B.S. and funny self.  He offered innumerable highly practical tips about raising money, communicating with potential investors, and even some tips on managing your own inbox (he gets to between 400-800 emails per day…).

David kicked off the presentation by relating the skills and techniques required to communicate effectively with investors as being very similar to those required to communicate well with potential customers.  I could not agree more. 

First and foremost David discussed knowing your audience.  Most investors make volumes of blog posts, interviews, and other information available online, and they expect you to read it.  As an example, if you are meeting with Fred Wilson and you haven’t read AVC, you are literally crazy.  (Side note: you’re crazy if you’re starting a tech company and you aren’t reading AVC regardless of whether or not you have a meeting with Fred).

Next David discussed some email etiquette.  His suggestions weren’t just his preferences— they were based on a survey that asked investors their email pet peeves.  Some of the key tips he offered were to send emails of no more than 3-4 sentences (don’t go all Tolstoy-esque), make your emails searchable by putting your company name in the subject and including other relevant key words, put attachments in nice formats like PDF and describe the document in the file name (e.g., “sick.ly demo 1.27.2012” “pay.me investor deck 1.27.12”), respond quickly, over-CC, don’t under-CC, and don’t ask open ended questions.  The big takeaway: make life easy for investors and don’t create more work for them.

Specific to cold-emailing, David suggested you should try to avoid it.  Get an introduction to someone you really want to invest in your business.  If you don’t know anyone in common, work to develop those relationships over time.  However, make sure you’re getting an introduction from someone that actually knows the investor (and the investor actually likes and trusts!).  If you get introduced to David by someone he doesn’t know or like, you are primed to be a use case for his Boomerang plug-in (he will respond right away, but it won’t get sent for a week, freakin brilliant).

If you must resort to cold-emailing, again, do your homework and personalize it in some way.  For example: “Hey David, What do you think of the Giants chances in the big game? (Side note: don’t actually use the phrase “big game”).  Next, make the email extremely concise – like 3 sentences.  Lastly, send it at a time when an investor might notice it.  David personally thinks Sunday night, the rudest time for “normals”, is actually the best time to reach a VC because they’re cleaning their inbox before the next week.  Outside of Sunday night, Tuesday is a decent bet.   

Once you get a meeting and a chance to pitch your firm, David emphasized that you should not sell your company by selling.  Sell your company by being good.  Don’t focus on the features of your product, focus on the benefits.  For your deck, the following is a high-level outline of what you should have, although there is no single right format:

· Who you are

· What you’re doing

· Why

· Where you’re at

· Where you’re going with it (and your $$ ask, though that might be different slide)

· Some market slide(s) with market size, total potential customers, competition

· Product (2-4 most important screen shots)

Other tips for the pitch are to not save the big reveal (if you have a rock-star team, make the team slide #1), don’t outline the general market (e.g., “mobile”) outline the addressable market, and mention the competition because if you say you don’t have any it will ruin your credibility. 

Lastly, just remember the following chart from Mark Suster:

Each time an investor interacts with you it is important to be more impressive than the previous interaction – that’s how you get funded.  So do your homework, be meticulous in your communications and interactions, and make progress. 

In all, it was a great talk as usual with a ton of extremely practical advice.

Ben Sesser, Stern MBA 2012
@bsesser

Below is a blog post I wrote for the InSITE (www.insiteny.org) blog about a breakfast we had with Steve Martocci from GroupMe and some of his great thoughts.

On January 25^th InSITE Fellows Joe Rizk, Sean Weinstock, Adam Kalamchi, Marianna Zaslavsky, and myself were fortunate enough to have breakfast with Steve Martocci, who co-founded GroupMe with Jared Hecht in 2010.  For those of you who don’t know, GroupMe is a group messaging startup founded in May 2010 at TechCrunch Disrupt and was sold to Skype (Microsoft)… about 14 months later. 

Steve, who joined us straight from Sundance (#winning), touched on a number of interesting topics from the perspective of a recent founder, a unique and valuable viewpoint.

The first part of the breakfast was spent discussing NumberFire (numberfire.com), a sports analytics startup.  NumberFire is a former InSITE company founded by Nik Bonaddio, where InSITE breakfast attendee Sean Weinstock is the COO.  Steve dug-in to understand NumberFire’s differentiated approach to sports projections, shared some suggestions about how to better engage readers of NumberFire’s newsletter (sign up for it!), and talked about the importance of filling out a round of funding with investors that can add value beyond their capital.  Once there is some competition for a round, the entrepreneur is in a better position to select investors that can add unique value based on their industry experience, connections, or perhaps visibility (see: @aplusk, investor in GroupMe).

Steve then shared some great advice about recruiting initial employees.  A key to GroupMe’s success and their acquisition was the A+ engineering team that Steve and Jared assembled.  This was driven by the networks of the GroupMe founders (prior to GroupMe Steve was at Gilt, Jared at Tumblr) and a willingness to over-pay for great engineering talent.  As Steve stated, if you don’t pay above market for the best engineers, someone else will.

Steve was also asked if he felt any trepidation about asking early employees to leave safe jobs for a startup.  Steve relayed the importance of aggressively recruiting great talent, and that as long as recruits understand the risks associated with joining a startup, entrepreneurs should not be bashful in their efforts.

Lastly, Steve directly and indirectly touched on the importance of cultural fit, and building a team of people that get along well.  In one instance, GroupMe was able to get two talented engineers to back out of commitments to work at another big-time startup after sitting around and listening to Disney music.  Why?  It was clear GroupMe was going to be a better fit…  This strength of the GroupMe team, getting along well, started at the top with the long-standing friendship between Steve and Jared prior to GroupMe.  Often we hear warnings about the risks of working with close friends because of all of the things that can go wrong.  GroupMe is a clear counter-example.  In fact, Steve discussed how critical it is to known your co-founders for a meaningful period of time before starting a venture.  

In all, the breakfast was excellent.  The team heard some great insights from an extremely grounded and cool entrepreneur.

The lead story in the Wall Street Journal today is about Kodak.  The 131-year-old company is “teetering on the brink of bankruptcy” and preparing to file.  Capitalism is ultimately survival of the fittest, but I have to say this makes me a little sad. 

I grew up with a love of photography thanks to my grandfather, learned to develop my own film, and spent countless hours in camera stores buying Kodak film.  It also makes me sad because of the 19,000 employees and the impact a Kodak bankruptcy might have on Rochester, N.Y.  Though I’ve never been to Rochester, one of my closest friends hails from the area and I’ve personally seen the hollowing out of industry across upstate New York having gone to school in Ithaca.

This reversal of fortunes for one of the great American companies of the 20th century would have been unthinkable in 1964 when Kodak was the “Apple Inc. or Google Inc. of its time” and employees, recruited from the best schools, were playing basketball on the company courts or watching movies at lunch in the auditorium.  However, the story reminded me of a telling anecdote I heard from the head of Marketing Research at Kodak four years ago.

At the time I was working in the Sales and Marketing Practice at Corporate Executive Board and writing a research study on innovation.  While interviewing this individual from Kodak (his exact title might have been VP of Consumer Insights) he described his experience making a presentation to the CEO of Kodak and other key executives regarding digital photography.  Essentially, he was asked to analyze the impact of digital photography on Kodak.  Nervously he relayed his findings:  traditional film-based photography was pretty much going to disappear with the exception of professionals and enthusiasts.  In hindsight, a great call. 

The CEO’s immediate reaction was this man’s nightmare scenario.  He was essentially berated and thrown out of the meeting.  Later, the CEO would apologize and Kodak would try to take steps to transform their business and adapt to the obvious sea change in their industry.  However, the reaction explains Kodak’s current plight.  It also shows a company too emotionally tied to their product. 

Companies shouldn’t be emotionally tied to their product, they should be emotionally tied to delivering their value proposition.  This is an important distinction because if your care more about the mode of delivering value than the value itself, you become susceptible to the types of industry-changing shifts described by Clay Christensen in The Innovator’s Dilemma. 

Given the CEO’s reaction, Kodak was clearly not a company with a posture towards questioning the sustainability of their current business.  This despite the fact that Kodak was responsible for many of the breakthroughs that enabled the creation of digital photography.  The company simply didn’t want to introduce something that would cannibalize their cash cow business.  So, they waited until someone else did. 

When companies do this it reminds me of a scene from the movie Billy Madison.  After being repeatedly picked on for thinking what made him cool in high school ten years earlier would translate to the present, like blaring The Stroke by Billy Squire and wearing an REO Speedwagon shirt in front of school, one of Billy’s classmates asks him: “What are you in loser denial or something?” Kodak was in loser denial.

If you are looking for examples of how something like this could happen to one of our current industry darlings, how about Google.  Their cash cow is a mode of search not particularly well suited to mobile (although they are clearly aware of this).  Not a great situation when one considers the myriad of statistics around the growth in the searches that originate via mobile vs. desktop, and the potential of something like location-based apps tied to your social graph powered by voice (like Siri) delivering you perfect recommendations for most common searches.

In summary, I am sad about the state of Kodak.  But they really should have kept the dissenters in meetings.

“Momma don’t take my Kodachrome awayyyyyy.” - Paul Simon

“If rap was a game I’ll be M.V.P.”

That’s the hook from one of my favorite songs by one of my favorite rappers, Big L (rest in peace).

The line is ironic because a music video for a friend’s new rap single gave me some additional clarity about minimum viable products.  Yes, you heard me right.  

Ever since my exposure to the “lean startup” methodology, I’ve been most interested in determining how to make a good minimum viable product.  I think most people find it hard to pinpoint what the MVP for their product should entail.  I certainly do, even having gone through the thought exercise for my projects, startups I’ve worked with through InSITE, with students from the great class I TA, and during Lean Startup Machine. 

Some of the common questions are:

How many features are too many, how few are too few?

What if I build something so bad it destroys our reputation?

If I only build a few features, and my product value proposition relates to comprehensiveness, an end-to-end solution, or being robust, what does an MVP teach me?

Eric Ries has pretty good answers for all of these questions. 

However, for an example of how to make a good MVP, take a look at the hip-hop on YouTube. 

My good friends from True2Life Music have been making music out of Brooklyn for years, and posting all of their songs to YouTube.  Initially the songs were pretty rough recordings made in college with no videos.  Later, the group got some nice professional recording equipment with the cash they made from live concerts and general hustling, put quality recordings on YouTube, but still no videos. 

It didn’t matter how rough each iteration was.  Each time a new song was posted to YouTube, True2Life was able to see measurable and contextual user feedback: views, likes, comments, and shares.  (The great thing about YouTube comments is that people pull no punches…)  The fact that there was no video was actually beneficial during this time.  The feedback was strictly about the most important aspect of their value proposition: the music. 

Art is a little different than many startups in that True2Life would never compromise the music they feel passionate about simply to become more popular.  No autotune and choreography here.  This reminds me of the quip that if you’re always pivoting to what drives more traffic you’ll inevitably get to porn.  Nevertheless, through YouTube (and other) feedback, True2Life has been able to hone in on what elements of the music they make most resonates with users. 

One member of True2Life, Slang, told me an anecdote about a remix they did of Miguel’s “Girl with the Tattoo”.  They liked the track, but didn’t really think it would be one of their more popular songs.  So they were surprised when it gained 13,000+ views and the son of a major music executive mentioned it to them at a party.  As Slang said: “The views don’t lie.”

Which brings me to the present.  Recently the group dropped a great video for the track “Daily Math” from their new album.  At this point, True2Life is producing polished recordings and videos.  But they are still running lean.  They do all of the beats, writing, music production, and video production themselves (all self-taught).  And YouTube is still paying dividends. 

First, they get the same great feedback.  Second, when an A&R finally wakes up and takes notice of the “Daily Math” video, True2Life can show them the 175-to-3 “like-to-dislike” ratio (talk about a good NPS), litany of all highly positive comments, and 10,000+ views in about a week.  They can also show them that the traffic to the video is from impartial outside sources, the names of the sources, and even the geographic diversity of the traffic.  This is some serious social proof.  All bootstrapped.

In summary, True2Life’s process helped me recognize the keys for a good MVP as:

1.  Just put something out there so you can get the essentials right.  Many people in the music business might argue the artists “value proposition” depends on a polished image, full albums, high sound quality, and slick videos.  Maybe this stuff helps a little.  Certainly people show “Daily Math” love because of the awesome video.  But with the same video and a weak song that doesn’t connect for people, it would have fallen completely flat.  True2Life put out the rough stuff and got feedback from the start.  As a result, their investments in “polish” paid off.

2.  Whatever MVP you launch, make sure you can measure both quantitative and qualitative results.  Data is great, but knowing whether someone liked the song because of the second verse on the track or the hot dancers in the video is important context.  The same is true for your website.  You might see that traffic is bouncing, or sticking around, but if you don’t know why, you can’t replicate success.

3.  Over time, the MVP should be able to give you some social proof.  True2Life has been killing it for years (you might have seen them in the movie “NOTORIOUS”).  The music isn’t materially different than it was six months ago.  But with a fast 12.6k views for “Daily Math” and increasing love on Twitter and in hip-hop blogs from complete strangers, the industry is starting to show them love.  This only happened because the MVP was out in the wild. 

Lastly, True2Life’s grind has been general entrepreneurial inspiration for me personally.  Here are three guys with top flight academic credentials who decided to pass on high paying jobs to chase a dream.  They’ve been doing it for more than 5 years since…

“Let me tell you one thing in this world so true, you ain’t got nobody in this world but you. You want it?  You take it, you make it, don’t quit, and tell them other bum bitches get wit it.  Head to the sky.” - True2Life Music, “Bottom of your Heart”

“Stay far from timid, only make moves when your hearts in it, and live the phrase ‘skies the limit’… see you chumps on top.” - Biggie

This post has been in my head for a while. 

The answer to the broad question “How do we make America more competitive?” has many complicated answers.  However, there are a bunch of simple things we can do to push America in the right direction that, inexplicably, aren’t being done. 

This drives me nuts on a daily basis. (Side note: Yesterday I heard someone ask Regis Philbin why he’s always in such a good mood, and his answer was that he doesn’t follow politics. Brilliant.)

Brief caveat: Some of these ideas will move the needle more than others.  Some will have a direct impact, others indirect.  I’m also positive that I’m not the first person to think of these.  However, the overarching theme is that from my vantage point these are simply no-brainers.

1) Staple a green card to every single STEM PHD or Masters degree proffered by an American college or university.

2) Provide incentives to, or force, colleges and universities to swallow their pride and merge less popular/niche programs with other schools to reduce overall costs and make college more affordable for students.  Not every college deserves a standalone Sanskrit department.  (Side note: US News, make average cost and financial aid a bigger factor in ranking schools, don’t just name “value” schools.  Unfortunately people care about your rankings.)

3) Make it mandatory that colleges and universities provide as part of orientation an overview of data on the amount of jobs currently available across disciplines, projections of future growth, average starting salaries, conversion rate (the number of students trying to enter an industry that actually get jobs in that industry), etc.  Students have no grasp on reality when it comes to this information.

4) Provide meaningful tuition assistance to math and science graduate students that participate in a new year-round STEM tutoring program for middle school and high school students.  

5) Make computer languages a class like French, Spanish, etc. (Hello Codecademy, or alternative.)

6) Pay a local entrepreneur to serve as an entrepreneurship teacher in every single high school as we do with football coaches.

7) Simplify the process for applying for a loan as a small business.  Yes there are other ways to induce lending, but we can start with making it more transparent.

8) Reduce the balance on student loan debt by $3,000 for each person hired by a graduate within 3 years of their graduation, and retained for more than 1 year.  So, if you graduate, start a company, and grow it to 10 people within 3 years, you get $30,000 whacked off your student loan debt. 

9) Raise the retirement age for everyone to 69, and create an incentive for public institutions to hire individuals over 60 and a tax credit for private businesses to do so.  The number 69 is a bit arbitrary, but feels about right.  When Social Security was created the average life expectancy of a man was 60 and a woman was 64.  Now the average life expectancy is 78.  Looked at another way, the percentage of people who reached 21 and survived until 65 increased between 1940 and 1990 by 19% (men) and 23% (women) and they had an increase in the average life expectancy after 65 of 4-5 years.  I cannot fathom how we don’t more meaningfully adapt a massive source of government spending to clear changes in society.  Call me crazy.

I am sure there are many other worthy ideas out there.  I would love to hear them.