Startups In The Startup Genome

Based on the first Startup Genome report we are releasing a new survey for entrepreneurs to assess their startup. Entrepreneurs that fill out the test will be given their startup personality type, with personalized advice for what to focus on based on aggregate data from the startup genome project. The data we collect with this survey will allow us to give entrepreneurs even more granular feedback.

In the 20th century large companies became dramatically more efficient as a result ofscientific management. This was arguably one of the biggest causes for the explosion of wealth the world saw in the last century. The Startup Genome Report is a major step towards triggering the same transformation for entrepreneurship and innovation. In a time where progress seems to be slowing down, this could unlock another century of transformative growth and prosperity.

Following are 14 more of our key findings. If you would like to read the full report, you can download it here.

1. Founders that learn are more successful: Startups that have helpful mentors, track metrics effectively, and learn from startup thought leaders raise 7x more money and have 3.5x better user growth.

2. Startups that pivot once or twice times raise 2.5x more money, have 3.6x better user growth, and are 52% less likely to scale prematurely than startups that pivot more than 2 times or not at all.

3. Many investors invest 2-3x more capital than necessary in startups that haven't reached problem solution fit yet. They also over-invest in solo founders and founding teams without technical cofounders despite indicators that show that these teams have a much lower probability of success.

4. Investors who provide hands-on help have little or no effect on the company's operational performance. But the right mentors significantly influence a company’s performance and ability to raise money. (However, this does not mean that investors don’t have a significant effect on valuations and M&A)

5. Solo founders take 3.6x longer to reach scale stage compared to a founding team of 2 and they are 2.3x less likely to pivot.

6. Business-heavy founding teams are 6.2x more likely to successfully scale with sales driven startups than with product centric startups. 

7. Technical-heavy founding teams are 3.3x more likely to successfully scale with product-centric startups with no network effects than with product-centric startups that have network effects.

8. Balanced teams with one technical founder and one business founder raise 30% more money, have 2.9x more user growth and are 19% less likely to scale prematurely than technical or business-heavy founding teams.

9. Most successful founders are driven by impact rather than experience or money.

10. Founders overestimate the value of IP before product market fit by 255%. 

11. Startups need 2-3 times longer to validate their market than most founders expect. This underestimation creates the pressure to scale prematurely.

12. Startups that haven’t raised money over-estimate their market size by 100x and often misinterpret their market as new.

13. Premature scaling is the most common reason for startups to perform worse. They tend to lose the battle early on by getting ahead of themselves.

14. B2C vs. B2B is not a meaningful segmentation of Internet startups anymore because the Internet has changed the rules of business. We found 4 different major groups of startups that all have very different behavior regarding customer acquisition, time, product, market and team.

http://startupgenome.cc/discover-the-patterns-of-successful-internet

New Capitalist Manifesto

The Capitalist Manifesto is an inspiring, thought provoking and important book. Forget all about classic CSR – Umair Hague is much more radical in his approach. A must read for everyone interested in making his or her company or organizations ready for the 21st century.


 In The New Capitalist Manifesto, Haque advocates a new set of ideals: (1)Renewal: Use resources sustainably to maximize efficiencies, (2) Democracy: Allocate resources democratically to foster organizational agility, (3) Peace: Practice economic non-violence in business, (4) Equity: Create industries that make the least well off better off, and (5) Meaning: Generate payoffs that tangibly improve quality of life. Yes, adopting these ideals requires bold and sustained changes. But some companies-Google, Walmart, Nike-are rising to the challenge. In this bold manifesto, Haque makes an irresistible business case for following their lead.


Haque contrasts the clumsiness and inefficiency of 20^th Century firmspushing products towards customers, with firms like Lego (toy bricks) and Threadless (T-shirts) that use the power of pull (or spinning), by incorporating the customers into the very process of decision-making as to what will be produced. As a result, the firms make quantum leaps forward in the agility of decision-making; the firms systematically make better decisions sooner.

Haque contrasts competitive advantage (lower costs) of the 20^th Century firm with constructive advantage, i.e. an advantage in both the quantity and quality of profit. Constructive capitalists have an advantage in the kind of value they are able to create, not just its amount. Because higher quality value is "less risky, less costly, more defensible, and more enduring, it is usually worth more to stakeholders of every kind: people communities, society, future generations, employees, regulators and investors alike."

Like Ranjay Gulati (Reorganize for Resilience), Haque envisages a fundamental shift from inside-out and top-downmonologues (“You take what we make”) to outside-in and bottom up conversations (“Let’s discuss how we can understand and solve your problems”). To be real, such conversations need to be participative (a right to take part),deliberative (a right to discuss not just vote), associative(space to conduct the conversation) and consensual (a right to express dissent). 

Yet he also notes the constraints on implementing the vision:

...for most industrial age companies, empowering the community equals disempowering layers of managers. Hence, responsiveness is more easily gained for start-ups, where there aren’t layers of middle managers fighting to retain their empires.

Haque believes in firms that have a philosophy, particularly “a philosophy that emphasizes the first, fundamental principle of value creation, rather than planning planning a strategy focused on value extraction.” There is thus a shift from an overriding preoccupation with financial value and costs to instilling real values that create the basis for generating thick value that makes a difference in people’s lives. He cites Google (GOOG) as an example of a principle-driven business with such a philosophy, with its celebrated commitment to do no evil, its preoccupation with speed (fast is better than slow) and its furious experimentation to enable continuous improvement.

How far has the revolution already happened?

“If you look closely and patiently enough, you might not discern full-blown revolution (as in “the successful overthrow of authority”)–yet. But I wager that you’d at least detect, in vivid detail, its prelude…. Examining it carefully, you might see what I see: the first tiny shoots of what scholar Thomas Kuhn called a paradigm shift—not a small step, but a giant leap from one system of thought to its successor, which recasts an art or science in a radical new light.”

Mobile trends

These are the trends we expect to see in mobile advertising over the next several years. We hope the result for users will be a less annoying, more useful ad experience.

1) More interactivity and "apps as ads."

You use your phone for different things than your laptop and your TV. So ads should be different, taking advantage of unique things you can do on your phone -- like touching its screen, moving it around, accessing its camera, and using it anywhere.

That's the basis for interactive mobile ads, or the concept of building ads like mini applications. Apple's iAds are perhaps the most famous interactive ads -- letting you explore a tiny virtual world inside the ad, watch video, enter contests, play games, etc. -- but they're far from the only ones. Other companies like Medialets and Crisp Media offer similar tools to app makers and ad agencies.

We expect to see more of these interactive "apps as ads" as brands and agencies discover all the things they can do with mobile ads. The key is figuring out a way to make these ads useful and engaging, not just annoying pitches.

One big question is whether people will care enough to bother playing with these ads, or if they'll ignore them. Another is whether they'll actually buy stuff.

For an example, here's a screenshot of one of Apple's early iAds, where you could goof around with the way this kid looks.


2) Deals and rewards, not just empty pitches.

One of the coolest mobile ad models we've ever seen is from a new startup called Kiip. Their ads -- rewards and coupons -- show up in mobile games when people reach certain points in the game. For example, if you beat a level, you might be rewarded with a free cup of coffee or a discount on new shoes.

We're also intrigued with real-time local offers like the new Groupon Now service from Groupon.

The idea is that you can get a short-term deal on something right now -- like a sandwich or a haircut -- which encourages you to do something right away. This is the sort of thing that could be expanded into an ad product for other apps over time, if Groupon wants.

The big idea is to give people a reward or save them money for using these ads. That seems more worthwhile than just sticking ads in someone's face.

3) Companies using cool mobile products to reach consumers directly, instead of ads.

New distribution tools like the iPhone App Store are giving brands unprecedented direct access to consumers, without the need to necessarily buy actual ads to reach people.

4) Ads helping save you money on mobile gadgets or services themselves.

Wouldn't it be cool if you can get a discount on mobile service, or even on the price of your gadgets, if you agree to spend some time with ads?

Amazon is leading the way here with its new Kindle with special offers, which is priced $25 cheaper than its ad-free Kindle models, with the requirement that you see some ads instead of its typical screensavers. Since its launch, it has been the best-selling Kindle that Amazon offers.

This may be the future of how gadgets are sold. If companies like Amazon, Google, mobile carriers, and others figure out that they can earn a certain amount of advertising revenue per customer, per year, they may subsidize your device or service.

5) Mobile ads linking up with mobile payments to "close the loop."

Mobile ads have information about you that other types of ads don't, including your location and the apps and music on your phone (Apple's iAds). But in most cases, they still can't tell the ad buyer that you've purchased something after seeing the advertisement.

http://www.businessinsider.com/future-of-mobile-advertising-2011-6

New financing tools

First they ignore you. Then they laugh at you. Then they fight you. Then you win.”
Mahatma Gandhi

I hesitate to use a quote from one of the greatest people ever to grace planet earth, and certainly the question of how to structure early stage investment is a laughable cause as compared to the rights that Ghandi (also a lawyer) fought to advance.  That said, I think this quote accurately captures the life-cycle of creating a simple set of documents for early stage investment.

I’ve attached version 2.0 of the Series Seed Documents as well as a red-line showing the changes I’ve made from the original set.  If you peruse the red-line, you will see that there are not many changes.  That’s because there are not that many issues to negotiate in a simple equity financing.  Of course, one could argue, that I’m just not taking comments I disagree with (or that nobody cares enough to comment), but I am of the opinion that these documents represent the 95% consensus of what should be in a very basic set of equity financing documents.  Based on the comments received, both on the blog and in the many deals in which these documents have been used, I am convinced that the terms of a simple set of equity documents are really not an issue.  I don’t mean to say that the Series Seed are infallible, but there are no major objections to their content.

http://znacomstva.blogspot.com/2011/05/new-forms-of-startups-financing.html

The Marc Andreessen VC rules

VCs do things that Marc Andreessen really don’t like. 

1. They are fake casual

A lot of VCs dress casually, speak casually and encourage the companies in which they invest to have casual board meetings and casual discussions with investors. They say things like, “We’re part of the team with you and we’re building this together, so no need for formal behavior, formal thinking, or unnecessary preparation.” This would all be terrific—if it were actually true.

In reality, the entrepreneur is building the company, and I’ve yet to see a VC who shows up in the company’s office at 8 am and works until 11 pm 7 days/week, so no: they are not “part of the team”. More importantly, VCs invest other people’s money into their companies and have a strong fiduciary responsibility to make sure that the entrepreneurs run their companies properly. Sure, casual board meetings might be fine as long as the company is delivering terrific results. However, at the first sign of trouble, I hear things like:  “The founder is not really capable of being CEO. He doesn’t even present critical information in an organized fashion at the board meeting.” Well, maybe he would have done that had you not instructed him to “keep things casual”.

As an entrepreneur, you should take board meetings seriously because board meetings are serious. If one of your VCs implies that board meetings aren’t serious business or that they prefer that board meetings be primarily open-ended discussion, you should view this as a 5 year-old child requesting complete autonomy and unlimited candy—that may be what they are asking for, but what they really crave is structure.

2. They want to grab a cup of coffee

Some of my best friends are VCs, and I am always happy to see them. Some VCs have important business to discuss with me and I look forward to those meetings. Some VCs are extraordinarily smart and meeting them is educational, and I am grateful for their insight. However, many VCs who want to have coffee with me are none of the above. Worse yet, they have no agenda and no purpose. They just want to “compare notes.”

When I was CEO, I didn’t take meetings with no agenda and no purpose. I’m not sure why I should take them as a VC. Of course, when I was CEO, people knew better than to request a meeting with me with no agenda and no purpose. I think that these VCs have mammas that didn’t raise them right.

More importantly, VCs having coffee with one another is a key conduit for VC groupthink.  This is how you get 30 venture-backed startups going after the same market at the same time.  It’s bad news for VCs and it’s bad news for their companies.

My proposal: less coffee, more original thinking.

3. They confuse pattern matching with knowledge

As a VC, I have come to understand the value of “VC pattern matching.” Experienced VCs have been on dozens of boards and seen thousands of deals. As a result, they recognize patterns of strategy and behavior that generally work, and patterns that generally fail. This is very valuable information for an entrepreneur who, if lucky, only sees one deal in his career.

Unfortunately, many VCs overreach with their pattern matching. Rather than saying, “Most companies who sell at this stage, regret doing so, and here’s why,” they’ll say, “Don’t sell now, that’s a stupid idea.” Other commonly expressed and incomplete patterns include “don’t hire very fast”, “hire faster”, “don’t build a sales force”, “build a sales force”, “don’t build downloadable software”, and “build an iPhone app”.  None of this is useful input for your specific company.

A pattern-matched instruction without a rationale provides very little help. Either admit that you are pattern matching and that pattern matching is limited, or explain yourself.

4. They are pseudo-tough

VCs often confuse marginal social courage with real courage. For example, they think CEOs who fire people easily are tough. I’ve fired dozens of people and laid off hundreds. None of them was easy—not a single time. Having an easy time firing your loyal employees indicates a lack of courage and a lack of leadership. More specifically, it indicates a lack of willingness to really understand the negative consequences of those actions. If you fire people easily, you likely lack the toughness to look in the mirror.

VCs who value pseudo-toughness often display it themselves. I see them bully entrepreneurs by directing them to do things without having the intellectual courage to explain “Why?”. They berate the CEOs in their companies, but don’t have the cojones to stand up to their own senior partners. They undermine their own CEOs in their own companies by interfering with important decisions, but don’t have the moral fortitude to even tell the CEOs that they are doing it.  These behaviors are not tough; they are pseudo tough. Pseudo tough VCs really annoy me, and damage their companies in the process.

If you are a VC and want to be tough, be real tough.  For a VC, real tough is:

• The strength to explain in detail to an entrepreneur what she is doing wrong when the company is doing well, in order to improve her performance.
• The courage to do what’s right even if it makes you look really weak to the partners in your firm.
• The valor to tell an entrepreneur precisely why you are not going to invest in her company rather than giving the traditional “VC no” by just going dark.
• http://blog.pmarca.com/2010/04/13/what-some-vcs-do-that-we-dont-like/

Start-ups valuation

If you're a new/small angel like myself with a fixed investment pool, what can you do to maximize the # of deals? Two things really. First, make smaller investments--though this isn't great because there's a lower limit where you'll get shut out of deals ($25K is probably the realistic minimum) and, when you do hit, you won't get that much back.

Second, liquidation preference. In my previous post on angel investment scenario planning, I noted that small returns (1-3x) don't influence overall deal pool IRR that much. And that's true in a static scenario. But the real world is dynamic and if you can do more deals you can increase the chances of hits, as noted above. Getting money back through liquidation preference won't move the IRR needle, but it will enable you to do more deals. And to the small angel (me) that is the most important thing.

If you have no idea what liquidation preference is (and you want to know!), check out Brad Feld's two great introposts on the subject. The default term from the Series Seed Term Sheet is essentially "One times the Original Issue Price." That means in an exit event, the investors have a choice to a) get their money back or b) get their equity %. It's an economic choice. If it's a small exit and the equity % doesn't yield as much money as was put in, you'd opt to get your money back; otherwise, you'd opt to get your %.

Tweaks on this model are:

• Get multiple times your money back (e.g. 1.5, 2 or 3 times) in choice a.
• Get your money back first, and then also participate in the distribution of what's left based on your %, which is called participating preferred.
• Participation, but with a cap. In this one you participate up to a limit, like 3x. So you get your money back, and then your % allocation, but if that exceeds 3x your money you have the choice whether to get that or your straight %.

Startup valuation

What valuation is better? Cash flow multiple basis or IRR?

IRR takes into account those returns over time. In other words, a huge payout after a long period of years can work out to a lower IRR than smaller, but quicker, payouts that end up returning less cash overall to investors.

Superangels, like VCs, raise money from institutional investors called Limited Partners (LPs), like big banks, pension funds and university endowments. And these LPs don't just invest in venture funds, they invest over a very large range of asset classes, from the pedestrian (stocks, bonds) to the exotic, like private equity. LPs use IRR to compare the returns over all these different asset classes, and professional venture investors, whether traditional VC or superangels, need to have a better IRR than those other investments. Superangels with better IRRs can raise bigger funds and/or demand higher fees.

By focusing on the speed, and not just the size of the exits, superangel funds can give much better IRRs to their investors than most traditional VCs. (Paul Graham made that point here.)

And the macro environment favors this, too. Companies take forever to go public now which, all else being equal, will lower VCs' IRR. Meanwhile it's much easier for superangels to sell their stakes in big startups through secondary sales and/or DST-type deals.


Detail about startups market valuation http://znacomstva.blogspot.com/2011/04/vcs-has-largest-quarter-since-2001.html