Big news from Dropbox today.  They announced hitting 25 million users.

I’m a big, big fan of Drew Houston (founder/CEO of Dropbox).  Have known him for many years (well before he started Dropbox) and am honored to call him a friend.  I will cancel plans with my wife to hang out with Drew if he and I happen to be in the same city.  There are only a few people I’d do that for.  (Plus, it helps that she loves the product).

Disclosure:  Drew is on the advisory board for my company, HubSpot.

There’s one big lesson and insight I want to draw out from Drew and Dropbox’s story.

The worst outcome for a startup is not failure — its mediocrity.  When I first met Drew, he was still working for a local Boston-area software company called Bit9 (in the security space, and they’re still around).  Good company.  Drew was in the midst of working on a startup idea that was in the SAT prep space (called “Accoladae” if my memory serves me right).  I met with Drew for dinner to talk about Accolade and his plans for it.  I was not a big fan of the idea (and told him so).  Super-competitive category, and it was going to be hard to differentiate.  Most importantly though, I was not sure how big of an opportunity it was.  I just didn’t see it being a big, “break-out” business.  Frankly, at the time, I could tell that Drew was really smart— but I didn’t have enough data to know if he was going to be great (as in a great entrepreneur).  I know many, many really smart people.  Few of them have what it takes to be great entrepreneurs.  As it turns out, Drew is one of those people, but I didn’t know it at the time.

So, Drew ultimately ended up abandoning the SAT prep idea to do something different (which later became Dropbox).

Here’s the big lesson:  Many founders think that the worst outcome you can have in a startup is failure.  You try something and it fails.  And yes, failing sucks.  But, what’s worse than failing is going sideways for years and years.  Being stuck in a quagmire of mediocrity.  Things are going reasonably well, but not spectacularly well.  The reason mediocrity sucks more than failure is very simple:  Failure lets you move on, mediocrity stalls you and keeps you from reaching your potential. 

It’s not knowable as to whether Accolade (Drew’s SAT prep startup) would have been a phenomenal success or not.  But, it’s doubtful that it had near the potential that Dropbox did.  Had Drew “stuck to it” with Accolade, it’s likely that Dropbox would have never happened and 25 million people (including me and my wife) would have been less happy.  And, of course, Drew would have been worse off for it.  As he will tell you, Dropbox has been super-fun and super-gratifying.  We all dream to have a startup like that someday.

It would have been a waste of talent and energy for Drew to have gotten stuck in a quagmire of mediocrity. 

Imagine if all the founders that are currently stuck in “sideways” startups could somehow pull themselves out of the muck, clean themselves off, and take another crack at becoming legendary.  How much better off would they and the world be?

Of course, there’s one big counter-argument to all of this.  How do you know whether you’re stuck in a quagmire?  Isn’t startup success often about persistence and focus?  What if that break-out success is just around the corner.  Those are good questions.  The simple answer is:  There are no simple answers.  If it were me, the question I would ponder is this:  If 90% of everything started going “right” with your startup, what will it become?  (I’ll call this the “wave the magic wand”, best-case scenario).  If the answer does not please you, and you’ve been at your current idea a reasonably long time, I’d ponder a change. 

One of the great things about software startups today is that it’s very possible to reach “ramen profitability”.  That’s also one of the bad things.  Once you get to “ramen profitability”, running out of cash is no longer a way to know that you should be starting afresh and trying something new.  You can run a startup like that indefinitely — and many entrepreneurs will do just that, instead of building the next Dropbox and becoming legendary.

Update:  The article has sparked a lot of interesting discussion on Hacker News and elsewhere.  One point I’d like to clarify:  I’m not suggesting that stable, sustainable businesses with modest growth are a bad thing.  Just that if the business is not something the founder is passionate about — she should move on.  Life is short.  We don’t all need to build the next Dropbox — but we all should stretch ourselves.  It reminds me of an idea that Tim O’Reilly planted in my head:  Pursue something so important that even if you fail, the world is better off with you having tried.  

What do you think?  Are you stuck in a quagmire of mediocrity?  Should you be hitting the reset button and taking your shot at becoming legendary?

Looking for other startup fanatics?  Request access to the OnStartups LinkedIn Group.  130,000+ members and growing daily.

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At AppSumo.com we do daily deals on tools for web entrepreneurs. The site has been growing steadily and I wanted to automate 100% of the business so I can focus exclusively on scaling it. This led me to find a copywriter friend who is a really funny writer. The writing was not just funny but it “seemed” convincing in getting people to buy things. 

• Expectations are key. Short and sweet like my girlfriend. Our emails have always been that way. Then on a great deal we bombarded busy people with 2,000+ words which they weren’t expecting

• Connect with your key customers. I personally emailed most past buyers who unsubscribed. Trying to apologize and learn for the future. We were even able to win some back, http://ericbrown.com/a-lesson-in-customer-relations.htm

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The following is a guest post by Rob Walling.  Rob Walling has been an entrepreneur for most of his life and is author of the book Start Small, Stay Small: A Developer’s Guide to Launching a Startup.  He also authors the top 20 startup blogSoftware By Rob, that’s read by tens of thousands of startup entrepreneurs every month and he owns the leading ASP.NET invoicing software on the market in addition to a handful of profitable web properties.

Imagine that you’ve just completed version 1 of your product and you’re preparing for launch. You’ve greased the wheels with a few bloggers, targeted some keywords with SEO, created a bit of linkbait, and scheduled the press release to launch in the morning. At this point your co-founder turns to you and says: “What are we going to do with the $300 we have stashed away for advertising?” Consider this your lucky day. The goal of this article is to provide you with the core of what you need to know about cheap startup advertising as quickly as possible, so you can start spending that ad budget wisely. Let’s get started.

Two Key Advertising Strategies

The half-life of advertising traffic is zero. This means that the moment you stop shelling out cash, the traffic stops. The problem is that with typical conversion rates of 1-2% you’re paying for 98 or 99 out of every 100 people to walk away and never come back to your site. To combat this inherent wastefulness of advertising, I have two key strategies I recommend no matter which method of advertising you use.

Strategy #1: Try to Get Permission

Seriously consider offering something in exchange for a visitor’s email address. It can be a free trial, a free report, or maybe even a free book. But gaining the means and permission to contact that customer again will increase your conversion rate over time in most cases. There is great power in an email list.

Strategy #2: Use Advertising to Test

Use advertising as a testing tool rather than a long-term stream of customers. Very few startups can withstand the cash outlay required to turn advertising into a marketing activity with positive ROI. Even if you figure it out, advertising is a volatile marketing medium. Prices increase rapidly in online advertising as new competition crops up or prospects grow bored of your ad and your click through rate drops. When this happens, all of the time you invested in optimizing your ad campaign is *poof*…gone. So instead of relying on ad traffic as an ongoing stream, use it for what it’s best at: the ability to generate a slew of visitors very quickly, and to be turned off just as quickly. This kind of traffic source makes it great for split testing and user behavior testing using tools like Clicktale and Crazyegg. It also gives you insight into how certain traffic converts for you. With properly tracked conversions and an ad on Facebook, you can determine that men from 35-45 convert at a rate 15% lower than women of the same age. This is valuable information, especially early in your marketing effort when you’re still trying to figure out the ideal market for your application. Often this is not the largest market; it’s the one to whom you can market for the lowest cost. As another example, with AdWords you can learn in a hurry which keywords convert for you, and which don’t. This is insanely valuable as you invest the time and money on the long-haul of search engine optimization. Knowing the keywords that really convert for your business, as opposed to the ones that you think will convert, can save you piles of cash and many months of SEO effort.

The “First Five” Advertising Options

With the above strategies in mind, let’s look at the first five advertising options you should consider.

Option #1: Niche Advertising

As a startup, there are hundreds of general advertising options available, and thousands more niche opportunities. Depending on the niche you’re catering to you should be able to find a forum, blog, magazine or website in which to spend some ad dollars. The tighter the niche the better. Remember that niche sites tend to be cheaper to advertise on and drive more targeted traffic, which makes a huge difference in your conversion rate. (And if you’re not targeting a niche because you want your audience to be the “whole world,” you’re going to need a lot more than $300 in your ad budget). In general, if you are marketing to a niche you will know the sites to target. If you don’t it’s time to pound the pavement and find out what they are. By “pound the pavement” I mean search on Google and contact people in the niche to find out where they hang out online. Two reputable niche ad networks I’ve worked with in the past are:

• InfluAds - With an increasing number of advertising “communities” covering design & UX, startups and entrepreneurs, work & productivity and web development, InfluAds can work with budgets as small as the $300-400 range. They sell a minimum set of granted impressions, and if more traffic is available during a month then existing advertisers receive it for free. Image ads only.
• BuySellAds - Though they’ve traditionally focused on the design & UX space, BuySellAds is in the process of branching into many other niches. This image-only ad network was the primary source of traffic for a design-oriented website I owned, and made the difference between a few hundred dollars a month in sales, and a few thousand. Advertising is purchased by impression or on a monthly basis from individual advertisers, meaning each offers different pricing. But the minimum buy is very cheap - in the $10-$20/month range.

Option #2: Google AdWords

• Ad Format: Text or image
• Ad Components (for text ads): 25-character deadline, 2 lines of body copy @ 35 characters each, 35-character display URL
• Approval Process: Automated, with manual review if you trip a filter

A few years ago, Google AdWords was great for startups. Many niches were untouched, and 5 and 10 cent clicks were commonplace. But these days, the vast majority of niches worth pursuing have ever-escalating click prices as more advertising dollars move online, including dollars from large corporations that don’t blink an eye about spending $5 to produce a single visitor to their website. With a 1% conversion rate you need a $500 lifetime customer value to break even. This is more than a stretch for most startups who are scraping by on 0.5% conversion rates and sub-$100 lifetime customer values (at least to start with). But with Google carpet-bombing $75 AdWords coupons to every business in the civilized world, the number of advertisers, and thus the competition, is increasing. For the most part, the days of cheap clicks are over. The $1-2 per click I used to pay to advertise my invoicing software has become a negative ROI for me at $4-5 per click. But all is not lost. There is still a place in the backwoods of AdWords where the wild-west mentality (and cheap clicks) reign. That place is the content network. People traditionally think of Google AdWords as the ads that appear to the right of the search results. But the lesser known cousin of search ads are the ads that appear in every AdSense block you see around the web. These are ads placed through the Google AdWords content network. The content network is less targeted, higher volume, and typically much cheaper to advertise on, than the search results. While we don’t have time here to delve into specifics of how to place ads on the content network, the most consistent approach I’ve seen that works over the long-term is to use their cost-per-action tool called the Conversion Optimizer. There’s a great write-up of how it works from Patrick McKenzie of Bingo Card Creator fame, here. There are also some helpful tips on advertising on the content network here. And if you’re willing to drop a few bucks, by far the best AdWords book available is the Ultimate Guide to Google AdWords, which includes a section on using the content network.

Option #3: Facebook

• Ad Format: Text with required image
• Ad Components: 110×80 image, 25 character headline, 135 characters of body copy
• Approval Process: Manual (sometimes slow)

Facebook is still viable for startups with its ability to deliver 10-15 cent clicks under the right circumstances. But it’s a bit like the Wild West: if you approach Facebook advertising incorrectly you will pay a premium, around 75-90 cents per click. The value of Facebook is its ability to show your ads to exactly who you want to see it based on information in a user’s profile. You can easily segment on gender, age, location, relationship status and a number of other fixed parameters, along with thousands of interests and occupations you can target using keywords. The key to low cost Facebook clicks is having a high click through rate (CTR). The key to a high CTR is a combination of a powerful image, an engaging headline, and laser-focused targeting. Due to space constraints we’re not going to cover the basics of choosing a powerful image or writing an engaging headline. Not when there are perfectly good articles already written on the subject for those who would like to know more: choosing an image / writing a headline. But once your ad is written, there is a trick to achieving those 10 cent clicks. Based on a tip from my friend JD, I now use the following method with Facebook ads:

1. Target your demographic information so tightly that you can write a headline that addresses them specifically. Example: if you are selling shoes online to the U.S. market, create 10 different versions of the ad, one for each of the major metro areas in the U.S. Also include the qualifying “interests” keyword: shoes. Now make each ad headline address its group specifically, using a formula like “Need Shoes in [city name]?”
2. Start the ads with a modest budget of, say, $5-10 per ad per day.
3. After 12-24 hours review the ads. Some will have high CTRs and costs per click around 10-15 cents. Others will have low CTRs and clicks in the 80-90 cent range.
4. Pause the higher cost ads and increase the budget for the low cost ads to whatever you can afford; $100 per day or more per ad.
5. For a few days you will receive extremely low-cost, targeted traffic. But since you’ve chosen a small group of people, they will start to tune out the ad rather quickly. At this point your CTR will drop and your cost will climb. Pause the ad, and start over with new cities, new images or new headlines.

This approach requires ongoing maintenance but if you can generate targeted, 10-cent clicks it’s worth the effort.

Option #4: StumbleUpon

• Ad Format: not applicable
• Ad Components: just your URL
• Approval Process: Manual

I recently advertised my developer’s guide to launching a startup on StumbleUpon. The plus side of StumbleUpon is that all clicks are 5 cents. The downside is the bounce rate is high since people are basically channel surfing. I achieved a 96.88% bounce rate in my experiment, with an average stay of 2 seconds. I wonder if it was something I said? In my test, only 25 visitors stayed longer than 5 seconds. I paid $50 for 1000 clicks, but since only 25 of them stayed long enough to read anything, I effectively paid $2 per click. Your mileage may vary, but through this and other experiments I’ve gathered the following tips for advertising on StumbleUpon:

• Your #1 goal is to get stumblers to stay longer than 5 seconds. Your #2 goal is to get them to up-vote your page. Paying $50 for 1000 clicks is one thing. Having it go viral and receiving 10,000 clicks for the same price is another.
• Don’t send StumbleUpon traffic to a landing page that asks for an email address. StumbleUpon users are notoriously fickle about providing their email.
• People stumble to be entertained, so if your page doesn’t have the potential to go viral or turn into linkbait, you will not likely fare well.
• Blog-like content and videos seem to work best. Anything that resembles a traditional landing page will bomb.

Option #5: Reddit

• Ad Format: Text with optional image
• Ad Components: 70×70 image, title, URL
• Approval Process: Manual (two-day lead time)

Reddit uses an interesting approach for their ad pricing: advertisers bid a certain amount per day, all of the money goes into one big pot, and each advertiser receives their share of the impressions based on the percetage of funds they contributed. It’s a simple system, but it means there’s a bit of uncertainty about what you’re going to get for your money. However, Reddit has the potential to provide some very cheap clicks - I’ve seen as low as 3 cents - if you play your card right. Similar to StumbleUpon, Reddit provides your ad with the potential to go viral. Gabriel Weinberg has a great write-up of the 20,700 clicks he scored for 3.14 cents each for his new search engine Duck Duck Go. His eye-catching image and tech-focused startup served him well with the audience. As he says:

First, a search engine ad is a good fit for reddit ads in general. It has broad market appeal and redditters in general like trying out new technology. Second, I think the ad is particularly well structured. The circular duck icon draws your attention, is contrasting to site colors, and sticks out because it is a circle (as most images are square). I believe the title also has appeal.

Gyutae Park also has a nice write-up of the 434 clicks he purchased for 9 cents each here. One of my recent experiments was a bit more pricey: 187 clicks at 40 cents each. My lackluster performance was a combination of landing on a competitive advertising day, and using a poor-quality header image. In retrospect, I have no idea what I was thinking using this unreadable image: Reddit ads are so simple (just two visible components) that the only tip I have is self-evident: your image has to rock, and so does your title. It’s all about choosing an image and headline that makes people click.

Conclusion

To conclude, I want to reiterate what I said early in this article: unless you have deep pockets think of advertising not as a long-term traffic strategy, but as a testing tool to improve your website and find out more about your ideal visitor. Few bootstrapped startups can withstand the cash outlay required to turn advertising into a marketing activity with a positive ROI, but that shouldn’t keep you from testing the waters to find out for yourself. I look forward to hearing about your advertising experience and recommendations in the comments.

Looking for other startup fanatics?  Request access to the OnStartups LinkedIn Group.  130,000+ members and growing daily.

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Today’s big news is that my company HubSpot announced a major new round of venture financing.  Details can be found in the non-clever, but descriptively titled  “Sequoia, Google Ventures and Salesforce.com Invest $32 Million in HubSpot”.  We could not hope for a better set of investors for this round, and we’re thrilled with the further marketing validation that this group of investors brings. 

My co-founder, Brian Halligan and I have been thinking about the Software-as-aService (SaaS) industry for many years now.  It started when we were classmates in grad school back at MIT.  We consider ourselves eager students on the subject.  As part of this most recent funding round, we dug into more details and want to share some of our insights, lessons learned and data with you.  We’ll also share some of the same arguments we made to our new investors.

Lets start things off with a few fun data points.

* At the end of 2010, the median valuation of publicly traded SaaS companies was approximately 4.2x their revenue.  (This median was 3.2x in 2009).

* The highest multiples were awarded to Salesforce.com (9.5x) and SuccessFactors (9.6x). 

* Size matters.  The market seems to value the larger revenue SaaS players more.  The companies with revenue above the median had a 5.2x multiple vs. 3.3x for the companies with revenues below the median.

Lesson #1:  Winners win big. 

We’re going to argue that in the age of the Internet, winners win big.  10–15 years ago, in most technology categories, oligopolies formed.  [To save you the Wikipedia lookup on oligopoly, it’s a market where a small number of sellers dominate an industry.] The #1 player in a category would get a decent chunk of the market-cap of the industry, but #2, #3 would have respectable portions too.  Basically, the top 3–4 companies would have most of the market power.  That seems to have changed.  In modern technology-driven industries, over time, the #1 player ends up capturing a very large portion of the mindshare and marketshare. 

To demonstrate this, try this short mental exercise.  For the following leading companies, see if you can name the #2 player and #3 in their category.  You have 30 seconds, I’ll wait:

• Amazon    
• NetFlix
• VMWare
• eBay

Difficult, isn’t it?  Chances are you struggled a bit with coming up with the #2 and failed completely to come up with #3.  The point here is, as these tech categories evolved, the #1 player became so dominant that we often don’t even know who #2 and #3 are. 

This is the main reason that HubSpot has been aggressively investing in growing our marketing platform and growing our marketshare and mindshare.  Similar to how Salesforce.com dominates the CRM industry, we think there will be one emergent leader in the marketing software industry.  We’re working hard to be that company.

Question:  Doesn’t this reek of the late 1990s craziness when startups were spending heavily to acquire “mindshare”?

Yes, back in the dot-com days, many startups raised millions of dollars of capital to try and “get big fast” (and be first-mover).  But, there’s a big difference today.  In the dot-com bubble, companies were investing heavily to acquire “eyeballs” (or some other proxy for value).  In our case (and in the case of many SaaS companies), we’re investing in growing revenue (not a proxy for revenue).  Like Salesforce.com did in its early years, we understand the economics of our business.  We understand how much it costs to acquire a customer, and the lifetime value of that customer.  And, for us, Lifetime Value >> Customer Acquisition Cost.  So, we don’t think it’s like the dot-com bubble at all.  We’re investing capital into building a real business.  At HubSpot, we not only have gross margins (gasp!) but they’re trending upwards month after month.

Question:  OK, that’s great.  But do you really need $50+ million in capital?  It’s a SOFTWARE company!

That’s an excellent point.  3–4 years ago, when I was just starting, I thought it was somewhat crazy to even be raising $5 million for a software company (my prior two software startups were self-funded).  I never would have believed we’d end up raising $50 million.  But, I’ve since learned that it’s not only not crazy to raise this kind of capital, it’s quite possibly necessary.  I’ve written about this (and other fun SaaS topics) before in the super-popular article “SaaS 101: 7 Simple Lessons From Inside HubSpot” (it’s been retweeted over 3,000 times!)  But, the point bears repeating:  SaaS companies often charge on a subscription basis — so cash comes in over time (often monthly).  However, the acquisition cost is paid up front.  The result is, even if you’re making margin on each sale, the faster a SaaS company is growing, the more cash it will need to fuel that growth. 

Lets dig into this a bit deeper.  Below is a chart that HubSpot created a while ago.  It does something interesting — it looks at some prominent, publicly-held SaaS companies and then time-shifts them.  The reason we did this analysis was we wanted to understand how our growth, cash burn and fund-raising matched up against other SaaS companies for which there was public data available.

The median (not mean) capital raised prior to the IPO for these companies was $47 million.  Of course, going public is not the only measure of success, but it’s interesting that those that did break-out and remained independent consumed significant capital getting there.  There are no “bootstrapped all the way through” kind of companies.  Don’t get me wrong, there’s absolutely nothing wrong with bootstrapping software companies (I’m at my core a bootstrapping kind of guy) — but I’m going to argue that to create a SaaS market leader in a large segment takes capital. [Side note:  Our peers in the industry have also raised tens of millions, presumably for this very reason].

Disclaimer:  We’re not investment bankers, and this is not investment advice.  This project was done as an interesting side project.  Data was taken from available public sources.  Don’t rely on our analysis for anything serious.

Question:  So, you’re going to spend all the money on sales and marketing?

Actually, no.  Last year (before we had even considered raising another venture round), we made a deliberate decision and formed a strategy that we labeled “HubSpot Inc 2.0” (a convenient label for the second-generation of the company — not the product).  The primary goal of this new strategy was to shift most of our dollars away from sales and marketing and into product development.  The company had been doing exceptionally well acquiring customers, and we felt that the best use of our cash was to make the product even better and produce happier customers.  We have a cool measure at HubSpot for customer happiness call the “Customer Happiness Index” (CHI).  It’s a regression-analysis based quantitative metric that uses available data about customers and their interactions with the company/product.  In any case, when we decided to shift to “HubSpot Inc 2.0” we set very specific goals for ourselves around things like CHI.  We’re in the middle of executing on that strategy now (and hiring aggressively in our R&D team). 

Big Insight:  System dynamics and the sales, marketing, service conundrum.

Here’s a big lesson learned from our HubSpot experience.  Think of the four primary areas of a SaaS company as being marketing, sales, product and customer service.  (You might call them different things, but that’s roughly right).  Now, lets temporarily take product out of the mix and look at just marketing, sales and customer service.  Across these three groups, an interesting thing happens.  If you try to improve the metrics of one of these groups, one or both of the other groups often suffer.  For example, if you’re looking at just decreasing the cost-per-lead (marketing metric), you can easily do that by allowing a higher percentage of leads into your funnel.  The result is less “quality” customers — and so the customer service group suffers and your cancellation rates go up.  If you try to improve just your retention rate numbers (customer service), you can do that by putting stronger “filters” in your sales group (perhaps reducing commissions on customers that are not ideal”).  Of course, that means your sales team is working harder for every deal, and your cost of acquisition/sale goes up.  Generally, you can take any of the key metrics for these three groups, and you can improve one metric at the expense of one or more of the others. 

The way to break out of that “robbing Peter to pay Paul” conundrum is to invest in the product.  If you invest in R&D and make the product better everybody wins.  Marketing has an easier job (because you get more referral customeres).  Sales has an easier time closing deals, because the product demo sings.  Customer service has an easier job because customers are happier with the product (and cancel less).  So, economically, investing in the product has the most leverage.  That’s why we’re taking so much of our available dollars and pouring them into the product. 

Of course, now that we have so much cash we can invest in both.  We’ll resume investing in sales and marketing too.  The economics of our business makes fundamental sense.  No reason not to get even more customers.  We have a dominant position in the marketing automation industry today (with 4,000 customers, we have more than all of our competitors combined) and it makes sense to extend our lead.  We also have customers in over 30 countries today — and we’d like to deepen that footprint.

One of the core values at HubSpot is transparency (we have others too, but that’s a topic for another article).  So, within reason, I’m happy to answer questions and share things we’ve learned.  We don’t have alll the answers, but we usually have opinions.  What would you like to know about our take on SaaS?

* Some of the data in this article was based on the Software Equity Group annual report, 2010.  

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The following is a guest post by Brian Halligan, my co-founder at HubSpot.  It’s not usually his style to lavish such gushing praise.

As many of you know by now, HubSpot just closed our Series D round led by Sequoia Capital with participation from Google Ventures and Salesforce.com.  I got a chance to work closely with Sequoia over the last two months and have thought a bit about how and why they are the top dog in the venture business and came up with 9 reasons.  At least a couple of them might surprise you.

1.  Brand:  Since they funded companies like Apple, Cisco, Google and Yahoo, they have the best “brand” in the business.  Because of this, nearly every aspiring entrepreneur pitches Sequoia (or would like to) in hopes of having some of that brand rub off on them.  This gives Sequoia a first crack at many of the best deals. 

2.  Know-how:  Since they funded all those great companies and sat on their boards, they have learned a ton about how to build great businesses and they are not shy about passing those lessons on to their current portfolio.  No doubt, other venture firms have made great investments, but Sequoia’s portfolio is particularly remarkable.

3.  Talent pool:  Since they funded all those great companies for so many years, many of their key employees have gone on to do other new startups and Sequoia is in the front seat for when those deals happen.  In addition, that network of talent is highly valuable for them in seeding their new companies with talented employees and board members.

4.  Hard work:  Yes, it sounds corny, but it’s true.  The lead on our deal was Jim Goetz – we spoke almost every day and usually had a call or two on weekends.  The second was Pat Grady.  My favorite Pat story was about halfway through the due diligence when we were trying to find a time to connect him with some of our folks and he suggested 7am EST.  Our team was concerned that one or two of our folks wouldn’t be available at 7 am.  The interesting part was that Pat lives in San Francisco and we are in Boston, so it was 4am his time.  The 4am slot wasn’t an issue at all for him as he was up at that time working every day anyway.

5.  Aggressive:  They are more aggressive than other VCs.  When I first met Jim Goetz, the second sentence he said to me after “nice to meet you” was “what’s it going to take for Sequoia to own a piece of HubSpot?”  That’s how you make a first impression on an entrepreneur!  At the time, we were planning on raising debt, but the advantages Sequoia has around network, brand, and talent lured me in.

6.  Reasonable:  As you might imagine with a complicated deal like the one we did with 3 new investors and 3 existing investors, there was a lot to talk about as part of the deal.  Sequoia was tough, but reasonable to deal with. 

7.  Agile:  Sequoia’s deal process felt a bit like our agile product development process.  Everything was pretty late-binding, but came together nicely at the last minute.  For example, for their visit to Boston, we didn’t really nail down the schedule until the night before.  I’m not sure why they did it this way, but I suspect they are gathering lots of due diligence and want to make sure they have as much information in place before they nail things down.  They trade off the false comfort of being organized early for relative discomfort of being organized late.

8.  Paranoid:  In talking with them, it is near impossible to get any of them to brag about any of their high profile investments/exits.  Rather, they seem to be constantly hand-wringing about the ones that got away and the ones that might be going on right now that they could miss.  Its almost like the firm is more motivated by fear of failure than of success itself.

9.  Chinese Firewalls:  They had looked at a few other deals in the marketing space, but were closed-lipped about anything they had learned.  This demonstrates respect for the entrepreneurs they work with – even the ones they don’t fund. 

I found the whole process to be fascinating.  I’ve always admired Sequoia’s success, but it was great to experience first-hand why they’ve been successful. 

Looking for other startup fanatics?  Request access to the OnStartups LinkedIn Group.  130,000+ members and growing daily.

Oh, and by the way, you should follow me on twitter: @dharmesh.

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hipmunk [hip-muhnk],   1.  verb:  To bring sexiness and simplicity into an existing industry with a fresh approach that delights people.  Example:  The real estate mortgage industry really sucks.  Someone should hipmunk it.  2. noun:  Startup funded by Y Combinator that makes it easier to find flights. 

The word disruption is thrown around way too much.  It’s often used to describe ideas that are not disruptive.  Recently though, I’ve noticed a trend of YCombinator backed startups that follow a similar theme: Go after an industry or process that is excruciatingly painful and make it better. Sure all startups are about solving a pain point, but in the case of Hipmunk and others, the pain is chronic and unbearable.  

Find Something Tied To A Process That Consistently Sucks

Some things are just a pain and never ever change. The industries that can be hipmunked are ones that you repeatedly ask yourself “Why hasn’t anyone made this better?” It can’t be a temporary cure either, it needs to be a full blown relief of pain. In the case of HelloFax , it seemed like a silly idea at first to most. Fax machines are a thing of the past it would seem, but in reality they aren’t. With all of the innovation we’ve had, trying to send a fax is still a pain. EFax is cumbersome and real fax machines are far worse. Every blue moon, there is no way to do anything other than send a fax. It’s still horrible. With HelloFax, they took a process that consistently sucks and made it just work.

Simple And Clean Interfaces Come First

One of the best ways to make a product enjoyable and easy to use is with an interface that is simple+clean. Give the user what they want, the bare essentials, and make the information easy to digest. It’s not about being the prettiest either. I love the hipmunk interface, but it’s not whiz bang beautiful. It’s clean, simple, and organizes information well. The flow of information should come first and foremost in a clean interface. Problematic and painful industries usually have a high amount of friction between the customer and information. They usually want to access or deliver information in a fast manner, but it often takes way longer than they would like.

It Will Probably Be Unsexy…So Make It Sexy

The industries most ripe for disruption are usually the unsexy ones that no one wants to touch. That’s okay, look at it like the startup version of the popular teen movie “She’s All That”. Find the ugly one and turn them into something absolutely beautiful. It’s not in the DNA of unsexy industries to think about everything else in this article. That’s why they’re unsexy and people despise them. The travel industry? Absolutely boring. Look at email. Everyone thinks that email is long dead and gone, but at the end of the day it’s still widely used. Companies like Groupon and Thrillist are growing faster than any other company before. They figured out how to leverage an unused, unsexy asset and make it work for the user.

Take a look at Square.  Payment processing is a sleezy, unsexy, and just headache of an industry.  Square took that and turned it on its head.  They added a beautiful interface and made it frictionless for real world merchants to have a payment processing engine without the headaches involved.  

Call Out Your Competitor

Don’t be afraid to call out your competitor and wage war. You should be respectful of course, but it’s okay to stir the pot. Look at Salesforce. They proclaimed the end of downloadable desktop software and Marc Benioff was no stranger to letting the world know the companies that are his enemy. His spat with Microsoft is supposedly one of the greatest things that ever happened to the company!

Deliver Great Support

Most unsexy industries don’t have a love for customer support. It’s not that they deliver bad customer support, it’s just that they don’t deliver GREAT customer support. Zappos for example… they sell shoes. Who would have ever thought that a shoe retailer could be an iconic company? Well, Zappos is really a company with great customer service that happens to sell shoes. If you have a passion for support that mirrors Zappos, you can extend the great experience you deliver with your application to the real human interaction you may have with customers.

Look For An Industry That Rarely Changes

I’ve always believed that those who get comfortable and think they are immune to disruption are the most likely to be disrupted. Having a large customer base makes large incumbents feel like they will never leave. In actual reality, they will, but they just need a great solution… your solution. Problems don’t make people change. Problems make people search for a solution. Until a good solution exists, they stick with the current one. It’s like a do while loop of seemingly neverending pain. Do deal with pain while looking for a better solution, until you find a better one.

Work Towards Building Fanatics

The hipmunk mascot is barely a year old I believe, but boy do people love that little critter. Some have even created fan art! In a short period of time, Hipmunk has created valuable brand equity and fanatical customers. Some companies never get to achieve that. If you’re able to resolve pain, finding fanatical customers will happen a lot faster.

Be Disruptive, But Respectful

It’s fun to shake things up, call out your competitors, and make a lot of noise, but always be a gentleman or a classy lady. Have logic and let people see the rationale behind your argument. You should always have an answer that is more than “just because”. Show those trapped in the Matrix why your solution is better and will free them from the pain that currently exists. Use a loud mouth and PR to get the world’s eyes on you, but deliver sound logic. There is a thin line between being passionate and just being insane. Rationale is usually the difference.

Focus On Power Users

Not every solution should do this, but I noticed that it worked very very well for Hipmunk. A lot of the people that I know who are Hipmunk users, travel VERY often. Sometimes you just want to focus on the normal users, but you can get fanatical users and strong advocates by solving the pain for those that have it the most often. A person that travels multiple times a month with long flights is much more likely to want your solution when you first launch/unproven than a person that travels a few times a year, often for vacation+light work travel. Hipmunk, padmapper, hellofax, and others are just the start. The number of processes that are beyond painful run deep and present a world of opportunity for aspiring entrepreneurs. What other industries are ready to be “hipmunked”? My vote: the domain purchasing industry. Someone should “hipmunk” Godaddy :).

You Should Follow me on Twitter: http://www.twitter.com/jasonlbaptiste, Friend me on Facebook: http://www.facebook.com/jasonlbaptiste, Email Me: jbaptiste@onstartups.com, or even call: 201.305.0552

Looking for other startup fanatics?  Request access to the OnStartups LinkedIn Group.  130,000+ members and growing daily.

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The following is a guest post by Healy Jones.  Healy is head of marketing at OfficeDrop, a digital filing system and scanner software provider – and moved to Boston from San Francisco.

The San Francisco Bay area is the clear leader in the internet startup world. Approximately 50% of the early stage fund raising in the United States is in California, with Silicon Valley and San Francisco dominating. Some days it seems like it is impossible to start an internet company anywhere other than the SF Bay Area.

But it can be done. Entrepreneurs everywhere are succeeding in getting their internet businesses going! I’ve polled some of my entrepreneurial and venture capital contacts outside of San Francisco to see what advice they could offer for successfully building an internet venture in their towns. The following is some of the great feedback I received. I’ve organized their responses (and some of my own thoughts) into seven tips on how to grow an internet business when you don’t live in sunny Palo Alto.

1) Cultivate the right mentors. In Silicon Valley, it’s easy to meet experienced startup entrepreneurs. I know for a fact that being around startup founders who have been there, done that can really make the startup process better. Both formal mentorship relationships and unstructured conversations with successful internet executives have helped OfficeDrop overcome significant startup challenges. Outside of the Valley you may not have access to a deep talent pool of potential mentors, so you’ll need to be nimble. Even though I’m in Boston, I’ve had great luck pinging smart internet marketing gurus in San Francisco and getting their thoughts on my marketing initiatives. You should also take advantage of being part of a smaller entrepreneurial community. Gabriel Weinberg, two time internet entrepreneur and angel investor based outside of Philadelphia says, “People really want to help you. Not that they don’t in the Valley, but there is an extra component of wanting to put the location on the map.” But be careful – Linea Geiss, an Atlanta based venture capitalist, comments, “Smaller investing ecosystems mean personalities / egos get magnified a little.  A smaller ecosystem presents an opportunity to do well by securing help and backing from well-respected advisors, but also beware of the landmine of pseudo-advisors that are not well thought of in the industry.“

2) Create networking groups. You know that feeling at 1:30 in the morning when it seems like you are the only person still up working your startup dream? Well, that feeling is a little bit easier to take when you have personal relationships with other people in your area who are experiencing the same thing. If internet founders aren’t exactly falling out of trees in your city you may need to be the organizer who gets people together. Sharing in each others’ successes and learning from each others’ failures is part of the fun of being part of a startup. I’ve also learned a ton from other executives in the same lifecycle point at OfficeDrop; people who are going through very similar challenges. I really recommend organizing a group of your peers and getting together as regularly as you can. In other words, you don’t just have to hang out with people who have been there, done that – people who are RIGHT there, DOING that have a lot to share and teach as well.

3) Think outside of your town. For most internet companies, competition is national or global, so you need to be 100% aware of what is happening in your space in SF and around the world. The technology press can be merciless, so if you “launch” something that gets compared to existing solutions/other technology darlings you need to be ready to discuss why/how your solution is better. Financing sources like VCs and some angels are also pretty sophisticated and often know a lot about particular verticals they find interesting. You never want to be in the position where some smart-alecky VC associate knows more about your competition than you do. Finally, and most importantly, your customers may be very savvy on the different technology solutions available to solve their problem, and if you don’t know how to position yourself against competitors then you are in trouble!

4) High hiring standards are critical. As Dharmesh has pointed out, there is a global talent war going on for developers. It’s hard to find experienced hackers everywhere. But compromising when hiring can be a big mistake. Scott Holsopple, CEO of Smart401k, based in Kansas City,  says, “Kansas City does have very talented people, but not surprisingly they aren’t as plentiful as SF so you have to be willing to dig a bit more.  We’ve made very good hires and some mediocre hires and the differences (on the company) were startling.  Lesson - Don’t hire just to fill a need.  Make sure they have the skills you want and the personality you want to reinforce inside the company.” Being able to manage a distributed development team is also a major asset. Vikram Kumar, CTO of OfficeDrop, says “if you know how to manage a distributed technology development team then you can find great developers. However, it is a mistake to assume that you can manage a distributed team in the same way that you manage people sitting in your office. And you need to be willing to invest in communication and project management technologies.” Finally, Scott mentions finding employees who get the startup mentality can be difficult outside of San Francisco, “if start-ups aren’t the norm the culture of start-ups won’t be the norm.  This may actually make it harder to recruit because you may be seen as the “risky” job rather than the “hot” job.” Scott suggests making sure you vet the culture of the people you interview just as much as you vet their technical chops.

5) Know your local ecosystem and play to its strengths. This tip comes from Linnea “Atlanta is strong in supply chain and logistics, fintech and security. It’s a lot easier to get funding, find customers and recruit experienced employees who will get excited about and understand your vision.”

6) You need to be in the flow (and have something to say) to get press. Attend important national conferences for your industry and for the web, and don’t be afraid to approach reporters.  OfficeDrop has had luck aggressively pinging targeted reporters with story ideas, and Jeremy Levine, founder of Boston based sports stock market StarStreet Sports suggests that you can be successful if you “reach out to those who have covered similar companies.” Jeremy also adds that Twitter has also revolutionized how people not in the Silicon Valley echo chamber can get to know what reports are working on. Engaging on Twitter in relevant conversations that reporters are having with intelligent content can help get the door open. I am in total agreement with Jeremy, and have a Tweetdeck list of technology reporters who I follow very closely. Without Twitter I don’t know how I’d have a clue as to which reporters I should be approaching.

7) Capital efficiency matters. General consensus from entrepreneurs I spoke with was that getting financing is much harder than in San Francisco, so focusing on getting the most out of what you have is critical. Scott Holsopple says, “I think resource (whether $, human capital, time, etc) efficiency is key.  This may sound trite, but if you’re in an area that isn’t a hotbed for start-ups or investment your resources are likely to be more constrained.  So you have to do more with less and minimize your missteps (not that you can’t make mistakes, but you have to recognize them and limit the resources used).” Max Niederhofer, founder of people search engine qwerly in London, agrees “Focus on a straightforward model not dependent on VC financing. Get to profitability early.”

Tap into the growing global angel capital market but also think local. This can often be the hardest part. How do you get money when you are not in an angel/venture capital hub? Gabriel says that “I think there are lots of angels scattered around who often invest outside their cities, but are willing (and often want) to invest inside. So you just have to find them and meet with them face to face. AngelList is getting good at that, but also look at angel groups, find out who is in them and pick off the people who invest in your kind of deals. They’ll often invest individually as well and will serve as an advocate for the group.” Mark MacLeod, a well known Canadian startup CFO and angel investor, says it is critical to network into local financing sources, since local momentum can build credibility with non-local angel investors. However, as many entrepreneurs know firsthand, getting funding outside of the Valley often requires more traction, so doing more with less is likely a necessary challenge.

The internet has given us the tremendous power to engage with tools and people without being constrained by geography. It would be a cruel irony if one region had a complete monopoly on good internet businesses.  Shouldn’t the Internet help us build great Internet businesses anywhere?  What do you think?

Looking for other startup fanatics?  Request access to the OnStartups LinkedIn Group.  130,000+ members and growing daily.

Oh, and by the way, you should follow me on twitter: @dharmesh.

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 There are over a hundred seed accelerators in the world and many more are popping up every year. In New York City, there are going to be 6 more this summer on top of TechStars NYC. The common thread amongst all of these programs is what is now known as “Demo Day”, which is a single day (sometimes days) where a number of investors are put in to a room to watch all of the participating companies present for 6-8 minutes. Recently, my company OnSwipe was a part of the inaugural Demo Day in NYC for TechStars. Everyone has been asking me how we prepared and put together our demo day presentation. Without further adieu, here’s how. You may want to watch the recording of my presentation below first: Actual Presentation

Put together slides with very few words

You should not have the audience focused on your slides, but your words during the presentation. Bullets are an absolute no-no throughout the presentation. My presentation had one sentence at most per slide with an accent color highlighting what was a really important word for the audience to understand. The slides should set the tone for what you are currently talking about to keep everyone on track. Stay away from transitions or overly flashy slides. They were cool when you were in junior high, but don’t add a lot when talking to a large crowd.

Slide Deck (some things might be out of place due to 2 animations)

Make Sure There Is A Screen In Front Of You On Stage

The worst thing you will ever do is look back at the screen. This makes you seem unprepared, especially during demos. It also makes everyone think you didn’t prepare with the person, usually your cofounder, that is controlling the slides. You don’t want to look down at it too much, but it’s there in case shit happens. In a split second you could be on the wrong slide or miss a beat. Instead of turning around to look back confused at the screen, you can properly pause and guide the presentation back to order while looking ahead. It’s a small subtle, yet useful prop. Make sure it’s there.

Practice, Practice, Practice

I practiced religiously before going on stage. Dave Tisch and Dave Cohen probably wanted to murder me when I skipped the public pitch practices with all the teams, but I was secretly practicing at home or late at night. I look at a presentation a lot like product. It just needs to be broken and tweaked a lot. It isnt’ ready for public consumption or scrutiny until you’ve fine tuned it enough. Make sure you practice until no end. It’s what makes you comfortable and confident.

Be bold

This might just be my style, but you need to be bold…very bold. You are going to be presenting with 10+ other companies or even more that day. Investors and press get antsy very fast. When was the last time you could sit through 5 hours of pitches easily? By being bold, you can give a great refreshing jolt to the crowd and pique their interest. It’s also great to stand out with a ton of press in the crowd as they will want to do an interview with you afterwards. “Be so good they cannot ignore you.”

Speak in tweetable soundbites

People love to tweet live events and demo days are no different. Inside of the room, you will have a great group of influential people that can send your message out to the right people. The thing is, they can’t send out the entire presentation, they can only send out 140 characters at a time. In our case, we had 3 tweetable soundbites that became well known afterwards. These weren’t by happenstance, but planned well in advance:

• “Apps Are Bullshit”- opening slide that set the tone for presentation. 




@TechStars NYC Demo Day, OnSwipe CEO: “Apps are Bullsh*t.” [most tweeted QOTD?]less than a minute ago via web Favorite Retweet ReplyMike Hirshland
VCMike

• “Tap the rocketship”- @fakedavetisch caused this to become some form of sexual inneuendo :) 




Btw, the code phrase for the afterparty bouncer is “tap my rocketship”less than a minute ago via Twitter for iPhone Favorite Retweet ReplyFake Dave Tisch
fakedavetisch

• “Series Awesome”- We didn’t announce that we were raising a Series A, but a Series Awesome.

The “Three Acts”

The best way to do a demo day type presentation is to put the entire delivery into three different acts. Entrepreneurship and delivering a presentation is absolutely no different than theater. You should look at your delivery as a spectacle that enlightens those in the audience, not a typical slide deck pitch.

Act I - The Setup Setup the enemy for the entire presentation, the elevator pitch, and the big vision business. It should be under 90 seconds and even that is something I found difficulty with. The goal here is to give context, hook the audience in, and get to a killer demo.

Act II- The Demo This is what really matters. Too many companies approach demo day as investor day, instead of showing what they’ve built off in-depth. Screenshots are a no-no and sadly, pre-recorded videos seem to be the way to go due to Wifi. Show off a logical progression of what your product does. Nothing gets someone ready to write a check like a great demo.

Act III- The Execution This is where you talk about what you have accomplished and where you are going. I usually like to talk about a few things: Press, current investors, business development deals, and the team you have been able to attract. This shows where you have been and how you are able to execute as a team. You should also make sure that you talk about what’s next. When are you launching? are you raising money? what is the big credo and philosophy behind the company? Tell the world why you exist and why you are going to take over the world.

Get to the demo as fast as possible

This was the biggest lesson we learned through practice. The first version of the presentation took 2:30 to get to the demo. That was an absolute eternity. Even now, I could have shortened things by a good 30 seconds or so. Make sure you get to the demo as fast as you can. The other side of it is, making sure that you give enough context to the audience.

Have an “enemy”

We set out to say app store apps for content publications like the Wall Street Journal and Wired were just complete bullshit. We were very bold in this statement, but we backed it up with undeniable fact. If you are going to make an enemy, make sure you have the weapons to combat them. You have to seem sure when declaring ane enemy and have a logical argument.

Make sure the big long term vision is known

Too many investors and potential partners will think about the present since that is mostly what you are showing. Spend time talking about the big vision in terms of product and in terms of business model. Your product is often different than your business model. ie-  Google’s product is search, but it really makes money through advertising. Sometimes you may not know what this big vision is, but if you do, make sure that is known. Most people thought our big vision was: be a WordPress plugin that makes things pretty. We made it clear that our goal is to power the advertising in a world where content is consumed with tablets, not point+click devices.

Be fashionable

I’m an outlier here, but the pink shirt went over well. It made me hard to ignore and ended up color coordinating the presentation. Trivia: The onswipe pink colors come from that shirt, not the other way around. Make yourself memorable with appearance. People will remember your ability to command an audience and that can often be done through how you dress. Once again, demos and presentations are not pitches, but theater.

Have an “ask”

Most companies go into a demo day with an intention of raising money. It might be something direct with an exact dollar amount or it might just be an announcement that you’re playing around in the waters. Either way, make sure you have an ask that lets the world know your fundraising plans. The biggest problem in entrepreneurship is the fact, that most entrepreneurs just don’t ask. If you have existing fundraising commits, let the world know who is in and for how much if possible. My buddies at thinknear did this by letting the world know IA Ventures was in for 400k of a 1.2 million round.

Show Off Social Proof

Social proof is one of the best things that you can portray during a presentation. Do not be arrogant or cocky, but certainly be confident. Show the world who is behind you and what you have accomplished. Nothing gets an investor more excited than tangible traction, social proof from their peers, and the ability to execute.

Things that didn’t work along the way

• We spent a lot of time getting to the demo. We originally had a lot of social proof and big vision talk before the demo. That got people antsy. Let the demo be your proving ground and then 
• Don’t try to practice in full run throughs at first. Go act by act, screwing up along the way.  
• Do not use anything from your investor slide deck. Even though we have never used a slide deck to raise money, we still sort of have one. I dusted it off from the Series Seed and tried to insert some slides. It just doesn’t work for demo day. Demo day pitches should be looked at a lot differently than your traditional investor pitch at the end of the day. Demo day pitches really appeal to three broad crowds, with some companies focusing in on one more than the other: press, investors, and potential partners. 

In short, this was the most important day of my life and a huge success. The only downside, is that it meant TechStars is officially over. You should apply to the program , and if you get in, hopefully this post will be of use.

Have you presented at a “Demo Day” before?  Any tips of your own that you’d like to share?

You Should Follow me on Twitter: http://www.twitter.com/jasonlbaptiste, Friend me on Facebook: http://www.facebook.com/jasonlbaptiste, Email Me: j@jasonlbaptiste.com, or even call: 212.361.9743

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Over the past week there has been a huge focus in the media and even the geek internet culture around Charlie Sheen’s supposed breakdown. He’s been doing a lot of interviews, but mixed in are a lot of interesting quotes that can be applied to entrepreneurship. An entrepreneur is on a thin border between insane and brilliant.

“Defeat is not an option. CBS picked a fight with a Warlock.”

Most entrepreneurs don’t end up losing because of market forces or what can be attributed to specific failures. At the end of the day, entrepreneurs fail because they decide to give up and accept defeat as an option. When starting a company, Elon Musk referred to it as the equivalent of eating glass and staring into the abyss on a daily basis. From day one, you need to realize that there is nothing else you can do accept win. It may be a hard road, but complete and utter defeat is NOT an option. Take a look at Airbnb. They failed to attract any attention and failed continuously for not only days, months, but actually years. Instead of accepting defeat, they persevered and kept going. Most startups don’t die due to specific circumstances, but because they commit “suicide”. Here are two HIGHLY suggested links:

Airbnb story from Startup School:  

Paul Graham on “How Not To Die”: 

“Everyone will say: Don’t be special, be one of us! NEWSFLASH: I am special, and I will never be one of you”

No one will understand what you do. They will hear the entrepreneur word and think you are crazy, broke, or some combination of all three. You have to ignore those that don’t understand us. We’re a crazy breed and we’re special. If this were for everyone, then it wouldn’t be special. As an entrepreneur you have to have thick skin and trust that it will all work out. Even when it does, you will always feel as if the respect you deserve isn’t where it should be. Steve Jobs said it best with a quote that goes along the lines of “You have to be insane to do this and you have to love it. Any sane person would do what a sane person would: just quit and give up.” Focus in on being different and drown out the noise. They will be fast to hate on you and they be move even faster to congratulate you.

“It (my brain) fires in a way, not particularly from this terrestrial realm”

As an entrpreneur you need to think at a level that is not from this world. Look back at the legendary Apple ad campaign about “Think Different”. The rest of the world happens to be a fickle bunch. On the one hand, they want to vilify you for being an entrepeneur and take you down a level or two. On the other hand, they want something that is outside the box and pleases them. The only people capable of doing that are entrepreneurs. If what you’re doing is criticized as “tame”, then you are doing something very wrong. At the end of the day, you should seem as if your creation is from another planet. Your brain needs to think in a manner that is truly extra terrestrial.

“I have one speed, one gear … go!”

There is no slow down mode when it comes to entrepreneurship. You need to be always be five steps ahead and pushing on red line. The main advantage of a startup is pure acceleration and speed. Speed in the real world is calculated by distance over time, I’ll declare that startup speed is the amount you want to accomplish (alot) divided by the amount you want to focus on (a small focused portion where you have domain expertise). Accomplish something sizable and focus on what matters. Say no and cut out a lot for each version. It will let you move faster and stay in that one gear that matters: Go!

“Can’t is the cancer of happen. aka I can’t do it.”

Yoda said it best: there is no try, there is only do or do not. As an entrepreneur, whether you made something happen is a very binary answer. Either you have made it happen or you have not. By saying “I can’t do it”, you are setting yourself up for failure and almost certain death. Take a look at the most successful companies in the technology sector and you will realize that “can’t” is not in their DNA. The best companies defy the laws of possibility and do what many would simply throw into the “can’t” category. Dream big and look for scenarios where many would say can’t and make something happen.

“I exposed them to magic. I exposed them to something they’ll never see in their boring normal lives…they’ll live with that for the rest of their lives.”

Your product needs to be the equivalent of pure and utter magic. One of my favorite Techcrunch articles from Paul Carr is centered around this notion of technology being magic. You need to wow people, many of which you will never meet. The best products will seem like magic to most of the general population and be an escape from their normal boring lives. A few days ago someone asked me, “How does Onswipe do what it does?” and I answered back with a simple response: “Magic. We code magic.”

It’s not about finding celebrity trends or other silly things. It’s about looking in places you would have never thought of for inspiration to make a better product and a better startup. Many of your influences will come from the startup world itself, but many will come from random offbeat sources. No matter what, just keep #winning.

You Should Follow me on Twitter: http://www.twitter.com/jasonlbaptiste, Friend me on Facebook: http://www.facebook.com/jasonlbaptiste, Email Me: jbaptiste@onstartups.com, or even call: 201.305.0552

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I came across a great article today by Jason Calacanis on the topic of PR for startups.  Jason Calacanis is founder and CEO of Mahalo, but you probably would better know him as the the guy behing Weblogs, Inc.  In any case, he’s accomplished, and knows a thing or two about getting visibility for a startup.

I’ve always thought of myself as being really different from Jason (note: I’ve never actually met him).  He seems to be the classic extrovert and seems capable of really putting himself “out there” for his startup.  Though I don’t think of myself as lacking in passion, I just don’t have the gumption he does.

In any case, If you’re involved in a startup (particularly if you happen to be venture-backed), the article is worth the read.  However, the original article is over 4,500 words and on the off-chance that you’re lazy like me, here are some of my favorite points from the article:

1.  “My philosophy of PR is summed up in six words: be amazing, be everywhere, be real.”

2.  First time I’ve ever the heard of the term ceWebrities.  clever.  With regards to these ceWebrities, “these overnight successes are 10 years in the making.”. 

3.  “Be the brand…you must be in love with your brand and inspired by your brand’s mission to have any hope of getting press.”

4.  “Be everywhere…every single night I would go out and meet folks in the internet industry…while other folks went home to their families, I went out and made a family.”

5.  “Your job is to transfer the enthusiasm you feel for your brand to everyone you meet.”

6.  “Always pick up the check — always…everyone remembers who picked up the check”. 

7.  “Set a goal of creating deep relationships with a small number of folks as opposed to running around trying to trade business cards with as many folks as possible.”

8.  “Be a human being.  The best way to get PR is not to sell someone on your company or product — it’s by being a human being.  Journalists hate being pitched…journalists and bloggers are, in fact, humans.”

9.  “Before meeting with a journalist, it is your job (as CEO) to read their last five articles in full…”

10.  “Your job as the CEO/founder is to create direct, honest and personal relationships with journalists.”

11.  “Attach your brand to a movement.” 

12.  “PR is, by definition a reflection of what you’ve done.  When a startup hits, it’s not one thing that does it, it’s typically many things working in concer.”

I’d summarize the advice and change the 6 words of advice to:  Be amazing, be passionate, be human.  What’s your 6-word version?

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I’ve been thinking a bit this past week about startup teams and what makes them work (or not work).  Most people that are in and around startups will readily agree that recruting the best team possible is criticalto success.  This leads to statements from startup pundits that look a lot like “get the best people possible.”  Far be it from me to argue against this kind of sage advice.  You should get the best people possible onto your startup team.  All things being equal, who wouldn’t want to recruit the best people possible?

However, the phrase “best people possible” is a bit too vague for my tastes.  The question is, what makes a given team member the best?  Are they the smartest ones?  The ones with the most experience?  The ones with the greatest skillset for a given role?  The ones with the most domain expertise?  For purposes of this discussion, I’m going to “merge” all the things that makes a given individual really, really good into something I’ll call “Capability”.  You can feel free to make Capability a function of whatever attributes (intelligence, experience, skills, etc.) as suits your taste. 

So,

Capability = How well the person can do the job

Now, this article isn’t really about capability.  It’s about a somewhat orthogonal concept that I’m going to refer to as Confidence (or Trust).  By confidence, I don’t mean how much confidence they (the candidate) have.  I mean the degree to which the rest of the team believes a person has the required capability.

Confidence = How strongly people believe in a person’s Capability

My argument is this:  The best people to recruit into a startup are the ones that have the optimal mix of capability (can get the job done) and confidence (trust from others that they’ll get the job done).  Even with lots and lots of capability, if there is moderate or low confidence, the individual will be second-guessed, undermined, and ultimately just plain ineffective.  Even if they would have a bunch of good decisions, it’s not really going to matter, because they won’t get to make that many, and the ones they do make might not “stick”.  Unfortunately, this kind of team dysfunction does not jump right out at you, it creeps in when you’re not looking.  Everyone has the best intentions.  A quick (totally made-up) example:  “Billy’s a great web design and UX guy…and he’s been lobbying for this simplified design to replace the $25,000 website we created last year.  Sure, he goes to all the conferences and stuff, but does he really get that sorts of people come to our website, not just customers?” 

So, you ask, why would people making the decisions ever hire folks that they didn’t have confidence in anyways?  Isn’t that stupid?  What’s the point talking about that?  I’d respond with two things:  First, confidence is not a binary thing.  It’s an analog thing.  There are degrees of confidence.  Second, confidence may start out being really high, but can be chipped away at as time goes. 

Now that we have some of the baseline behind us, here are some thoughts on capability and confidence when it comes to startup teams:

Capability vs. Confidence

1.  How did we find this person?  Certain sources of referrals engender more confidence than others.  Did your co-founder bring the person in?  Is she your niece, once-removed?

2.  Who has the most confidence in them?  Is it the person that introduced them?  Someone that will be working with them?  One of your investors?  One of your advisors?

3.  How important is confidence for this role?  There are certain areas in your startup where folks need to have a fair degree of discretion.  For example, regardless of how smart and passionate the founders might be, if you hire a professional UX designer, you have to let them do their thing.  Debates are good, but whoever is the best qualified to make the decision should make the decision. 

4.  Who on the team loses the most if they don’t work out?  Yes, I know, everyone loses when you lose a team member.  But, who is impacted the most? 

5.  Is the eroding confidence justified?  Is it possible that a bad hiring decision was made?  Did people expect a degrree of capability that just did not get delivered?

Some though (but important) questions. 

Closing words of advice:  When recruiting team members make sure someone on the team will go to bat for the person when things are shaky.  You need a trusted member (like one of the co-founders) to help objectively assess issues of eroding confidence — and help restore it if needed.  Otherwise, things go into a downward spiral and nobody wins.

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I just got back from Y Combinator Demo Day, Summer 2008.  For a startup fanatic like me, it’s hard to imagine a more fun use of a few hours.  I got to watch 20 back-to-back, rapid-fire startup demos. 

Here are some of my initial reactions and thoughts on the newest cohort of YC startups.  Note: Like most OnStartups articles, this article focused on the entrepreneurial perspective (not the investor perspective).  The folks that should (hopefully) get the most out of this are the YC startup founders themselves.

Notes From The Y Combinator Summer 2008 Demo Day

1.  Best Cohort Yet:  Overall, in my (highly subjective) opinion, this is the best batch of YC startups yet.  I think I have a bias (which has been tempered over time) for startups that have demonstrated some thinking around things like monetization and revenue, and that might be influencing my thinking.  The current cohort, on average, seemed to have a stronger emphasis on not just making something people want, but something that will yield revenue, and (gasp!) profits.  Good stuff.

2.  Presentations were better than what I’ve seen in the past.  More fluid, more polished, more effective.  My hat’s off to all the YC startup founders that presented today.  You guys did a great job!  Having said that, it’s not a totally fair comparison.  You guys do have the advantage of many more YC founders before you that you can learn from.  I’m guessing that  Paul, Jessica and the rest of the YC crew are also getting better and better at nudging you in the right direction when it comes to Demo Day presentations. 

3.  Tip:  Use your precious minutes:  The Y Combinator team did a great job keeping things moving, and I think the format of Demo Day works well (6 minutes per presentation, no audience questions).  One quick tip for the presenting team:  If you are doing the presenting, you should begin with your message even while your team member is setting up.  Don’t wait for the slide deck to come up on the screen.  Don’t shift the focus to your buddy who is switching out the cabtes and stuff.  Don’t wait.  Just start delivering your message.  In your preparation, come up with introductory remarks that don’t rely on your first slide being up yet.  When you only have a precious few minutes, 30 seconds counts.

4.  Don’t use gender stereotypes:  This one’s going to be a little touchy.  A few of the startups today used examples and screenshots that were um, a little too “gender-stereotypical” (that’s a semi-polite way of saying they were too far down the spectrum towards being sexist).  I can understand and appreciate that most of the YC founders are young males in their 20s.  But, my advice would be to resist the temptation to use scantily clad women in demos.  It’s both inappropriate and sub-optimal.

5.  Answer the question you know people are asking themselves:  Once you start doing presentations a lot, you begin to realize that there’s a “pattern” to the kinds of quesitons people have in their heads.  The same themes recur.  Do what you can to make it as difficult as possible for people to dismiss you because they’ve got that one big “obvious” question/objection/whatever.  For example, I thought the Fliggo team did a smart thing by closing with this nugget:  “I know you’re asking yourself, how are these guys going to make money…I’m glad you asked…”.  You don’t necessarily have to answer the “how do you make money” question (though that’s not a bad thing), and you don’t even have to frame it as a quesiton.  Just try and address the most obvious things people are likely to wonder about.

6.  Tip:  If you’ve got traction, share it earlier in the presentation:  There were several startups that had pretty impressive early traction (like users and revenues).  They didn’t talk about this until later in the presentation.  I’d suggest possibly getting this message out earlier in the presentation, because it will grab people’s attention and cause them to listen more intently to the rest of your story.  Imagine an opening sentence that is something like this:  “Hi, we’re XYZ.  We launched just a few weeks ago and we’re getting some encouraging early evidence that we’ve built something people want…Here’s what we’ve learned from our 14,000 users…”.  I’m not suggesitng you use that exact sentence, just a thought.  When dealing with investor types, remember that folks have short attention spans and you’re best served by grabbing them as early as possiblewith something they care about. 

7.  Memorable sound-bites are not just for TV:  I’m generally not a big fan of over-preparing for presentations (more often than not, sounding natural is more important than sounding polished).  Having said that, some clever, funny, well-crafted sound-bites thought of in advance and added to the presentation are a good thing.  They’re particularly good for bloggers and media types that might cover you.  For example, the PopCuts folks had this great snippet:  “The only way to get famous on BitTorrent is to get arrested.”  Simply brilliant. 

8.  Audience participation/engagement works:  A couple of the startups were able to work their demo such that the audience was “involved” in the demo itself.  Although this is hard to do, it’s valuable.   For example, Poll Everywhere (which provides SMS polling) ran a “live” poll for the audience on a topic near and dear to their hearts (i.e. if you knew nothing else about a startup other than which VC funded them, which VC would you bet on?).  The audience was rivited.  It also helps a lot when you get audience members to do something (instead of just sit there and listen). 

That’s all I have for public consumption.  However, I have notes from each of the presentations.  If you were one of the startups that presented today and want my quick thoughts or feedback, feel free to email me. 

I just noticed a great summary write-up of today’s event on Scott Kirsner’s Innovation Economy blog.  If you’re not yet reading Scott’s blog, you should be.

Best wishes to all the Y Combinator startups.  It was great to see you all and chat with many of you at the close of the event.  Knock ‘em dead next week.  In the meantime, some closing advice:  Get some sleep!

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I have been tracking Y Combinator (a new kind of venture firm for early, early stage startups) for several years.  They have a distinctive approach to the early-stage funding process and have funded some interesting companies.  YC is in the news again because of Google’s recent acquisition of Omnisio, a YC investment. 

Thinking back on several years of YC history, I dervied the below list of companies that I would have funded had I had the opportunity to do so.  I tried not to cloud my judgement with hindsight (that is, I’m not just picking the ones that ended up being successful).  Also, note that these are not what I think to be the best YC companies — just the ones that I’ve thought about in the past.

1.  Reddit:  I remember the day I first encountered Reddit.  They were presenting the product at one of the early Web Innovators Group meetings.  I was still a grad student at MIT at the time, and went to the meetup with a few of my classmates (we were working on a paper about “Web 2.0” for one of our classes).  Interestingly, Kiko (remember them?) was one of the other companies presenting that evening.  I’ll be honest and admit that on the first evening, I didn’t quite “get reddit” (the category of social news was very new at the time).  But, reddit showed up on my radar pretty quickly a little while later.  I noticed a bunch of traffic coming to OnStartups.com (this blog) through reddit.com.  It caused me to take a second look, and I’ve been following them ever since.  I don’t know Steve Huffman that well (he might actually be even quieter than I am), but Alexis is about as nice a guy as you can find and has a weird, quirky creativity that is magnetic.  To build a successful startup, it helps a lot if people actually like you. 

2.  Xobni:  I met Adam Smith for lunch at a Thai place in Coolidge Corner (Brookline) a long, long time ago.  Long enough that it was before the exceptionally talented Matt Brezina joined as co-founder.  Even back then, I liked Xobni for one simple reason.  It complies with my notion of “the problem you solve should be ugly, the solution should be beautiful.”  There are few things less fun to develop these days than desktop applications for Windows.  It’s ugly.  What’s even uglier is developing desktop software that has to integrate as a plug-in to something else — like Outlook.  That’s one ugly problem.  Further, the fact that millions of people still use Outlook made it in an interesting commercial opportunity.  Plus, I really like Adam.  He’s super-smart and listens.  [Matt, I like you a lot too, but I didn’t know you back then and I’m trying to talk about my early, early thoughts on the company].

3.  Pairwise:  I saw the pairwise guys present at the YC Demo Day (the big day following months of furious coding that is the core of the YC experience).  Of all the companies in that cohort that presented, I liked Pairwise the most.  It appealed to my data-driven nature and they had something that I felt had commercial opportunity.  More importantly, unlike many startups, it seemed they were actually thinking about the “how do we make money” part very early in the process.  I haven’t kept up with Pairwise much since then, and they haven’t written on their blog since November, 2007 — so I’m guessing things didn’t take off like they had hoped.  Regardless, I thought the guys were great and the idea was a good one.

4.  Wufoo:  I’ve been dealing with the frustration of web-based forms for a long, long time.  It’s a common enough problem that lots of people try to solve it by creating a “form builder” of some sort.  It’s an appealing problem to try and solve (unlike what Xobni is doing, it’s a fun problem to work on).  We even built one as a part of our landing page application at HubSpot (not because it is fun, but because it is a necessary part of what we do).  Back to Wufoo.  The thing I like about them is that they are exceptionally good at the UI/UX thing.  I’m not a designer myself, and don’t play one on TV, but I know great design when I see it.  I also know how hard it is to do right and how rare it is to find people that have that gift.  What’s even rarer is the notion of great UI/UX design talent intersected with a strong business sense — which the Wufoo folks seem to have. 

5.  Disqus:  Of all the startups from YC that I’ve seen, I feel like I understand Disqus the best.  Having been a blogger myself for some time, I get the notion of centralized comments and the tradeoffs therein.  This is why I met with Daniel Ha — coincidentally, at the same Thai restaurant in Coolidge Corner where I met Adam Smith.  (Yes, I’m a creature of convenience and the place is 2 minutes from where I live).  Daniel’s one of those entrepreneurs that makes a great early impression.  He’s clearly smart, but also recognizes there’s stuff he needs to learn that’s going to increase his odds of success.  I like the general notion of Disqus (always have) and even back then, there was some early evidence that folks were going to use it.  Disqus is also one of those companies that likely benefits most from an association with YC and Paul Graham. 

6.  RescueTime:  Tony Wright (the founder of RescueTime) probably doesn’t even recall this, but he and I first had online contact years ago.  He reached out to me way back then as a reader of my blog and reported a problem with the commenting system.  Since then, Tony and I interact sporadically (mostly through each other’s blogs).  Tony’s one of those guys that I’d bet on simply because he has an uncanny knack for how the startup game is played.  Intersect that with an interesting idea that could get massive appeal, and you have a great startup.

So, there you have it.  6 Y Combinator startups that I probably should have been more aggressive about investing in.  But, that’s not my style.

My best wishes to all the Y Combinator founders.  Particularly those that are working away furiously on their products in preparation for demo day coming up soon.  I hope to see/meet many of you there.

By the way, if you’re not in YC, but you’re a superstar web developer (take 5 minute quiz) and looking for a fantastically fun startup gig, I’m recruiting for HubSpot.  Just drop me an email.  I’m easy to find.

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You remember 1999, right?  It was the day of the sock puppet and crazy, CRAZY marketing strategies.  By the way, before going too much further, I will confess that I actually bought pets.com shares back in the hey day.  Why?  Because everyone was doing it, and my wife and I thought the commercials was creative and funny.  Granted, my “due diligence” bar was lower back then, but I’d understand if many of my colleagues would revoke my angel investor license just for that.

But I digress.  Today’s article is about new ways startups are using to try and attract attention and — wait for it — eyeballs!  A software company in Cambridge, MA is running a “viral marketing contest” whereby they are giving away a total of $50,000 for bloggers, videographers (basically anyone with a video camera) and others into the “new, new marketing”. 

Here’s the article: 

Insanely Brilliant or Just Insane?  The HubSpot $50,000 Viral Marketing Contest

Now normally, I’d be having a jolly old time making fun of this startup with references back to every lame attempt at “marketing” we saw out of dot-com startups back in 1999.  There’s just one problem.  It’s my startup that’s doing the crazy stuff!  Yep, that’s right, my startup HubSpot, which recently raised $12 million in venture funding is giving away $50,000 of that in a viral marketing contest. 

I figured once people get wind of this, many of my friends, colleagues and bloggers are going to send me emails saying, “Dharmesh, what the hell?”.  Actually, I might get an email from an investor or too as well, because we haven’t run this by them yet.  I figured I’d try and pre-emptively answer some of the inevitable questions.

1.  Why do it?  Well, it’s kind of simple.  We’ve been having great success with attracting leads (and closing customers) through our blog and other online channels.  Some of our most successful marketing efforts have been blog articles that went viral on social media sites like digg and reddit.  Last week, we tried to do a rough economic analysis and estimated the value to us of leads generated from these successful pieces.  It was high.  So, there’s opportunity here.  Plus, we don’t like spending too much money on AdWords.  It pains us.

2.  Why not just do it ourselves?  Well, frankly, because developing viral content that spreads like wildfire is a tricky business.  We have a team of great folks writing content all the time for our blog (including me), and sometimes we hit it out of the park.  But our guess is that there are folks much more talented than us that are capable of producing remarkable content (as Seth Godin would say).  We figured it’s worth a shot trying to draw those people out.

3.  If it works, it could work big.  We’re at a stage now where experimentation is reasonably cheap.  Instead of getting stuck in the rut of turn this dial a bit, flip this switch a bit, and crank out the customers — we’d like to look for some non-linear growth opportunities. 

Oh, and if you’re a VC reading this (particularly one of our VCs), we’re doing the same thing in marketing that you do when looking for investments:  Pick projects that have potentially huge impact, even if they are a bit whacky and high-risk.  If we do a dozen of these crazy projects, if just one wins, we’re golden!  Champagne and chocolate-covered strawberries for everyone! 

So, what are your thoughts?  Is this genius or desperation?  Would love to hear your comments.

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