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UW Guest Lecture Deck - MKTG 555

Here is the deck I used for the University of Washington School of Business class  (MKTG 555 - Entrepreneurial Marketing and Management) I guest lectured at yesterday. It's part of their Center for Innovation and Entrepreneurship program, and I spoke about "marketing your small business across the new landscape of the Web -- Online Marketing v2.0".

UW Biz School Lecture - Fall 2009

View more presentations from Jordan Mitchell.

Swing for the Fences or Focus on 1st Base?

Who is more likely to produce long-term shareholder value -- the entrepreneur who raises too much investment capital, or the entrepreneur who funds growth through profits alone?

First time entrepreneurs often have skewed visions of "how it all works". Their perceptions are often shaped by the numerous successes that get touted about the media, rather than by the 1000-fold number of failures. It makes the "accidental success" of YouTube appear reachable, or at least "just as likely" as any other startup.

One of the things that entrepreneurs usually believe is that once they have an idea, they need investment -- that's just how it works, right? Once they start to talk to investors though, as well as advisors and other folks in the startup community, the questions usually come up ... is this a lifestyle business or a "swing for the fences" big market opportunity? A "lifestyle business" is one which you intend to keep running for a decade or two -- like my Dad's optometry practice, for instance, or my brother's event audio/visual recording business -- typically an owner-managed business in which the profits are used solely to support the ongoing lifestyle of the proprietor.

Then there are the "swing for the fences" big market opportunities. These are the startups with big goals, where the entrepreneurs focus on a market opportunity >$100M. To get there, most companies on this track sell ownership in their company at some stage of their business to raise the capital necessary to build their company. Some companies even raise huge amounts of venture capital, at a hefty dilution mind you, before they even arguably HAVE a business. (Twitter comes to mind ...) Investors are compelled by visions of a healthy return on their investment, and in the latter case also by extremely savvy entrepreneurs.

For whatever reason, I'm NOT a "lifestyle business" kinda guy. I'm only interested in building a company with a compelling market value and resulting shareholder ROI, but as a founder I'm ALSO uninterested in immediate dilution down to single digit % ownership. I want as much equity in the company as possible.

I learned long ago that the best way to build personal wealth and shareholder value is through "bootstrapping". Bootstrapping is the art of building companies with very little outside capital/investment. I'm proud of my bootstrapping skills actually, which I've developed over four startups now, yet I've also realized that outside capital is also essential to developing/realizing a substantial market opportunity.

The reality is that there is a middle ground. Bootstrapping your way 100% to IPO, while honorable, is very difficult and uncommon. If the market opportunity is truly there, being under-capitalized will usually result in missing the market window of opportunity. Conversely, raising too much capital too early rarely results in long-term shareholder value. In other words, given a large market opportunity -- a startup that raises too much investment capital is just as likely to fail (to generate shareholder value) as a startup that doesn't take any investment capital. 

I've been building Others Online based on what I thought to be an appropriate balance of equity financing and bootstrapping ("sweat equity" financing). Unfortunately we're still not profitable and thus reliant on investment capital at a time when the market opportunity is large and we're landing large customers, but market conditions are unstable and investment capital has dried up. And the other day I was talking to one of my investors, who literally wrote the book on bootstrapping, about our status as a company. He insisted that there "has to be a way" to generate more cash from our pipeline immediately. The only way I can see to do that is to shift our business model in the short-term, and I worry that doing so may negatively impact our ability to achieve the "big market opportunity".

I keep thinking about this. Is it possible to "swing for the fences" (big market opportunity) at the same time as focusing on 1st base (getting to cash flow breakeven)? Or are the two incompatible? I suppose it depends on the market opportunity, but I'd argue most high-value windows of opportunity in the market are open for a limited period of time. Rarely do you not have competition eyeballing the same opportunity, and sufficient funding is generally a prerequisite to nailing these windows of opportunity.

Market leadership positions are always attained as a result of execution. Financing is not execution. However, financing provides the means to develop the necessary components to execution: team, timing, marketing, and product development. Since paths to success are rarely a straight line, financing also helps recovery from bad decisions (on any of the above). Under-capitalized companies are therefore at greater risk. That said, bootstrapping is also essential. It teaches you to make your mistakes quickly and therefore least costly. Bootstrapping is good execution.

2009 is going to be a difficult time for companies who are "swinging for the fences" but aren't financed for the next 12-18 months.  If you're one of them, like we are, it seems you can only either change your game plan and just focus on 1st base, or merge your team with a team in a far better position to hit the home run.

Best Year Ever for Others Online!

(Cross-posted from the Others Online blog.)

I've never been one to think in terms of calendar years starting/finishing -- rather I view new years just as I do new days or months, as simply a progression of time. I suppose it's because of this that I've never embraced either resolutions or predictions. But I do like to recognize achievements now and then.

Others Online started building our core technology in 2006, and the company pretty much flat-lined for most of that year as we dealt with an emotionally upset and litigious [former] consultant. So 2006 pretty much sucked. In 2007 we got back on track, added some amazing investors, launched consumer services and grew that user base nicely by the end of the year. But by January 2008 it was apparent that our affinity profiling technology was more valuable to online media companies (B2B) than online consumers (B2C). So 2008 was the "year of the pivot" for us.

As I look back on 2008, I am extremely proud of what Others Online has accomplished, notably:

• Successful shift from B2C to B2B, earning valuable customers, real revenues and an AMAZING pipeline for 2009!!
• Quietly launched our Affinity Profiling Platform in mid-July, moving our data center infrastructure from our own servers to an elastic, cloud-computing infrastructure -- thereby allowing us to scale much more rapidly to meet demand.
• Since July, expanded our cookie footrpint to nearly 80M.
• Since July, developed over 52M rich profiles comprised of over 3B individual affinities, based on almost 300M Web searches and well over 1B page views across nearly 1M sites.
• Drove targeting for >500M ads, resulting in an increase in eCPM rates exceeding 50%.
• Added Sam Tingleff to the Others Online team.
• Added a half-dozen incredible angel investors -- the caliber of people whose accomplishments humble mine.

All this despite the declining economic conditions in 2008! So while I'm not one to generally congratulate ourselves on a job well done -- rather I'm much more inclined towards the "only the paranoid survive" school of thought -- I am quite proud of what we've done as a team in the last year, and I'm ready to face the challenges of 2009. In fact, I believe 2009 will be a much better year than 2008!

Actual vs. Perceived Progress

When you spend all your time at a "low altitude" elbow-deep in code (or similar deep effort), it's easy to lose site of the difference between actual progress and perceived progress. External stakeholders are often only  concerned with perceiving progress, not measuring ever little detail of actual progress.  And in many cases, it doesn't matter how much actual progress you've made if the critical stakeholders can't SEE it -- even if what they see is completely trivial and/or simplified. In fact, oftentimes the more trivial the indicator the better off you are. Simple visual indicators are the best indicators of progress, especially when the individual components to progress are complex.

For instance, check out this simple visual of an evolutionary algorithm evolving the design of a car (in Flash) to traverse the landscape without the red circles touching the ground. It's a simple visual demonstrating what I'd guess to be a complex set of code. (Evolutionary algorithms are optimization algorithms designed to evolve/mutate on their own, using mechanisms inspired by biological evolution: reproduction, mutation, recombination, and selection.)
In business, one thing you can count on is that everyone is extremely busy. Therefore, it's important to apply the fruits of your efforts to visual metaphor, so that stakeholders (investors, customers, partners, etc.) can empirically see their progress without even caring about how it was done. For board meetings, they're called KPIs (key performance indicators). It gets harder though when software engineers and business people need to communicate. This is why I think it's so important for engineers to learn to SHOW their progress, instead of simply achieve progress. No one else is going to care what you did or how you did it, until/unless you can demonstrate it. The perception of progress, therefore, is much more important than the actual progress.

What It's Like to be an Entrepreneur

I thought this video provides a very accurate picture of what it's like to be an entrepreneur.

When you're an entrepreneur, the #1 goal of every day, week and month is to NOT DIE.  You're continually dodging bullets, and must continually look out for and focus on every risk -- running out of money, losing a key customer, pissing off an investor, losing a critical member of the team, etc. When you have no momentum (and even if you do have momentum), there are hundreds of ways to screw everything up and be done as a company.

RIP: Good Times? Here's to Better Days.

The presentation entitled "R.I.P Good Times", presented by Sequoia Capital to over 100 CEOs last week, warned of grim times ahead and gave rather dramatic advice. It hit me over the head like a mallet, as it did many others.

But my friend and board member Mike Crill was quick to remind the companies he works with who the audience was for this presentation -- multimillion dollar VC-backed companies, primarily in the Bay Area -- and gave his own advice in a blog post aptly titled "To Better Days". In it he correctly points out that early-stage companies operating on or raising angel rounds under $1MM will find their circumstances different than venture-backed firms or late stage companies, and provides some advice.

Investors are going to look for deals with traction.  If you can’t demo your product, go get a job or go back to school.  The competition for angel dollars is going to be too tight for you this year.  If you can sell your product, then sell.  You’ll find more success in selling product than selling shares.

He points out three timeframes working against the CEO raising angel money this year:

• Market stability -- we're in a timeframe of extreme market instability, which is apt to continue through the end of the year.
• Election year -- Bush is a short-timer. He's got senioritis. He's far less apt to bend over backwards in the last three months of presidency to rise to the occasion and fix the economy, than to just pass it on to the next guy.
• Recovery cycle -- I'm not sure anyone predicts a rapid recovery.  Get used to it.

I think the main point Mike makes is that while Sequoia made an effort to tell their portfolio companies to "get scrappy", those of us not VC-backed are already scrappy. (Not that it's meant to make us feel better, but ...) Our world is different. We're not sitting on several million dollars and executing a Go Big or Go Home strategy.

While you should just read his post, his advice is roughly as follows:

• If your product is selling, focus on execution.
• Focus on smaller rounds, and accomplish key objectives. Set your targets low and oversubscribe if you have that option.
• Lay off any B and C players on your dev team. Sell what you have. Build v2.0 another day.
• If the market is being less receptive to marketing, reduce your marketing costs. Focus on ROI.

Startup Challenges - Raising Money

I'm on the board of directors for the Northwest Entrepreneur Network, who last week held their annual Early Stage Investment Forum. I could only attend in the afternoon, and I missed a great video (shown during lunch) with 4 local entrepreneurs on starting a company, raising money, pitching at a conference, etc. Extremely well edited, and I think they do a good job capturing the challenges of startup fund-raising. (FYI - Others Online presented at ESIF last year and it was definitely worth our time!)

Great job to Sam, Alyssa and David! (I don't know the other guy.)

Macro Management

Just read this in an article within Fortune magazine on the future of management, and thought it was interesting:

Turns out you don't need a lot of top-down discipline when four conditions are met:

1. First-line employees are responsible for results.
2. Team members have access to real-time performance data.
3. They have decision authority over the key variables that influence performance outcomes.
4. There's a tight coupling between results, compensation, and recognition.

Making It Big, then Trying Again

Just read Glenn's post on execs who've previously had success  now getting involved in new startups, and Allen's post on what he calls the "community CEO" (referring specifically to Jason Calacanis getting back into the game with Mahalo).  Both are about execs who've done well for themselves and now getting back in the game. (Reminds me of one of my favorite Yvon Chouinard quotes -- “only from the extremes of comfort and leisure do we return willingly to adversity”. )

I’m generally skeptical of execs AND founders who have already made a ton of money, and want to get back in the game. Why? I’ve witnessed too many highly comfortable individuals *want* to get back into the startup world because they remember the good days and they’re bored, but bail when they begin to remember just how hard it is to build a company. The more $ they made, the harder they’ve forgotten how to WORK.

Startups are hard, whether it’s your first or fourth. In my opinion, you’ve gotta have something driving you past the point where you consider giving up — the “eye of the tiger”. Maybe it’s pure competitive drive, maybe you just can’t stand the thought of having to get a “job”, or maybe you just have to show some assholes that you’re better than them.

Whatever it is, if you don’t have that drive and especially if you’ve already made your money — you’re far more likely to fail/bail when the shit starts to fly. If you do have that drive, then you can often bail yourself out of any situation (bad idea, for instance) and figure out the path to success.

The Value of a Facebook App

I was one of the panelists at the recent TiE event Opportunities in the Web 2.0 Ecosystem, and moderator John Cook asked whether a new startup ought to build their company around the new Facebook platform or choose to build their own platform and network effect.

For a while there (after May, when the platform first launched), I kept getting questions from investor-type people asking me if I was going to build a facebook app -- there seemed to be a lot of "enthusiasm". We chose not to, for a variety of reasons. It'll be tough to ever know whether that was a bad decision or not (it's not like the opportunity is forever gone), and clearly there are many companies building their business around a facebook app.

But in my opnion, the value of a facebook app is as mere advertising and/or a feature, not as distribution, a standalone product or a business. Here's why:

• When you're offering a free service within another free service, it's damn hard to arrive at a sustainable business model. The advertising revenue model with Facebook apps is still unproven.
• You don't own your facebook app users, facebook does. Users/customers form the core value of a business, and you're not going to have any unless you get a facebook user to register separately for your service.
• The biggest value to web 2.0 products, besides users, is the network effect -- which is more valuable than the sum of all users. With facebook apps, you don't own the network or any of the connections between the users, facebook does.
• Facebook is free to compete with your app, shut you down, etc. They are already doing so.

As a startup, a core value in your company centers around your distribution -- your users. Jeremy just wrote a good post on how to value a social media company, and # of users is his first variable for good reason -- assuming they're YOUR users. I guess maybe I'm just old-fashioned and want to build my company earning my own users instead of someone else's (who can be taken away from me within 24 hours). I just wouldn't do a distribution deal unless it added tangible value to my core business.

Now there are times when a facebook app makes sense to me, such as:

• As a feature of your core product/service, which is offered across multiple channels. Any social media company is going to have a percentage of their users on facebook, so why not make it easy for them to use it within their fb community?
• Promoting your core product/service. Just as widgets ought to be viewed as advertisements promoting your company, a facebook app ought to be viewed the same.
• Optimizing your viral coefficient. Startups need to continually hone their messaging and features in order to improve their viral capacity. Doing this on a closed network can be very effective for ongoing iteration/testing.

The companies that focus on a core product/service, earning their own user base and network value,  utilizing Facebook (or any other closed platform) as just one channel of promotion and testing will be in the best position to create real shareholder value. The companies that are defined by their Facebook app incur a greater risk that they end up creating no shareholder value at all.