In my days as an equity analyst, I would occasionally be asked to give my opinion on a financial corporation that my portfolio manager was considering as an investment.

Image provided by: The Car Connection

Almost every time, my answer was, ‘don’t invest.’

I didn’t take that position because I believed it was over-valued, but because I simply had (and still have) no idea what the vast majority of financial companies are worth. For an investment bank with 20x leverage, the difference between being insolvent and compliant is a change of just 5% in the value of its assets. A clever and adequately unprincipled accountant can easily — and legally — fudge assets by 5% using inflated carrying values on illiquid assets. If I can’t tell you whether the company is or isn’t insolvent, I definitely can’t tell you if it’s worth more or less than $16.45.

Instead of giving an answer in which I had virtually zero confidence, I abstained on the financial sector altogether, saving my brainpower for all the companies out there that are transparent enough to analyze.

I feel the exact same way about marketing.

Marketers have all sorts of options for how to promote their product, both online and in the tangible world, and each and every one of these options has the potential to drive sales. But a marketer’s job isn’t just to drive sales. They’re also charged with:

1. Generating a positive ROI from their marketing efforts
2. Increasing their ROI over time by optimizing their spend

Without the possibility of calculating marketing ROI with some precision, a marketing channel to me is just like a financial stock. You know it’s not worthless, but you really have no idea how much it is worth. And if you can’t measure the value it brings to your company, then you can’t calculate an ROI or compare it to other campaigns. You’re better off not playing.

A perfect example is billboard advertising.

I’ve long thought of billboards as the single hardest ROI to calculate in the marketing world, so I found a SlideShare presentation that makes a valiant attempt. I’ve excerpted the page where the author calculates the ROI of his/her Honda billboard campaign here:

Seems pretty reasonable. But there’s a big assumption here, which is that the billboard was responsible for 8 car deals. How did he/she come up with that number?

There’s another slide for that:

Here’s where it gets messy, for three reasons:

1) Survey tactics matter

The ROI is basically derived from a survey question, and how the survey phrased that question matters A LOT.

For example, asking the question, “Did seeing our billboard influence your decision? (y/n)” will get a much higher positive response rate than a long picklist of sources, especially if the “billboard” entry is buried in the list. Entrants who saw the car in multiple places before purchasing it may just pick the one they come across first. Suffice it to say that number could easily have been either 2 or 4 if the tactics were different. It’s not a simple binary fact.

2) Tough sample size

When the number of positive responses is this low, the confidence interval is not kind. At a 95% confidence level, the number of actual responses out of the 189 total buyers is somewhere between 3 and 13. Not all that precise.

3) Intangibles to Consider

The fine print at the bottom of the slide hints that there is hidden, intangible value in the campaign from partial credit and brand perception/awareness. That’s good for the value of the campaign, but how good? We have no way of knowing.

So returning to the campaign return slide, the true numbers are really:

Plus, of course, the intangible benefits, which we have no way of measuring. 

So, the campaign delivered somewhere between zero and a 6x return, or in other words, it either barely broke even or was outrageously successful.

In a vacuum, I’d probably pull the trigger on this campaign, because there’s a low likelihood that it actually loses money. But if I’m also asked to optimize my marketing ROI, these results are not nearly conclusive enough to compare against other options and therefore don’t allow me to do my job.

I’m not writing this to pick on this author (who I think did the best he/she could), or even billboard advertising in general. Technology is not a silver bullet, and I actually think many online marketing channels face a similar problem.

If you’re a B2B company with a long-cycle sales process, a prospect may be evaluating your product for months on the internet, asking their peers about you, and interacting with salespeople, so it’s not always obvious which campaign was responsible for bringing them to your website or converting them into a customer. Even if it is technically possible to do so, many companies lack the time or expertise to properly attribute leads to the right channel.

My advice is, if you can’t measure it, don’t invest in it. You don’t have to take advantage of every marketing channel, so stick to the ones you can actually analyze, even if that means sitting out on some logical-sounding opportunities.

Do you agree you should never invest in a marketing channel you can’t accurately measure?

Image provided by: sgrouples

Some, like the Ad Man quoted in this VentureBeat article, think the tracking cookie is not long for the world. “It’s going to go,” he says. “I think it will take five years to kill it.”

His reasoning is that people find it creepy and invasive, and given an easy enough way to do so, will opt-out en mass.

If that’s true, it’s seriously bad news for marketers. If the cookie goes, say your goodbyes to Google Analytics. Give your best regards to targeted and re-targeted ads, you won’t be seeing them again either.

Online Marketers Could Be in for a Rude Awakening

For all practical purposes, the death of the tracking cookie puts online marketing back into the stone age, also known as ‘traditional media.’ Without the context of knowing where your visitors have been and where they’re going, you might as well be in the billboard business.

So if you’re an online marketer, should you put in your two-weeks notice now, or take a gamble and wait until next month?

Well, as we all know, the one inexorable truth of new developments in technology is that they always result in more privacy for their users.

Oh wait no… my mistake… it’s the exact opposite of that.

The public’s thirst for sharing minutia about their daily lives seems virtually unquenchable, drawing comparisons by one 28-year-old billionaire to Moore’s Law. Put it this way: if you really hated cookies, where would you rant and rave about it? Right next to the pictures of last night’s dinner on Facebook, right?

Look, I consider myself a fairly private person. Other than the occasional blog post (Jonathan Crowe will come find me if I don’t write it), my online footprint is pretty minimal. It would take a pretty sophisticated algorithm to tell the difference between my Twitter account and a spam bot.

But even I don’t really give a damn if a website tracks me anonymously.

You really want to track me? Great. Now you know that in the past day I read 12 ESPN articles speculating on the Bruins playoff chances, and 1 E! article speculating on the name of Kim and Kanye’s baby (which I totally clicked on by accident). What possible damage could someone do with that information, and what possible motivation would they have to do it?

Compared to the slim benefits of saving basic preferences when I visit a website for the first time, it’s just not worth it to me to disable cookies, no matter how easy they make it.

If technological developments are at all related to the preference of users, and I believe they are, cookies are here to stay for a very long time. You’d better know your way around a Google Analytics account.

This is big news for us here at OpenView Labs, having worked closely with Mashery since OpenView made its first investment in 2011. But the acquisition isn’t just a good sign for us as investors, it’s also a vote of confidence by a couple of old-school companies that the Application Programming Interface (API) is the future of application infrastructure.

In a world where internet access is ubiquitous and more and more applications are being accessed through multiple clients, API’s aren’t just for mashups anymore, they’re core architecture. This has big financial implications on anyone who has hitched their wagon to the standard.

Who is that exactly?

Glad you asked. While there are thousands of companies that offer and consume APIs, really only a handful task themselves with developing and building functionality on top of the standard itself. Some are large companies like IBM with a relatively small API product.

But it’s the pure-play API companies that really stand to gain from Intel’s vote of confidence, and that may see a spike in interest from potential acquirers.

7 Companies in the API Ecosystem Set to Catch a Ride on the Wave of M&A Interest

Apigee

Apigee may not have taken kindly to Mashery CEO Oren Michels’s comments that they are ‘Pepsi’ to Mashery’s ‘Coke,’ but their close competition actually makes Apigee the biggest external beneficiary of the Intel-Mashery deal. They’ve raised capital and grown employee count aggressively in the past year or so, and I have to think they’re looking for a similar result.

Apigee should have plenty of suitors. Many legacy hardware manufacturers like HP and Dell are trying to reinvent themselves as software companies, and are still mostly on the outside looking in at the API movement.

3scale and Apiphany

3scale has been around a bit longer than Apiphany, but I group them together because in contrast to Apigee and Mashery, they’re lighter, self-serve API management solutions relative to the enterprise-level agreements that Apigee and Mashery typically shoot for. While their revenue picture may be a bit behind Apigee and Mashery, the model has great potential as APIs move downstream into the SMB segment.

ProgrammableWeb

As the most comprehensive directory of APIs on the internet and a central authority for API-related news and commentary, PW has not only helped accelerate the API movement but has also been one of the only sources documenting it. For instance, at last count PW’s 8,922-strong directory of APIs is up 56% from the same date last year. It’s not too much of a reach to see PW and its somewhat surprising owner, Alcatel-Lucent, realize some market value from the increased prominence of APIs.

IFTTT, Zapier, and Mashape

All ~10 person startups, this group is the new generation of VC-backed efforts to make APIs more accessible to the masses, blending the flexibility of APIs with consumer-grade usability. By democratizing the marketplace for APIs, they‘ll increase the reach of APIs and the benefit to their creators. They’re very early stage – with the biggest, IFTTT having raised $7m — but appear to be in the right place at the right time to capitalize on the growing use of APIs.

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Are all of these companies headed for an acquisition on the scale of Mashery? Probably not.

But as the movement continues to turn the heads of big players with deep pockets, the funding and acquisition opportunities available to this ecosystem of companies should continue to strengthen.

I know I’ll be watching.

Image provided by: Matt Rehnstrom

Michael Lopp wants to help prevent that, and after reading his argument, so do I.

Have Fewer Meetings that Are More Productive: 4 Questions to Ask Before Scheduling

Before clicking send on a meeting request addressed to my email address (or anyone else’s, for that matter), ask yourself the following four questions:

1) Am I looking for a discussion, or just an update?

Emails, spreadsheets, and text messages are usually sufficient for one-way updates. They fall short when there are questions that need to be answered and differences that need to be resolved.

If you absolutely need my feedback before proceeding, it’s fine to schedule a meeting with me. If not, just send it to me in a format that I can read at my leisure, or not at all.

2) Does everyone really need to be involved?

The Lopp post finally put a name to something I’ve long struggled with: scale tax. A decision that can be made in one minute by one person always takes longer than three minutes when there are three people asking questions and debating solutions.

That’s not to say the outcome isn’t better when you include an additional viewpoint; it often is. But adding the fourth or fifth person implicitly commits you to including them in the decision, even if their contrary opinions take an extra half hour to resolve. Excluding someone from a meeting doesn’t mean you don’t respect his or her opinion, it just means that different people have different responsibilities, and this particular topic doesn‘t require their input.

3) Should this meeting really be two meetings?

Occasionally, you may run into a scenario where you need to discuss Item A with Person 1 and Item B with Person 2, so you schedule one meeting to cover both. This may seem like it economizes on time, but do these two people care about each other’s items? If not, you’re all better off with two meetings instead of one.

4) Is there a better time to discuss this?

Over the course of any given day, a working man or woman will invariably come up with questions and comments for his or her colleagues, many of which the same working man or woman could easily resolve in a few minutes without their colleague’s help. Scheduling a reoccurring meeting to answer all questions related to a single topic cuts down on distracting ad-hoc meetings, while still leaving a venue to ask the truly important questions.

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Meetings are extremely valuable in certain situations, but my sense is that if everyone thought more critically about why, when, and with whom they’re meeting, there would be a lot less of them. That means more time for everything else.

Are too many meetings hijacking your productivity? What are other ways you can ensure each meeting is absolutely necessary?

Like many people in and around technology, from time to time I come across a problem in my daily life that I feel could be solved by technology.

If you ask Paul Graham, that’s the perfect way to start a company:

“The way to get startup ideas is not to try to think of startup ideas. It’s to look for problems, preferably problems you have yourself.”

I love this premise: I’m an expert when it comes to my own problems, therefore I’m the best person to solve them. I like music, ergo, I’m ideally positioned to start a music sharing company.

But there’s one problem.

As a consumer, I’m fairly knowledgeable. I’ve been one my whole life. But my professional experience, on the other hand, is limited to a few years in a small number of industries. I’ve never been a doctor, or a lawyer, or a network administrator. Does this mean I can’t ever start a B2B business relevant to these industries? More importantly, does it mean only doctors can start medical technology firms?

Industry Inexperience Shouldn’t Hold You Back

I’m sure there are some great doctors-turned-entrepreneurs out there. But realistically, there probably aren’t enough of them to satisfy the creative demands of the entire industry, or of virtually any other B2B industry. It takes a unique kind of person to leave a stable and lucrative career in medicine to learn to code and start their own company. As a result, there’s a serious shortage of industry experience in early stage B2B technology.

There’s only one way for a non-practitioner like myself to close this experience gap and come up with a valuable idea for B2B tech. That’s by realizing I’m not an expert, and asking the right questions to extract the relevant problems from the people who do have them. I may want to enlist an expert as an adviser or even co-founder, but I shouldn’t let my inexperience discourage me from spearheading a project.

A doctor doesn’t learn how to cure a disease by contracting one, and an entrepreneur doesn’t need to have a problem to solve it. Doctors learn to be doctors by studying other peoples’ problems, and so should entrepreneurs learn to be entrepreneurs.

So while the best consumer technology ideas will — as Graham says — probably come from your own personal experience, the best B2B ones probably won’t.

Want to come up with a great B2B technology idea? Don’t restrict yourself to the problems in your narrow sphere of expertise. Get a working understanding of the subject matter, seek out the people with problems, and pull them into your circle.

Despite what the Hair Club for Men infomercials taught us, you don’t always have to be one, sometimes you just have to know one.

Image provided by: Viral Heat

Sometimes this means qualifying prospects through secondary research (i.e. company size or industry), sometimes it means qualifying them based on some action they did or didn’t take (i.e. downloading content or responding to an email), and sometimes it means coaching our portfolio how to read a person-to-person communication (i.e. do they have a budget?). In any case, the goal is the same: determine as quickly and accurately as possible which early-stage prospects to spend time and resources on, and which to write off as dead-ends.

The good news is that this process means the leads you do spend time on will be higher quality leads. The bad news is that by definition, it means there will be fewer of them.

“Less Is More” Can Be a Tough Sell

All of the executives we meet with are ecstatic about the first piece of this arrangement. Who doesn’t want better quality? But not everyone is comfortable with the fact that lead qualification means you’ll have to discard some leads if they don’t meet your higher standards of relevance. All too often, executives want better leads and more of them.

Of course, there are other ways to get more leads through SEO, SEM, list scraping, gated content, etc. However, the core function of lead qualification is always subtractive. Don’t ever expect stricter criteria to yield more leads. Expect it to yield fewer, better leads.

Balancing this tension between quantity and quality is a delicate art, which usually requires you to prioritize one or the other. As a sales or marketing executive responsible for the progression of leads through the funnel, you can approach the problem in one of two ways:

1) Fix the Quality

Begin with the premise, “We only want our sales reps to speak to leads that meet X criteria,” or “have Y probability of converting.”

Advantage: You’ll know every lead that comes out of that process is of a consistent quality.

Disadvantage: The quantity of leads that survive will be somewhat unpredictable. If you don’t put careful thought into this, you may get what you think is a great set of criteria, only to wind up with just a handful of super-qualified leads that your inside reps burn through before 10 AM.

2) Fix the Quantity

“We need 2000 leads per month,” or “we only want to call the top 25% of qualified leads.”

Advantage: The next tier in your sales process will have a consistent workload and you won’t ever be stuck with two few leads to pursue.

Disadvantage: The quality won’t always be consistent: a bad campaign or lead list will produce substandard results. You’re less likely to hear complaints about the number of leads you’re generating, but more likely to hear that they suck.

Given the choice between these two less than ideal options, which one should you pursue?

Ultimately, the healthiest thing for your business in the long run is to pursue only quality, profitable leads. If it’s economical to pursue more than you’re currently generating at any stage in the funnel, you’ll eventually have to hire more salespeople, buy more leads, or otherwise spend more resources to expand capacity.

But in the short run, you’ve got to manage your funnel to fit the people and capacity you have right now. If your field reps are able to take six meetings per week, it doesn’t make sense to send them 12, just to have them spend half their time on lower-quality leads.

If you’re consistently finding 12 worthwhile meetings per rep per week, then maybe it’s time for a larger discussion about how many reps you should employ and how to allocate your resources. On a week-to-week basis, however, you don’t have the option of adding or subtracting reps to meet demand, so you should aim to produce a quantity of leads that fits your capacity to process them.

Do you agree? Does quality typically beat quantity when it comes to leads?

photo: Aidras

Every few months, I read or hear another reformed management consultant come clean about their experience in the business and what it’s really all about. The shocking revelation actually follows a fairly predictable script, involving some combination of the following confessions:

1. Lavish spending on travel and accommodations: Consultants rack up travel and accommodation expenses to no apparent benefit of the client.
2. Shady billing practices: They bill by the hour and aren’t accountable to their results.
3. Playing politics: They give their stakeholder the answer they want to hear, not the correct one.
4. No leg to stand on: They know less about the company they’re working with than the executives who hire them.

I first came across these in college while thinking about pursuing a career in consulting. They were eye-opening. The projects seemed interesting, but the lack of accountability pushed me off of consulting entirely.

After a while, when I realized the tell-alls weren’t the first of their kind and wouldn’t be close to the last, they started to bug me.

If I could figure it out as a college senior after reading a couple of memoirs, how were the authors only realizing this 20 years into a consulting career? Had they never heard the “consultants borrow your watch to tell you the time,” jokes, or seen the absurd (but I must admit, very entertaining) Showtime series House of Lies? Were they really that naïve?

The truth is, it’s an open secret that traditional consulting suffers from a crippling lack of accountability due to misaligned incentives. Consultants know it, and the executives who hire them know it. They participate for the mutual benefits, and then deprecate the business once they’ve left. It’s all part of the show.

So if I’m part of that show, and I’m not retiring, why am I writing this?

The simple answer is that I’ve never really considered myself a consultant, and few of us working here really do. Yes, our projects, at a high level, are pretty much identical to an HBS case study. But I don’t feel the same lack of accountability that permeates the confessions. Our ownership stake in the companies we consult won’t allow it.

Why I Will Never Be Able to Write a Traditional Management Consultant “Tell-All”

Here’s how that structure nullifies each of the first three items the typical reformed management consultant writes about in his or her post-retirement confession:

1. Travel and accommodations: Modern marvels of science such as the telephone and the internets have allowed us to do most of our work remotely, so we don’t often need to rack up travel expenses.
2. Billing practices: We don’t bill by the hour, so it’s never in our interest to make a mountain out of a molehill. We do have a quarterly service contract, but it isn’t a profit center for the company.
3. Politics: We’re literally invested in the companies we work with and don’t make a profit on our consulting engagements, except in that they make our ownership stakes more valuable. That dynamic removes the pressure to be a yes-man just to satisfy the client. We give our honest opinion and don’t agree to projects unless we think they’ll make an impact.

Which brings us to #4, the admission that no consultant tell-all would be complete without: Consultants know less about the clients they’re paid millions to consult than those clients themselves.

This actually isn’t wrong. In fact, it’s the definition of consulting.

I can’t pretend to be as knowledgeable about the API ecosystem as the industry veterans at Mashery, or as in-tune with cloud backup technology as my counterparts at Intronis. I’m not any smarter than they are, and I don’t always have better industry contacts.

What I do have are a very particular set of skills, acquired from executing a similar market research process in rapid succession with a number of our portfolio companies. With each iteration, I’ve absorbed a different perspective from the stakeholders involved and had a chance to tweak the process. In my short year and a half at OpenView, I haven’t had nearly enough time to become an expert at all things marketing, sales, or business development. But I have had the chance to learn the horizontal slice of each of them that concerns primary and secondary research.

The True Value of a Good Consultant

That’s really what a consultant brings to the table: the ability to become an expert at something that happens too seldom at a single company to develop an expertise. It’s not magic or genius. It’s just reps and focus.

As long as there is management consulting, there will be ex-management consultants writing confessions on their way out. They’ve been so busy exaggerating their impact and expertise over the course of their career, that they’ve never had time to stop and think about how a consultant can actually add value for their clients.

If that helps them sleep at night, confess away.

I, for one, don’t plan on writing one and I’ll still get in eight solid hours.

By my rough estimate, about a third of those results will be startups that profess to be changing the world with big data. Another third are VCs, OpenView included, quoted in TechCrunch about their latest Big Data investment. The remainder are Fortune 500 executives explaining how Big Data is their number one priority for 2013.

In short, everyone wants data, and the bigger the better.

Image provided by: Sonian

As a member of the research and analytics team at OpenView Labs, it’s my job to translate data, big or small, into insights for our portfolio companies. The buzz-wordiness of the big data movement and its ability to universally inspire awe among business executives has certainly helped raise interest in our services. But it’s also engendered deep misconceptions about big data, principal among them that more data is always better. This mentality can actually impede companies rather than enlightening them.

Surrounded by this behavior, I feel it’s my civic duty to issue a warning about the limitations and dangers of big data. Before you fire all of your mid-level executives and replace them with Hadoop, consider the following seven inconvenient facts:

1) Data ≠ Knowledge. Data x Analysis = Knowledge

Given a properly sophisticated analyst with the right tools and enough time, a big data set can be a treasure trove of insights. But data on its own is just numbers, and numbers can’t run a company. This is a topic I touched on previously in a blog about Big Analytics, but what I didn’t mention is that the opposite is also true: no matter how many advanced degrees and fancy tools your data scientist has, he/she can’t give you a shred of insight without the right data. Both of these inputs have to be in place for a project to be successful.

2) Data and Analysis Compete for Valuable Resources

Regardless of how you choose to assemble, store, and clean your data, large data sets are expensive and time consuming. Given a limited budget (what budget isn’t limited), building big data will suck resources away from the analysis of that same dataset. Since Data x Analysis = Knowledge, leaving too little resources for one input will cripple your ability to make data-driven decisions.

3) Data Always Seems Important. Often It Isn’t

Let’s say you want to collect data on prospective customers to help your salespeople give more personalized pitches. More data can’t hurt, right?

Actually, it can.

In a fascinating study conducted at Princeton and Stanford, psychologists discovered that the quest to assemble relatively unimportant information can actually distract us from the few relevant facts. This “addiction to data” inhibits our decision-making. So even if you do have the maiden name for the mother of every one of your prospects, you may not want to give it to your salesperson: their over-sensitivity to this data point may distract them from the information that can actually help their pitch.

4) Small Data Can Have a Huge Impact

Another misconception widely held by executives is that you need big data to make data-driven decisions. Often, only a little data is enough.

Small data sets won’t always give you the full picture, but the most impactful conclusions often actually require the least data. That’s because more glaring discrepancies in a data set require a smaller sample size to reach statistical significance. So don’t wait until you have a ‘complete data set’ to begin making decisions.

5) There’s No Such Thing as a Complete Data Set

In the previous paragraph, ‘complete data set’ is in quotes because one doesn’t exist. The world contains an infinite amount of data and almost all of it is irrelevant to whatever you’re trying to measure. Attempting to quantify the effect of everything on everything else won’t just waste a lot of effort, it’s also likely to land you with a type I error, such as the Superbowl Indicator. Don’t bother collecting data unless you think there’s a strong possibility it will be relevant.

6) Granularity Often Makes Decision Making Harder, Not Easier

Suppose you’re a B2B company trying to decide which industry makes the best customers. Given the option of multiple levels of granularity in the SIC code system, many executives will opt for the most granular choice.

This is usually a mistake. The objective of analysis is to boil down an impossibly complex world into a digestible set of approximations. Always choosing the most granular option works against this, making it easier to miss the forest for the trees.

7) Big Data is Useless if You Can’t Communicate it Clearly to the End User

Hopefully my stats or econometrics professors aren’t reading this, because if they are, they might fail me retroactively. But from my perspective, clarity in how you present your analysis is often much more important that the precision of your model or completeness of your data set. A logistical model may be more accurate than a linear one, but if you can’t explain it to a layman, it’s not likely to have any impact on your organization. Business people don’t trust black boxes, and they won’t follow advice when they don’t understand the rationale behind it.

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If there’s one piece of advice I have for executives looking to bring big data to their companies, it’s to focus on the insights, not the size of the data set. Often, much more can be learned from a small, targeted one that’s properly cleaned, collected, and analyzed, than from a hulking one that’s dirty, old, and granular. Big data can be a star for your organization, but it can’t do it without the right supporting cast of technology and manpower to support it.

Image provided by: CoastalCare.org

Of course, this solution leaves money on the table. Natural gas is a $70 billion dollar market in its own right, and if dealt with correctly, millions of cubic feet of natural gas can be a lucrative second revenue stream for the operator. Whenever possible, oil companies try to unlock their byproduct’s value by processing it themselves, or selling it to somebody who can.

In this respect, the software industry is no different. There are many byproducts of the development process, and the vast majority are never fully monetized.

Sometimes this is unavoidable, when the costs of bringing a secondary product to market are overbearing. But if your company has the resources, byproducts can be a major source of revenue.

Here are three examples of valuable products that spawned from what was originally an accidental byproduct:

1) Amazon Web Services

As the world’s premiere internet retailer, Amazon needed an infrastructure that could handle huge global traffic volumes, with high performance, secure payment processing, and minimal downtime. To fulfill this, they had to build a world-class network of data centers, that could scale with their rapid growth in traffic.

In this case, their byproduct was an infrastructure network on a scale that only a handful of companies can match, and AWS was how they monetized it using existing assets.

2) Twitter’s Firehose API

When the founders of Twitter originally sketched up a business plan, they probably foresaw consumer advertising as the social network’s primary source of revenue. They likely never imagined that Twitter’s massive scale and cataloguing system would yield a treasure trove of data for marketers. Twitter has been able to monetize this data by offering ISVs like Hootsuite unfettered access to their API in exchange for revenue share or licensing agreements.

3) CrunchFund

After achieving moderate success as an entrepreneur, Michael Arrington struck gold in 2005 when he founded TechCrunch, a tech news blog. The website quickly became one of the most prominent sources of news and information for Silicon Valley.

With his frequent contributions and public appearances, Arrington himself also built a strong personal brand and a powerful entrepreneurship network. It wasn’t long before Arrington sought to monetize these assets in another relationship business, venture capital, by launching CrunchFund in 2011.

Benefits and Potential Drawbacks of Monetizing Byproducts

Monetizing a byproduct is a large endeavor, and shouldn’t be taken lightly. If you’re not ready, it can act as a distraction and compete with your core product for resources. That’s a problem for early-stage companies. If you aren’t sufficiently focused on your main product, there’s no way it will be able to compete with your larger competitors.

That being said, it pays to at least think about the byproducts your technology is creating, and how they can be cultivated for future monetization. If you have data that you may someday want to monetize, you may want to think about organizing your architecture around APIs that could eventually be opened to external applications. If your valuable byproduct is internal software, consider designing an architecture that could scale to many more users given additional computing resources.

Small adjustments ahead of time will make it much easier to productize the asset down the line.

What am I missing? Are there any other reasons why companies should or shouldn’t consider monetizing byproducts?

I worry that something has gone seriously wrong with the way we run companies. If you read the media coverage of our company, or of the technology industry in general, it’s always about the competition. The stories are written as if they are covering a sporting event… How exciting is it to come to work if the best you can do is trounce some other company that does roughly the same thing?

His message is clear: don’t worry too much about your competition, and shoot for the moon with your products.

I actually do think there’s a place for this philosophy, but it’s in very early-stage startups, universities, and R&D departments like Google X. These fields aren’t expected to be economically viable, so they aren’t as crowded with competitors. They’re also a very small slice of the overall economy.

The rest of us, especially in technology, are attacking very old problems in new ways, which means we still have an abundance of competition.

When Google launched Gmail, there were already a number of email providers. But it also, less obviously, faced a ton of additional competition from traditional media companies jostling for advertising dollars, and old-school telecoms competing for consumers. Without having a great answer to the questions, “why would I place my ad on your website instead of a billboard, TV, or Yahoo?” and “why would I use email instead of snail mail or a fax?” Gmail would never have made it. They did have great answers to both those questions, and that’s why Page is where he is today.

Most startups that I’ve come across resemble Gmail from a competitive standpoint: there are low-tech solutions to the same problem as well as a handful of less mature high-tech ones. But for the rare company that is attacking a brand new problem, any whiff of success and competitors will show up in droves. Google’s self-driving car may not have a whole lot of competition now, but when they start selling them, you can bet Toyota won’t be far behind.

Companies get in trouble when they take Larry Page’s advice literally and act as though they’re a unique snowflake. In a non-competitive market, convincing someone to buy a self-driving car is about convincing them they have problems that the solution will resolve:

• Robots are way better drivers than people
• If your robot does get into an accident, you can sue Google for the damages
• You can get drunk after work and it will drive you home
• You can sleep off your night of drinking during your morning commute

First of all, you’ll notice that even though there isn’t competition in self-driving cars, the messaging still implicitly acknowledges that the alternative solution is the low-tech solution of driving a car yourself.

The status quo is also a type of competition. But it won’t remain your top competitor for very long.

Once Toyota enters the market, the customer doesn’t care that you can sleep through your morning commute if you buy Google’s car. Toyota’s car does the same thing. All they care about is how the two are different:

• Google’s car gets better gas mileage
• You look cooler when you drive it
• Leather seats come standard

Too many companies market as though they’re in the first category and tackling a totally new problem, when what makes them unique and new isn’t the problem itself but their technology and execution. The second category might sound less cool and startupy, but it’s much more effective if your customers realize they have options.

Larry Page and Google X don’t have to worry about competition at all if they don’t want to.

But if I’m those competitors, I’m licking my chops.

But what if your target customer isn’t a whale at all? What if it’s a nimble, high-growth startup?

Popular knowledge is that selling to minnows is easier than selling to whales, but the truth is that the segment comes with its own challenges and pitfalls. Anyone who’s worked at or with a startup can tell you that the environment is unlike any a corporate one, and that goes for their buying process and criteria as well.

Ignoring the factors that make a startup sale unique, or worse, lazily treating one as an enterprise, can mean your win rate is lower than it should be.

Before designing a sales strategy for selling to startups or small businesses, consider the following five ideas to make your product more appealing:

1) Employ a Tiered Pricing Model

High-growth startups are generally allergic to committing big money upfront, since they are currently strapped for cash and don’t know what their needs or resources will be even next week. For this reason, a Freemium model or free trial will be especially attractive to them.

They’ll also like to see the product get cheaper as they scale into an enterprise, so even if they aren’t ready for the “enterprise” tier yet, they’ll like to see that it exists.

2) Align Yourself with Their High-Level Business Goals

The vast majority of startups that I’ve come across have one of two goals:

1. Grow revenues as fast as possible, expenditures be damned.
2. If they don’t yet have revenues, stay lean, cheap, and flexible until they’re able to get some.

As a result, they likely won’t respond to an ROI pitch optimized for an enterprise sale. Find out early which of these business goals describes your potential customer, and hammer home how your product will either help them grow revenues or save money.

3) Target the Right Buyer

Large companies may assign a lower-level employee or committee to evaluate technology products, but at startups, it’s usually an executive making the purchasing decisions semi-autonomously. Of course, which executive it is depends entirely on the industry and size of the contract.

Make sure your marketing content and messaging are targeted at the right level and function and use an appropriate vocabulary and touchpoint model for your buyer. For instance, a CTO is usually more interested in features, whereas a CFO is more likely to respond cost-savings.

4) Sell Through Growth-Friendly Marketing Channels

Consider where else growing companies will be spending their time to properly target growing customers. A job board or venture capital search keyword might be a terrible place to find Enterprise buyers, but if your buyer is a startup CEO, it may be worth looking into.

5) Show Your Product is Growing with Them

As a startup, your customer may not want or need the full set of features that an enterprise would. But they do have an eye on the future, so you need to show them that your product will grow with them.

You can do this with a really good product roadmap that you emphasize during your sales process, or simply by blogging about exciting new or upcoming features.

*****

As with any 500-word blog post, this is an oversimplification and will have to be tweaked and refined to fit your specific product and market. An ad-hoc profile is not a substitute for thorough and targeted market research. Still, if the startup segment is important to you, mapping your sales process to a gross caricature of a startup is better than nothing.

What other ways can companies effectively go after “small fish”?

Image provided by: Wikipedia

Occasionally they make sense, like when Amazon purchased Kiva Systems in order to absorb a technology they already used extensively in their warehouses.

But acquisitions are rarely so obvious. The bulge-bracket technology companies that do most of the acquiring often seem to be playing pin the tail on the donkey in their acquisition strategy, without rhyme or reason to anyone outside their four walls. This can be extremely frustrating for an entrepreneur or VC looking to sell their company.

That doesn’t mean all is lost. A deeper dive into recent M&A activity reveals common themes that shed light onto the rationale of big companies looking to make acquisitions:

1) The biggest enemy of your biggest enemy is your biggest friend

Taken out of context, Microsoft’s acquisition of Yammer in June 2012 may have seemed like throwing darts at a board. They hadn’t been very active in the social space, and Yammer had almost nothing to do with Microsoft’s core products: Windows and Office.

It did, however, make a great deal of sense in the context of Yammer’s competitive marketplace. Yammer’s biggest competitor, Salesforce Chatter, is a major differentiator driving Salesforce’s domination of rival CRMs. For Yammer, by targeting their biggest competitor (Salesforce’s) biggest competitor, MS Dynamics, Yammer was able to find a partner who badly needed their technology for competitive purposes.

2) New entrants prefer to buy rather than build

The aforementioned Microsoft made a different type of acquisition in 2008 when they bought flight cost predictor Farecast for about $100m. Unlike Yammer, the acquisition wasn’t in direct response to a competitive threat. Rather, they were getting ready to launch Bing and knew they needed to make a splash to get entrenched Googlers to give them a chance. Since their developers’ hands were probably full building the core Bing product, the idea of buying a side feature that can differentiate their product was especially attractive.

3) Businesses in transition are always looking for a boost

Similarly, old-guard businesses looking to redefine themselves are often willing to part with resources for the right acquisition. Dell wasn’t exactly a new entrant into the enterprise software space, but their well deserved reputation as primarily a hardware company has made it difficult for them to catch up in the software space organically. Their combination of inadequate in-house development resources, a large pile of cash, and a sense of urgency to show their shareholders progress towards a new Dell, all contributed to their purchase of Quest Software in July of 2012.

4) Public companies love playing musical chairs

One week after Dell’s acquisition of Quest, Oracle made news with another acquisition, this one of Involver, a SaaS social media manager. Hot on the heels of Vitrue’s acquisition, also by Oracle, and Buddy Media’s by Salesforce, the game of musical chairs in that industry had officially begun. It wasn’t long before Google followed suit with its acquisition of Wildfire.

Big public companies, by nature, are extremely conservative in their decision-making. No executive wants to be the only one of his or her peers that missed out on a big trend or new technology. This can work against you if your company is in a quiet space, but it can also work in your favor when the music starts in your space. Pay close attention to who is buying your competitors, and when activity starts accelerating, find the company without a seat.

***

Will you ever be able to completely understand the acquisition strategy at a big public tech company? Of course not. Like a complex weather pattern, the politics behind these decisions get exponentially more difficult to project the further out.

But that doesn’t mean it’s a fruitless exercise to think about the different reasons a larger company might want to purchase yours.  Hopefully, these four angles will serve as a valuable starting point to build your list of potential acquirers.

The problem with the Internet startup craze isn’t that too many people are starting companies; it’s that too many people aren’t sticking with it.

-Steve Jobs

Image Credit: AllOfThisBeforeEleven

When I think of entrepreneurship, the first things that come to mind are extravagant launch parties, multi-million dollar rounds of funding at outrageous valuations, and ringing the bell at the NASDAQ on the morning of your IPO. The glamorous milestone events are what make entrepreneurship and venture capital so appealing to so many people.

Most serious entrepreneurs are fully aware that lots of companies don’t make it that far, and that you have to be mentally and economically prepared to go belly up. Whether it’s 4 out of 5, 9 out of 10, or 99 out of 100, we’ve all heard some stat about how many startups fail. It’s no secret that it’s a risky business.

But there’s also a third possibility, one that gets far less attention than either immediate success or failure.

It’s that your company will grow slowly, and that success may take many years and a lot of hard work.

There’s no stat for this kind of trajectory, but it’s definitely much more common that the immediate success stories like Instagram. It may even be more common than companies that burn out after their first year.

It’s also a prospect that, to many, is more frightening than swift failure. If you’re attracted to the exciting, dynamic nature of the startup world, you likely aren’t incredibly interested in doing the same thing for 5+ years while making incremental progress. That’s what working for a big corporation is like, and escaping that culture is probably the reason you started your own company in the first place.

Still, it’s a possibility you absolutely have to be prepared for if you enter this world. For the vast majority of founders, much more of your time will be spent addressing the unexciting minutiae that characterizes employment at a small company than making strategic decisions, meeting with big shots, and grabbing headlines. Once the luster of being part of something new and exciting wears off, the reality sets in.

Entrepreneurship is a grind.

That’s particularly true if your company isn’t an immediate hit, but it’s also true even if it is. For instance, take Steve Jobs and Mark Zuckerberg, who are revered in the startup community for their big, disruptive ideas.

Is that really who the majority of entrepreneurs aspire to be?

Between the career milestones we all remember are years and years of what was probably often a boring and frustrating grind of hiring and firing lieutenants, groveling to investors, and tweaking and re-tweaking the company’s operations. If that’s what arguably the two most iconic CEOs in the history of technology had to do to get there, don’t for a minute think your road will be any easier.

In order to survive in the role long enough to attain success, a founder has to have an exceptionally long-term outlook, simply love the details of running a business, or ideally, both. While the two CEOs in the previous paragraph certainly did have big ideas, it wasn’t their day job. The stamina and passion it took to improve their companies little by little, day by day, was just as instrumental in carrying them to the pinnacle of their respective fields as were the original concepts they may or may not have written in dry erase marker on their dorm room windows.

What the startup community needs is more Mark Zuckerbergs

And by that, I don’t mean the arrogant 20-year-old who thought he had the biggest idea since sliced bread. I mean the arrogant 28-year-old who stuck with his idea long enough to see it through. 

First, a quick history lesson:

Much like the wider world of software in the 1990s, media in the early 2000s was held hostage to the distribution channels. One of the hardest things about producing a hit TV show or movie was physically putting it in front of somebody’s eyeballs, so power was concentrated in the few companies that could do that: Blockbuster, Network TV, and Movie Theaters.

Fast forward to today, and streaming video has made content distribution, much like software distribution, more or less a commodity. Broadly speaking, I no longer have to think about what content I can watch where. Most media subscriptions come with multi-channel delivery across TV, desktop, mobile, and tablet devices. Because there are fewer barriers to entry, there are many more viable options.

Content may have always been king, but in this competitive environment it’s even more regal.

Last year, Netflix made the right decision to diversify out of content delivery and into content creation. But in their first year as a TV studio, they likely realized what studios have been trying to tell them for years during contract negotiations:

It’s hard as hell to make a hit TV show.

With this in mind, Amazon’s own attempt is careful not to compete with the big guys head on at their own game. Instead, they’re using guerrilla tactics: six comedy pilots, with one winner decided by viewer response.

It’s the lean solution to an overwhelmingly waterfall Hollywood mentality, and here’s why:

• It’s cheap: With $5 billion in cash on their balance sheet, Amazon could afford to throw money at the problem like the traditional studios do and Netflix did in their first attempt. But their decision to go with only comedies — and for the most part, unknown actors — indicates that they’re not willing to take a big upfront risk on the project given the swirling uncertainty and their own inexperience. They’d prefer to inexpensively shoot for a value play while they build out their own skills and business model.
• They have six chances to succeed: Lean methodology instructs startups to quickly iterate on their product until they find one that is commercially viable, or go bankrupt trying. By bringing six pilots in front of viewers, Amazon gives themselves six inexpensive lottery tickets, instead of the one expensive one that Netflix opted for. Reading the descriptions of their six pilots, I can’t tell you which one (if any) will be the hit, but I’m pretty sure at least one of them will be pretty good and have moderate success.
• The product is extremely targeted: Startups can’t afford to be everything to everyone, so the first few iterations of their product must be extremely targeted. Amazon’s six pilots are all comedies, aimed at the young professional demographic. It’s no coincidence that yuppies are also Amazon Prime’s core customer.

Will Amazon’s entry into original programming be successful?

As always, it depends entirely on how good their content ends up being. But if the software industry is any indication, their distinctly lean approach to content creation will translate to a better product.

In doing so, it could change the media industry forever.

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Eli Whitney’s Cotton Gin is widely credited as a big driver of the industrial revolution and the economic success of early America, even though Whitney himself made little from the invention. Ford’s Model T in 1908 led to a massive shift towards mass production, and in turn, the roaring twenties. More recently, the prosperous Clinton years were fueled by the displacement of brick and mortar industries with their e-quivalents as the internet gained steam.

Even in the cases when the inventor did get rich off of their own invention, the real benefactors were their many peers who quickly adapted the new technology to suit their own purposes.

Today’s equivalent boom technology is mobile computing.

Like the desktop internet before it, the mobile revolution is easily mass produced. That doesn’t mean it’s easy to build a successful mobile company — that still requires the right expertise, first-mover advantage, and great execution. But it doesn’t require a once-in-a-generation stroke of genius, and that’s why the industry is able to move so quickly — strokes of genius don’t happen very often.

But like the roaring 20’s and the roaring 90’s, today’s roaring teens (at least in the technology community) won’t last forever. Once we’ve optimized every desktop application for mobile and taken advantage of every user’s geospatial information, we’ll have to come up with another new idea to drive tomorrow’s economy.

Of course, if I knew what this idea was, I’d have already invented it. But that doesn’t stop me from speculating on some likely areas to for the next big thing after mobile:

1) Artificial Intelligence / Visual Recognition / NLP

The SOA and Big Data movements have thoroughly whetted the corporate appetite for decision making based on analysis of large data sets. However, the ability to create this data is still very limited. In most cases, the data sets used by businesspeople rely on human interpretation of the real world (for example, a nurse inputs a person’s vital signs and demographic information into a console).

Using Artificial Intelligence, Visual Recognition, and Natural Language Processing technology, machines will continue to develop better ability to interpret real-world events without the aid of a human being. Imagine a technology that could scalably analyze every-day conversations in the same way that brands can mine Twitter. How many industries would that revolutionize?

2) Unified Identity

As a person’s many identities across their network of applications converge and their actions gather ever more context, our understanding of human behavior will grow exponentially. By owning my browser, search history, and email account, for instance, Google understands how interactions with my personal network influence my other activity on the internet, and vise versa. Using the technology in #1, I expect my offline activities to be gradually integrated with this information to create a comprehensive picture of me and my behavior.

The main hurdle for progress in this field is privacy considerations, but if the past is any indication, economic benefits always win over privacy. People may be morally opposed to their cable operator analyzing their phone conversations, but that’s exactly what Google does with your emails, and nobody’s quitting Gmail. My bet is that consumer identities will continue to consolidate, and with it an ecosystem will develop around collection, analysis, and application of insights related to these identities.

3) Wireless Infrastructure Renewal

What’s the one thing that the cloud computing, big data, and mobile movements all have in common?

They all place tremendous pressure on network infrastructure:

• Cloud applications rely much more on remote data and computing power than their on-premise counterparts.
• Mobile means users are taking previously desktop-bound activities onto less efficient wireless networks.
• Big data means more information is stored and transmitted for any given action. The total volume of data stored globally doubles about once every two years.

Let’s assume that global smartphone penetration is right now at 15%, and 10% of the bandwidth you use comes through mobile (versus broadband). In five years, if these numbers are 90% and 50%, respectively, and the total volume of data is 10x as high, will the same infrastructure be able to handle it?

My guess is no.

That means that network infrastructure, which has been an unsexy business since the industry over-expanded in the late 1990’s, will be under tremendous pressure to keep up with the demands of a supercharged mobile internet. As always, with tremendous pressure comes tremendous rewards.

This powerful sense of urgency makes it tempting for early-stage companies to cut corners in market research to get to results faster, and cutting corners only exacerbates the biases that are natural in these projects.

As much as market researchers like to consider themselves scientists, there is a fundamental difference between the social sciences (market research included) and controlled experiments. In market research, it’s not an option to reach a completely unbiased result; the only question is how much bias to tolerate and how to properly qualify your results to account for it.

The best option is to organize the project to minimize bias. When we can’t eliminate a bias from our project, we at least highlight the directional effect when we present our results to stakeholders: “Our research showed this, but here’s why it might not be completely representative.”

In particular, there are four common biases we make sure to look out for when conducting quantitative and qualitative market research projects:

1) Sample Bias Towards Customers

The Bias: Customers are the easiest interviews to schedule, they’re pre-qualified for relevancy, and there is plenty of information on them readily available in their CRM. It’s natural that they’d be the first targets when conducting interviews or surveys for buyer or user research.

The drawback from relying too heavily on customer input is that your results may be too complimentary to your own product and too tolerant of your company’s weaknesses. If your company’s strength is customer service but has poor integration with legacy systems, your customer base is likely to be more sensitive to customer support and have few legacy systems. That doesn’t mean these characteristics are representative of your target market though, and suggesting so can lead your company or client down the wrong path.

The Solution: We typically try to stratify our sample between three groups of market participants: cold prospects, current customers (or partners), and lost customers. While the mix depends on the goals of the project, a health balance insures you have a balanced perspective on your strengths an weaknesses.

2) Self-Selection Bias

The Bias: Our interview requests or surveys usually have response rates between 1% and 25%, depending on the specifics of the request. The fact that someone responded when many of their peers neglected to can say a lot about the person. Often, they have a good relationship or perception of your company. If there’s compensation involved, they may be the most price-sensitive in your sample. Regardless, it introduces bias into your data set that must be addressed.

The Solution: This bias is impossible to eradicate, since you can’t force a response. Still, there are ways to mitigate its effect. Consider putting more resources towards less responsive groups (such as higher-level respondents or lost customers), either by increasing the total pool of requests or the compensation offered. Don’t just rely on the low-hanging fruit.

3) Confirmation Bias

The Bias: In order to organize a concise interview or survey, you’ll have to go in with some idea of what you want to validate or invalidate. This can be problematic if your questions lead an interviewee to confirm what you already thought. For instance, if you believe price is the most important consideration in your interviewee’s purchasing decision, you may be tempted to ask, “How important was price in your purchasing decision?” to which they’ll almost definitely reply “very.”

The Solution: Lead with more open-ended questions that give the interviewee a chance to surprise you. Prompt them with possible answers and ask more specific questions later in the interview. Make sure to record whether an answer was prompted or unprompted.

4) Bias towards memorable interviews

The Bias: A typical primary research project for OpenView Labs involves 10-20 interviews, often spread out over a few weeks. Since memory research has shown a universal tendency to recall the first and last events of a sequence more clearly than the middle ones, your memory may be slanted towards a subset of your responses. Relying on your memory when presenting the results can in turn bias your results towards this subset as well.

The Solution: Your memory isn’t perfect so rely on it as little as possible. The more standardized your results are when you record them, the easier it will be to systematically analyze them, giving equal weight to all responses. Anecdotal results can be useful in building a narrative, but should always be grounded by hard data.

*****

Check out this link for more on market research biases.

For additional help, see my colleague Brandon Hickie’s tips on writing interview guides.

THIS guy doesn’t mind that Gmail raised their prices! EyeEm Blog

In case you haven’t heard, Gmail for Business is no longer free. That’s bad news for any startup that hasn’t signed up for it yet.

The good news for startups, however, is that with almost zero backlash, Google’s announcement provided a perfect model for how to break the news of your own price increase.

This is a common issue at expansion-stage companies. Many startups choose to undercharge for their product originally to demonstrate demand to investors, build up a critical mass of customer referrals, and gather feedback while they make improvements.

But at some point in almost every company’s adolescence, it becomes obvious that their foot-in-the-door price was too low and they’re leaving money on the table. Raising prices without causing sticker shock can be difficult, but Google just gave a great example of how to do it the right way.

Here’s what you can do to emulate Google:

1) Grandfather in current accounts

Although Google’s existing customers were unaffected, it has to make them feel good that they still get the service for free while new accounts have to pay for the same set of features. This will likely benefit Google’s word of mouth marketing and help it retain customers.

2) Don’t wait too long

By my estimates, Google currently has less than a 20 percent market share of small businesses, although this number is growing by the day. This allows the company to grandfather in current accounts without leaving too much money on the table.

If it had waited another year or two before making the announcement, Google may have had to think seriously about removing the grandfather clause, which would have been disastrous on customer retention.

Facebook, for example, waited way too long to charge customers for its service, and now it’s impossible to do it. If Facebook wanted to charge even a nominal fee per account, it would have to either grandfather in half of the Internet-enabled planet, leaving little opportunity for further revenue, or increase prices on their bajillion users, which would cause riots in the streets. Neither scenario is attractive.

3) Give customers value in exchange for the higher price

The worst thing to do is make your new customers feel like they’re paying more for the same product. When SmugMug raised prices earlier this year, it was guilty of this mistake, even though the company did do many things right in its delivery of the news.

Google got around this pitfall by eliminating that tier of service altogether, so that customers who are asked to pay the higher price at least get more features for it. Another way of accomplishing this is by piggybacking the pricing change on a new feature announcement to soften the blow.

4) It’s all about the delivery

A delicately crafted press release or blog post is a must. You don’t want to appear arrogant, like Netflix did when it delivered a 60 percent price increase and told customers they could cancel if they didn’t like it.

At the same time, (most of) your customers aren’t stupid and they know a price increase when they see one. Deliver the facts unambiguously, but provide some context around them to explain why you need to raise prices, and what you’re going to do with the revenues (ideally, pour them back into the product).

***

Major price increases can be a disaster or a non-event. Which bucket yours will fall into doesn’t hinge on the size of the increase, but rather its timing and delivery. Do you want to be like Netflix, which lost hundreds of thousands of customers due to its price increase, or Google, which seems to have made its announcement with zero backlash?

The decision is up to you. Think hard about the details, and don’t underestimate how much the delivery matters. 

It’s somewhat ironic, then, that the biggest nugget of investment news this past week was an almost comically tiny deal made by a few of the industry’s heavyweights. The news is Y Combinator’s announcement of YC VC, a new fund that automatically offers $80,000 to each of YC’s annual class of ~75 startups. The total $6 million dollar per year commitment will be split four ways between angel investor Yuri Miller and VC firms Andreessen Horowitz, General Catalyst, and Maverick Capital.

Given the size of the deal, you might be wondering why it’s even news. YC already had similar third party commitments in place in the Start Fund (now being retired), and YC VC actually scales down this commitment. If they weren’t before, the financial implications on the four participating investors are now thoroughly insignificant under the new fund, amounting to 0.06% of AUM for A16Z and similarly trivial percentages of the other two participating VCs (I’m not sure how much Yuri is worth). At the same time, the new agreement actually asks for even more time from the investors.

So why would Andreessen Horowitz, fresh off raising a billion-dollar fund and facing criticism around their ability to put it all to productive use in a timely fashion, contribute even more manpower to an even smaller financial investment?

There’s no question this decision is a purely strategic one, and that’s what makes it so interesting. Venture capital is often called a relationship business, and an early investment in virtually all of YC’s graduating startups allow the VCs to develop long-lasting relationships with talented founders before the rest of the industry has a chance. This ensures they’ll be top of mind when those companies need to raise real money.

Additionally, it gives them access to proprietary intelligence about the markets YC’s companies are disrupting—market intelligence that could potentially impact larger investment decisions outside of the YC VC arrangement. Given these strategic benefits, any returns from the investment itself are gravy for YC VC’s constituents.

That is… if there are any returns. When it comes down to it, YC VC’s investors are taking a leap of faith by blindly investing in the notoriously risky asset class of revenue-less startups. It’s difficult enough for VCs to make money by cherry-picking the best ideas and doing extensive diligence. Many believe that skipping the selection process and diligence and going straight to the funding is lunacy. And maybe it is. It’s just that in this case, financial failure of the fund, on such a small scale, is well worth the price of admission. Perhaps they don’t even see YC VC as an investment at all, but rather a marketing expense.

Viewing the decision in this light, it’s consistent with a large push at many of the largest VCs upstream, into the startup realm previously dominated by angel investors and a handful of accelerators. Popularly seen as a way to increase their coverage of New York’s technology community, Andreessen’s recent addition of Chris Dixon as partner could just as easily be a way to improve their cache in the startup community, where Chris is one of the world’s premiere brands.

Perhaps the big VCs are tired of ‘fishing’ for investment-ready prospects and are experimenting with start-up ‘farming’ instead. By developing a relationship with startups from their inception, a VC can pick successful ones off the vine when ripe for funding, without having to time their relationship development to the narrow window when the company is actively looking for funding.

Regardless of how it turns out, YC VC is perhaps the first VC fund ever where its success or failure will have virtually nothing to do with the ROI it delivers or the size of its exits. In a way, it’s much bigger than that.

The fund’s success could lead to widespread change in how, and more importantly when, the VC industry engages with startups. If A16Z, Maverick, and General Catalyst see marked improvement in their ability to invest A and B rounds into YC companies, I’d be shocked if many more firms don’t grab a pair of overalls, hop on their tractors, and follow them into the business of startup farming.

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As an overarching movement, the quest for accountability using sales and marketing attribution is a good thing… I think.

However, the expectation that every action can and must be quantified by the sales it generates can be unrealistic and detrimental.

This is especially true in sales and marketing activities aimed upstream from the actual sale. One example is a brand awareness campaign, or its sales equivalent — a non-closing, lead qualification program. In either case, the revenues come so far downstream of the activity that attribution is practically unfeasible and rarely attempted.

Does the lack of a measurable ROI mean one isn’t there? Of course not. But in a misguided rush for accountability, organizations sometimes confuse the two.

This is a mistake. Early-pipeline sales and marketing activities should be evaluated critically, but if they’re fulfilling a business need, they shouldn’t be held to an impossible standard of revenue attribution.

In many ways, a sales and marketing organization is like a football team. A casual fan might attribute a team’s win to the player who scored the last-second touchdown. While it’s true that without that player, their team would not have won the game, a more nuanced understanding acknowledges a variety of factors and circumstances contributed to the team pulling out the win.

The player wouldn’t have scored without the linemen who blocked for him. Without a first quarter field goal, the team wouldn’t have even been in position to win on the last play of the game. And without practicing the play over and over again during the prior week of practice, it would never have been successful in the game.

Only one player will be attributed with the game-winning touchdown, but many other events were just as crucial in leading to the win. The trick is to strike a balance between accountability for performance when performance is directly measurable, and maintaining a healthy appreciation for the unsung heroes who indirectly contributed to the victory.

Football teams don’t ignore their supporting cast, and neither should your sales and marketing organization. Before you pull the plug on a marketing activity that isn’t leading directly to revenues, consider whether the ROI isn’t there, or whether you just can’t measure it. There’s a big difference.

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A Forbes article from a few months ago has been circulating around the office called “Why Do VC’s Cold Call?” The article is written from an Entrepreneur’s perspective (his name is Steven Rosenbaum), and essentially concludes that cold calling has no place in the VC-startup relationship.

From our perspective here at OpenView, this couldn’t be further from the truth. Cold calling is certainly not the only way VCs fund companies, and I’m sure there are many VCs who rely solely on their partners’ connections for their deal flow. But there are also plenty of VCs that do source deals by cold calling entrepreneurs, and neither those VCs or the entrepreneurs they invest in are any less successful.

To make his point, Rosenbaum gave five reasons not to take cold calls from VCs. I’ll respond in order:

1) They won’t invest in you—ever

OpenView’s investment team does a fair amount of cold calling. We invest globally, and don’t have the global network or the big-time name (yet) to have deals just fall into our lap. When I asked my MD how many of our 20 portfolio companies we cold called at some point prior to making an investment, he simply told me “all of them.”

Rosenbaum wants VCs to have a warm introduction before reaching out to a company, but from our perspective it’s the exact opposite — when one of our partners goes into a conversation with a CEO, we usually want to have done our homework to understand their business model, need for capital, and vision for the future. Those are details that won’t necessarily be found on a company’s website.

2) The person calling you is a summer intern

In OpenView’s case it’s usually an Analyst or Associate from our investment team, but to his point, it is usually a junior person at the firm.

So what?

If there’s a fit, it will quickly escalate to a partner. The partners work closely with our analysts and associates, respect their judgment, and don’t discriminate against companies that were sourced by a junior team member in favor of their own connections. Why else would we bother employing them?

3) They haven’t done their homework

Sometimes this might be true. If you clearly state on your website that you’re a consumer-oriented company, and one of our analysts calls you, you’re right to be annoyed that they didn’t do their homework and are wasting your time (we focus on B2B). But we also have a minimum revenue requirement, which probably isn’t posted on your website. In this case, calling you to find out if you meet our criteria is the analyst doing their homework. And even if you don’t yet meet the requirement, it’s worthwhile for both parties to develop a relationship, so that when you do have $2 million in sales and are looking to raise capital, you know who to call.

4) The data you share isn’t confidential, or worse (the VC will share it with your competitors)

Perhaps there are some VCs who have ulterior motives when calling into companies, but OpenView’s investment team is pretty busy finding investment prospects. Any market research we do for our portfolio is executed by OpenView Labs, our consulting arm, out of a separate office down the street from our investment team. We’re extremely transparent about why we’re calling you, and we wouldn’t do that sort of shady project even if one of our portfolio CEOs asked us to.

5) If it’s the right firm for you — it’s the wrong door

Even if you’re interested in the firm, Rosenbaum suggests hanging up on the associate and reaching out to the partner. While this might still work, I think it would actually hurt your chances of receiving an investment from us. That’s because an associate who’s psyched about your company will be a great ally during the funding process. But even if you did go over their head and reached out directly to a partner, the cold call was a success — it made you aware of our firm and the fact we’re interested in learning more about you.

*****

That, in a nutshell, is why we cold-call: to open up a conversation.

Sometimes it leads to an investment, sometimes it doesn’t, but the chance that a ten-minute investment of your time could result in a multi-million dollar, multi-year partnership is well worth the price of admission.

Image provided by: TechRadar.com

The general consensus is that Windows 8 is a mobile OS in disguise. More specifically, some of the more mobile-friendly features are:

• The start menu is gone, having been replaced by an entire start screen that displays Windows 8 applications only in a center navigation panel, similar to iOS or Android. This is the mandatory boot screen for Windows 8, emphasizing that it is here to stay so you’ll have to get used to it.
• Many features have been redesigned for touch. One of the most stark examples of this is that right clicking on an icon on the start screen brings up a menu of options… at the bottom of the screen. This makes perfect sense for, say, a tablet, but is cumbersome for a PC user used to having the menu conveniently pop up right next to their mouse.
• Windows 8 applications, like most mobile apps, are full-screen only. This contrasts with features in Windows 7 that made multi-window computing much easier.
• Since only Windows 8 apps can be accessed through the start menu, many apps (including Microsoft Office) require exiting the start screen to bring up a desktop screen, which uses conventions much more like what we’re used to from prior Windows products.

While there’s likely a subtle UX decision behind each of these changes, the overall strategy is crystal clear: Windows 8 is a step towards a single OS that spans desktop, table, and mobile computing. By driving a consistent experience across a range of devices, Microsoft is looking to capitalize on their considerable market share lead in PC computing to further penetrate the mobile market. They’re betting that a person who uses Windows 8 on their laptop will go with what they’re familiar with when they choose a mobile OS.

I understand completely why this strategy would be attractive to Microsoft. A few months ago, I wrote that Converged Converged Devices — that is, smart phones that double as your laptop — were the future of computing. Windows 8 is an ambitious step in that direction, offering a more versatile OS across different device and screen sizes than has ever been attempted. If we’re ever going to live in a converged converged world, we’re going to have to figure out how best to solve this problem.

Still, I don’t think Windows 8 is the solution, for several reasons:

1) You can’t be everything to everyone. Mobile and PC users have extremely different needs, partially dictated by their hardware, and partially dictated by the context of their use:

• Different screen sizes lend themselves to proportionally different icon and font sizes
• The lack of a keyboard makes the one-click accessibility of a mobile app that much more attractive
• Mobile devices are used fairly narrowly for consuming entertainment; they don’t need a complex file system to store
• Lack of consistent access to wifi puts bandwidth efficiency at a premium in mobile

2) Windows 8 has clearly prioritized mobile. Many of the features of the start screen — especially the fact that it’s the mandatory boot screen — are clearly designed with the mobile user in mind and at the expense of the PC user. Since their customer base is primarily PC, I think this will have a considerable negative impact on their user experience. Why would I want to essentially learn two operating systems (the start screen and desktop) and toggle between them depending on what app I’m using?

3) Familiar customers aren’t an asset if they’re unhappy. Microsoft’s strategy appears to be to get their existing PC users to upgrade to Windows 8 and then stick with what they know for their next mobile device. But with a mobile operating system crammed into a PC’s hardware, Windows 8 might not promote enough brand loyalty to accomplish this strategy.

Microsoft sees the writing on the wall when it comes to personal computing, and is attempting to drive a more consistent interface across devices. I applaud them for that. Still, they haven’t quite figured out how to do this while still leveraging the hardware and use cases of those individual devices. It’s not that I think a single OS will never be able to work across mobile and PC, but I think it will have to be done with a much subtler touch than Windows 8. Microsoft is putting a round peg in a square hole and I think it will show in a loss of market share.

In case you’re wondering, I’m not writing this because I’m an Apple fanboy (although I do own its stock). When the majority of my company switched over to Macs this year, I kept my PC. While I recognize the usability is likely better overall on a Mac, I spend most of my time in MS Office products, and for those, the usability is much better on a PC.

That’s the thing about usability — it’s always contextual. What’s great in one scenario and on one device might be terrible in another. Future iterations of Windows should be more sensitive to this simple concept.

Answer: They all count themselves among the Internet’s recent murder victims.

Image provided by: DeviantArt

If you walked into a business meeting any time in the hundred or so years before 2000, chances are pretty strong you’d be wearing a business suit. Business attire followed a very strict code that had remained more or less unchanged since Custer’s Last Stand. It wasn’t mandated by your employer or even your industry, yet was completely beyond reproach.

In that historical context, what’s happened in the past ten years — the sudden and unceremonious death of the business suit — has been quite remarkable. I, for one, can count on two hands the number of times I’ve had to wear a suite since graduating college, and nearly all of them have been for special occasions that had nothing to do with work. I know I’m not alone, and it’s not just because I work in the technology world. The business suit is marching towards extinction in virtually every industry.

The number one suspect for the demise of the business suit, in my opinion, is unquestionably the Internet.

Once upon a time, the only way to broadcast your status as a high-powered businessperson was to wear things — watches, ties, shoes, and suits — and work in offices that only high-powered businesspeople could afford. If you wanted to prove to someone that you had a bunch of clients that paid you a lot of money, there weren’t a lot of options. You pretty much had to spend like it.

In the past decade, however, the Internet has opened scores of other ways to broadcast your success and stability to potential business partners:

• Your Linkedin profile shows that you share connections, who would presumably vouch for you if asked
• Your Facebook profile (hopefully) shows that you don’t spend your weekends sniffing glue
• Your company’s website shows that you’ve invested in your business and know a competent front-end designer
• Googling your name turns up a hopefully small amount of police blotter links
• If you have one, your blog leaves a trail of opinions for the world to read and digest

The multi-channel B.S. detector that is the Internet has made it very difficult in this day and age to get away with saying you’re something you aren’t. It’s also made it much less necessary to superficially communicate how successful you are in a first impression. When the CEO of a multi-billion dollar company can show up to a press conference wearing a hoodie and let his accomplishments speak for themselves, you know you’re in a world that no longer needs the business suit.

I can’t defend every way in which the Internet has changed society. It’s shortened our collective attention span, facilitated anonymous slander, and ripped away our fragile right to privacy. But it’s hard to argue that promoting a system where people are judged more by their accomplishments and less by their clothes is anything other than a noble feat. The suit is a thing of the past, and I for one won’t miss it.

Image provided by: ryandurkin.com

The internet has opened the door for both massive productivity and massive procrastination. Given the two options, most people choose the latter, and I don’t blame them. When nobody’s watching, it’s human nature to take the easier option.

Even so, we hate this about ourselves. People will go to pretty dramatic lengths to improve their productivity. Take, for instance, the author of this VentureBeat guest column. Maneesh Sethi found he was wasting more than half of every day chatting and generally screwing around on the internet when he was supposed to be working. So Maneesh did what any rational person would do — he went on Craigslist and hired someone to slap him in the face every time he procrastinated.The results? With a slapper watching over him, Maneesh was productive 98% of the time, up dramatically from the 38% productivity he previously registered (according to RescueTime). Maneesh gave five reasons why he thought the Slap Challenge worked so well:

1. Someone else, besides me, knew exactly what I want to accomplish that day.
2. Kara (the slapper) pushed me through the cheese monster (the proverbial urge to get up and get a cheese sandwich).
3. I finally had someone to bounce ideas off of.
4. The Slap Challenge added a playful, silly element to working.
5. Having another pair of eyes to go over my content drastically improved the quality of my work.

Reading that list, I noticed something remarkable. I have all of those things. And it’s not because I spend a fortune on Craigslist paying people to slap me. It’s because practicing Scrum, surprisingly, has many of the same benefits of having someone slap you every time you procrastinate.

In a nutshell, Scrum is an agile project management process used primarily by software development teams, which OpenView Labs has adapted to manage consulting projects. The core is a prioritized to-do list for each team (called a ‘sprint’). Teams meet quickly each day to review progress against that to-do list, make sure everyone is on the same page, resolve problems, and plan out the day.

While newcomers sometimes find the Scrum process cult-like and overly structured (I certainly did at first), it doesn’t take long for the advantages to become clear. Surprisingly, they match up pretty well with the benefits of having someone slap you, except without the stinging pain or bruising:

1) Someone else, besides me, knew exactly what I want to accomplish that day.

> Your whole scrum team knows what you completed yesterday and what you’re working on today. If you don’t accomplish what you said you would, nothing terrible happens. It just provides some peer pressure to make sure you at least try.

2) Kara (the slapper) pushed me through the cheese monster (the proverbial urge to get up and get a cheese sandwich, even when you’re not the least bit hungry).

> I still succumb to the cheese monster, but my moments of procrastination are shorter and less frequent. When you have a short-term goal each day it’s harder to mentally get away with procrastinating.

3) I finally had someone to bounce ideas off of.

> The regular meetings we have as part of Scrum are a great venue for this, since you know you’re not disturbing someone and everyone can be part of the conversation.

4) The Slap Challenge added a playful, silly element to working.

> I wouldn’t quite call Scrum playful or silly, but being more efficient allows me to kick back and have a beer at the end of the day without feeling guilty that I haven’t accomplished more. It makes for more relaxed working hours and a more fulfilling end to the workday.

5) Having another pair of eyes to go over my content drastically improved the quality of my work.

> Getting feedback from your colleagues during a project (instead of just after it) allows you to ensure you’re on the right path and makes the eventual output that much better.

But there’s one last thing that makes scrum superior to getting slapped.

Maneesh could only bear a few hours with Kara smacking him in the face before he called it quits. Apparently getting slapped across the face really sucks.

On the other hand, the incentive to be more efficient in Scrum doesn’t come from an external threat or reward, but from an internal desire to make progress against your goals and contribute to the team. That makes it a much more sustainable firm policy than, say, slapping someone every time they visit Facebook (also, I’m pretty sure that’s against this country’s labor laws). It has had a huge positive impact on my productivity, and if/when I leave OpenView, I hope to take at least a piece of Scrum with me.

Image provided by: eHow.com

For many years this urge was left unfulfilled. The number of websites we used on an everyday basis continued to multiply, as did the penalties of getting your password hacked. At one point, it was totally reasonable for a single person to have separate identities for their accounts with Gmail, Bank of America, Geico, Facebook, Twitter, Netflix, Amazon, Paypal, and so on and so forth, each with a different username and password.

Those were dark times indeed.

Somewhere along the way, however, somebody dared to question this sadistic system. Why, they asked, can’t all of these services know me by the same name? And with that, the long march towards unified identity began. At first, it was just a handful of single-login providers who took up the call. But slowly, over time, these niche products were joined by a host of other vendors with varying objectives but a common end goal of single sign-on identity.

The unified identity movement is still young. and up to this point has been driven primarily by the user experience benefits. We all hate remembering dozens of user names and passwords and plugging them in every time we want to access an account. I don’t know about you, but a product that can skip this step and use an existing identity that I already use is much more likely to win my business.

The full benefits of single sign-on for businesses are only just beginning to be realized, however. Just a few examples:

1) Increased Conversion

If you can make signing up for your product more painless, more people will do it. One-click access using Facebook or Twitter streamlines the signup process and should (at least logically) increase conversion rates.

2) Droves of Customer Data

Another benefit of single sign-on is that it keeps track of meaningful relationships between user activities that would be virtually impossible to discover otherwise. Knowing what other websites a Twitter user is logging into could be tremendously valuable information, either for Twitter’s marketing department or if sold to a third party.

3) Security

I’ve been conditioned to plug in some combination of my typical usernames and passwords indiscriminately every time I’m asked, which is a terrible habit and will likely end with my identity being stolen. Single login helps mitigate this risk by keeping the knowledge of my identity limited to one authority (i.e. Twitter) and accessed via their API, instead of being strewn across questionably secure sources all over the internet.

While the process is still in its infancy, the combination of better usability and business benefits makes it a sure bet that your identity will continue to consolidate. The only question remaining is which company will reap the benefits. Early frontrunners were pure-play single login companies. In recent years, they’ve been replaced by ubiquitous personal accounts like Gmail, Twitter, and Facebook. However, judging by the number of login credentials the average person still has to manage, the winner may just be a company you’ve never heard of.

Take Zoove, a company whose primary product is **Me, a ‘vanity’ phone number with a length of your choosing. If Zoove catches on, it isn’t unthinkable that your phone number could be your single personal identity. Given the consumer demand, the winner-takes-all dynamic, and the amount of marketing and investment dollars likely to pour into the industry (some of them ours — see our recent investment Unbound ID), who will ultimately come out on top is anything but a sure bet. That said, there are two certainties in the identity economy:

The future will look different from the past, and billions will be made making it that way.

Over the last few months, Craigslist has been cracking down on mashups of their data. Because Craigslist itself does not offer an API, these mashups rely on 3^rd party data providers such as 3taps, which uses a web spider to scrape Craigslist postings from the public domain and repackages them as an API. PadMapper, the target of much of Craiglist’s ire, mashes up the 3taps API with geo-location data from the Google Maps API to display Craigslist as a map.

Image provided by: WallpaperGate.com

Craigslist, to put it nicely, does not like this practice. They took legal action earlier this year to shut down PadMapper.

As this lawsuit works itself out, Craigslist has also pursued other ways to impede PadMapper. On October 2^nd, Craigslist sent a cease and desist letter to OpenView  portfolio company Mashery, which managed 3tap’s unlicensed Craigslist API. Mashery, not wanting to get in the middle of a messy legal battle, promptly complied and severed their relationship with 3taps.

While it’s not a kill-shot for 3tap or PadMapper, it certainly makes their lives harder and opens the door for Craigslist’s recently launched mapping application to take back some of PadMapper’s traffic. Craigslist will no doubt continue to pursue similar legal channels to impede their unwelcome partners.

Although I’m fully prepared to bash their legal strategy, let me first say that I love Craigslist.

I’ve found multiple apartments, bought and sold more furniture than I can keep track of, and even found a sublettor on Craigslist, who I’ve been friends with ever since. I love the company’s simple UI, focus on functionality and substance over glitz and glamor, and especially its lack of commercialization. In a prophetic interview with UBS tech analyst Ben Schachter in 2006, Craigslist CEO Jim Buckmaster was asked how the company planned to make money on the back of impressive user growth.

“That definitely is not part of the equation,” the ironically named Buckmaster replied, while Wall Street analysts everywhere spat out their coffee.

But despite Craigslist’s public persona as a quasi-non-profit disinterested in making money, its recent litigation against 3taps, PadMapper, and Mashery can’t be viewed as anything but profit-maximizing. Craigslist wants the economic value of its data all to itself, even if that’s at the expense of the technology community, and even — gasp — its users. If, like Buckmaster says, all Craigslist wants to do is help people find apartments, shouldn’t PadMapper get a gold star? Instead, they get a cease and desist order.

Hypocrisy aside, Craigslist, just like every other private company, is entitled to try to make money on their proprietary data if that’s what they want to do. And while there’s some legal debate over who owns the postings that’s over my head, it certainly feels to me like Craiglist should have the right to restrict 3rd party access to their postings. Even so, as a long-term business strategy I think Craigslist’s litigation efforts are misguided for two reasons:

1) It’s incredibly easy to scrape Craigslist. Much easier, in fact, than to litigate against someone scraping Craigslist. That means that even if Craigslist succeeds in shutting down 3taps, you can be sure another dozen websites will be waiting in the wings. The situation is reminiscent of the music industry’s never-ending battle with Filesharing websites. Within about a week of Napster’s bankruptcy, Kazaa had stepped in to fill the vacuum, followed closely by Limewire, Mediafire, etc. In the end, litigation only serves as a temporary fix to a long-term problem. Craigslist would be better served by beefing up their virtually non-existent security than fighting a never-ending, uphill battle against web scraping.

2) They’re missing out on the benefits of open data. Many unabashed capitalist companies are very public with their data, not as a service to the community, but selfishly to keep their company ahead of the curve:

• Realizing that developers outside the four walls of their own organization are talented too, Twitter has vastly benefited from the functionality 3^rd party developers like Hootsuite have added to their platform. Despite drawing heat for the recent restrictions on their API, Twitter remains more transparent than most with their data.
• The more applications use Twitter to power their app, the more Twitter becomes the internet-wide authority on social media. Paradoxically, opening up their data has strengthened their competitive moat.

So even if Craigslist finds itself on the right side of the law in their battle with PadMapper and 3taps, their war against the open web is destined to fail. Like skinny dipping in a receding tide, the internet has an unmistakable tendency to expose more information than its users/owners intend. Companies that have resisted this inevitability have — like the music industry — endured decades of frustration, wasted millions in legal fees, and seen their brands erode. Almost without exception, the companies that have benefited from this error in judgment have been the ones that most embrace the open web.

I’m not saying Craigslist should immediately roll over and play dead while PadMapper makes millions off their data. But they should be looking for ways to work with 3taps and PadMapper, instead of against them. That could mean opening up and charging for a firehose API, like Twitter does, or some sort of revenue-sharing agreement.

Craigslist, we love you. Don’t be the next Tower Records.

The venture capital industry is all about helping companies scale.

Peter Thiel and Clarium helped Facebook grow from a $5 million company in 2004 to a $44 billion company today. Forget doubling or tripling. That’s growth of nearly one million percent, and they did it in under a decade. Helping small companies become staggeringly, mind-bogglingly, impossibly big is the industry’s core competency.

Why, then, can’t VC’s achieve this type of scale, themselves?

That’s the observation Dave McClure made a few months back in his blog post Scaling Venture Capital? We Suck. We Can Do Better (I know, that was 6 months ago, but better late than never). As a VC in the midst of scaling, OpenView spends a lot of time thinking about how we can do more stuff – complete more consulting projects, hire more people for our portfolio, make more investments, generate more content – without compromising the quality of our work.

The truth is that it’s very difficult, and we’re not alone in choosing the easy way out by choosing to grow our own firm in a much more controlled manner than we attempt to grow our portfolio. We’re not alone. No VC, to the best of my knowledge, has cracked the code to achieve Facebook-style one-million-percent growth. There are many in the billions of AUM, but none in the hundred billions. Why not?

The answer lies in the limitations of modern technology. It’s allowed some actions to scale infinitely while others are left in the stone ages.

To demonstrate what I mean, consider some of the things Facebook needs to do in order to grow so rapidly, that are only possible because of modern technology:

• Deliver its product on a massive scale. With computing power and storage dirt cheap, how much does it cost to maintain someone’s Facebook profile?
• Communicate instantaneously across the entire company. With a few key strokes, Mark Zuckerberg can let everyone at his company know exactly what he’s thinking and what they should be focusing on.
• Analyze huge amounts of incoming quantitative data. With terabytes of behavioral data being generated by its users, real-time analysis requires both sophisticated back and front-end systems.

Essentially, outgoing communications, technology, and quantitative analysis are incredibly easy to replicate. Since these are Facebook’s core functions, the company is able to scale at a positively ridonculous pace.

The problem is that venture capital’s core functions don’t really rely on those things.

Personal relationships and qualitatively-based decision making can’t be mass-produced by a computer. And while innovations like Twitter and Salesforce.com have certainly made a VC’s life easier, they haven’t been able to replace their core functions. Ironically, very few of the innovations that venture capital has fueled have actually made venture capital easier to do. That’s why no VC has yet succeeded at growing at a million percent.

Now there are business models that are threatening to disrupt the VC paradigm:

• Crowdfunding platforms are hailed by many as a more scalable alternative to VC. In my opinion, they’re liable to skimp on the main value proposition of a VC: qualitatively evaluating management teams (I’ve made my opinions on this topic very clear in the past, here and here).
• A few VC’s have launched with an explicitly quantitative value prop, such as Correlation Ventures. Knowing how difficult it is to scrounge up quantitative data on the companies we’re looking into, I have my doubts about this model. I’d love to be proven wrong.

These models are ambitious, and maybe someday we will see a VC grow one million percent. But until the new models are proven out, VC will remain a craft industry. We do suck at scaling, and no, we can’t do better.

Given that the elevator pitch is generally a company’s first and only chance to impress a prospective investor before their attention turns to something else, it’s remarkable how many companies choose to dilute them with meaningless filler. It’s a wasted opportunity to impress your audience.

Some buzzwords are defensible. ‘Big Data’ is an enormous buzzword, but I’ll tolerate it because it’s an equally enormous field, and might actually give me some information about what your company does and your competitive advantage. The ones that really bug me are startup buzzwords that offer no additional information on the problem your company is solving, provide absolutely no reason why you’re different from the competition, and actually make me angry just for having read them.

Here are the 5 worst startup buzzwords to use at your own peril:

Disruptive – Also known as game-changing, revolutionary, or innovative. Any tech startup that is good at what they do will end up being disruptive to some industry, so calling yourself disruptive is basically saying your company is good. Oh really? You think your own company is good? Shocking!

User-Friendly – You launched your startup two months ago and it has no features and no integrations, so it damn well better be easy to use. Besides, what data are you citing? You telling me your product has good usability is the UX equivalent of calling your company disruptive.

SoLoMo – In isolation, “social,” “local,” or “mobile” might be viable ways to describe your business, but using all three together tells me nothing except that you read way too much TechCrunch and don’t have a clue where you’re going. Bonus points for using this buzzword so much that it needs to be abbreviated (note: bonus points are a bad thing).

Driving Engagement – Typically, this phrase — along with anything to do with “community” or “network” — serves primarily to obfuscate what the problem is you’re trying to solve and how you intend to make money solving it. Driving engagement in a community may be a means to an end, but it is NOT an end, and anyone who treats it as such immediately earns my loathing.

SaaS / Cloud – Five years ago, these terms may have actually differentiated your business from the thousands of others just like it. Now, pretty much everything is cloud, so if that’s the best thing you have to say about your company, don’t quit your day job. Before you use either of these words in your pitch, consider the few most recent software IPOs: Yelp, Linkedin, Facebook, ExactTarget, Pandora, Angie’s List, Groupon, etc. How many of them are accessed through a browser? By my count, all of them. Sorry, your SaaS delivery method does not make you special.

What do you think? Are there any particularly annoying startup buzzwords I’ve missed?

Image provided by: Obama Pacman

Unless you work for Apple. But even then, you still aren’t Steve Jobs.

What made Steve Jobs so successful was that his tremendous amount of talent was matched by an equal quantity of arrogance. Talent and arrogance are a great combination. He was convinced his own ideas were better than everyone else’s – especially when it came to UX — and it turns out he was right.

The problem is that arrogant people, as a result of their arrogance, always think they’re as talented as Steve Jobs, and they are always wrong. And when I say always…yes, I mean always. Apple is the biggest company in the world — by a wide margin — and is much younger than most of the other companies in the discussion. I think it’s fair to say that Jobs was the best technology CEO ever.

But that doesn’t stop executives from trying to be him. Usually, this means emulating his arrogance, which isn’t hard, without a quarter of his talent. The result are managers with some combination of the following traits:

• They’re unwilling to compromise, even when all of the evidence points to the contrary.
• They don’t get along with their employees or colleagues. It’s not fun to work with people who are wrong frequently and never acknowledge it.
• They prefer a yes-man over an honest critic.
• They think they know their users better than the users know themselves.
• They believe they’re above marketing. Their product is so good it will market itself.
• They stick with failed ideas way too long before finally killing them and moving on.

To be a successful entrepreneur, you do have to have a healthy renegade streak and think you can fix a problem that nobody else seems able to. But there’s a lot of real estate between that healthy level of skepticism and the caricature of arrogance most people have developed of Jobs, whether or not that caricature is accurate.

The good news is that because you aren’t Steve Jobs, it’s okay to do the following things:

• Accept that your initial take on any given subject has a non-zero likelihood of being wrong.
• Surround yourself with people whose opinions you respect, and actually listen to them every once in a while.
• Do research to understand how your users and competitors operate, and where and how you can fit into that ecosystem.
• Pick your battles in UX. If your user is used to a certain workflow or visual cue, don’t reinvent the wheel unless you have a MUCH better way of doing it.
• Learn from your competitors. They probably have good ideas every now and then, too.

I love golf, but I am not Tiger Woods. Deluding myself into thinking I am won’t help me get better. What it will do is lead me to make terrible strategic decisions that will hurt my score and hamper my development.

Likewise, most people who think they are Steve Jobs could probably benefit from taking down their arrogance a notch or two. That doesn’t mean they can’t have big aspirations. It’s entirely possible to build a $100 billion dollar company using a much more humble management style, and it’s been done many times in the past. Most of those founders probably didn’t even think they were capable of building a $100 billion dollar company. But guess what? That humility didn’t stop them from getting there, and in fact it probably helped them get there by allowing them to properly delegate responsibilities and dispose of failed ideas.

Personally, I have much more confidence in someone with a reasonably modest opinion of themselves than someone who thinks they’re the next Steve Jobs, even if there’s a remote chance they might be right. Sure, the next $500 billion dollar company will probably be built by a founder who does think they’re the best ever and has the talent to back it up. But how many Steve Jobs wannabes will fail spectacularly in the process?

A few days ago, I wrote a blog explaining why I’m against crowdfunding as currently defined by the JOBS act. It’s a controversial topic, and one commenter, Jonathan Sandlund, wrote a thoughtful counterargument raising a few good points in favor of crowdfunding. As a follow-up, I’ve pasted excerpts from his comment in block quotes (it could have been a blog itself) along with my responses. For my original blog (with his full comment), click here.

From Jonathan’s comment:

I think it’s important to distinguish between the types of companies crowdfunding will serve and the varying models that will serve them. The media is largely focused on startups — they’re sexy — but crowdfunding holds enormous implications for traditional main street small businesses as well. For these SMBs, crowdfunding represents a desperately needed additional source of capital, as well as an invaluable and defensible marketing channel (if I invest $5 in a local business, I’ll be much more likely to buy there).

Jonathan raises a great point. Crowdfunding for SMBs that have straightforward, familiar business models doesn’t make me quite as nervous. But I think startups, particularly technology ones, are where the most money will be invested — and lost.

Jonathan continues:

Back to startups — a completely different beast — I agree that an unfiltered, wild-west exchange will not play nice with inexperienced investors. But two quick points: (i) I, even as an inexperienced investor, have the right to choose the risks I take, as long as they’re properly disclosed. I can legally buy a lottery ticket, legally sit down at a black jack table, invest in an OTC penny stock – why can I not legally invest in a high-risk private startup? It’s not only nonsensical, it’s also hypocritical.

Again, I understand his argument. Investors are adults, and if they are aware of the risks they’re taking, they should be able to take them. I think the problem with crowdfunding is that the risks AREN’T going to be properly disclosed. At a blackjack table, most people understand they’re at a 55-45 or so disadvantage to the house. But what are the chances of losing your entire principal when you invest in a two person social media company? 99%? My concern is that platforms won’t be completely transparent with the data that could shine some light onto the odds investors are facing. Kickstarter has been accused of hiding failed projects, and whether or not it’s true, they’re clearly incented to do so. I sincerely hope the next rendition of JOBS will include legislation to prevent this.

Additionally, the current draft of the law doesn’t require smaller crowdfunded companies to offer audited financials. At least penny stocks require this minimum standard of disclosure. The combination is a very hazy picture of the risks involved with crowdfunding. I understand this, and for the right project I’d be willing to accept it. But I’m not sure my grandmother, with as little information or investment experience as she has, should be allowed to take this same risk.

Jonathan’s second point is also worthy of discussion:

(ii) That being said, I don’t think successful crowdfunding models will allow me to take these black jack risks. Rather, successful crowdfunding portals will leverage their own industry experience and domain expertise to provide me with curated selection. This is exactly what CircleUp is doing, and doing well. It is leveraging the founding teams’ consumer product experience to provide curated deal flow. Today with accredited investors, but post-JOBS with anyone.

I do think some “premium” platforms will do diligence on their companies and only post projects that pass their requirements. But who is paying for this diligence, and how can an investor be sure the platform is actually following through on it? My concern here is that with platforms taking a flat fee on each investment, their incentives won’t be aligned with investors and they’ll skimp on diligence. If a fledgling crowdfunding platform can choose between making a few more dollars to grow their company and doing proper due diligence to prevent the remote possibility of fraud, I think many will choose the former.

In conclusion, Jonathan relates crowdfunding to the triumphs of the free market in peer-to-peer lending:

I understand the risks of business crowdfunding are different. But the guiding, invisible force that is infinitely wiser and efficacious than any governmental body (cough…) is the same. And this force is the Crowd. The Crowd is a superhero and, pulling from Don Tapscott’s wonderful TED talk, it will fight for the New Open World — a world of collaboration, transparency, sharing, and empowerment.

As an econ major with political beliefs bordering on libertarian, nobody wants free markets to be a superhero more than me. But looking back at the manic-depressive cycle that seems to repeat itself every decade or so in the financial markets, it’s clear to me that the free market is painfully mortal. Investors — and companies — need to be saved from themselves, and while the SEC isn’t perfect, I think we still need it to have a presence in regulating the crowdfunding market.

In recent months, the startup community has rallied behind the crowdfunding provision in the JOBS act, expected to come into effect sometime in 2013. Proponents of the proposed law applaud it for two reasons:

1. It will allow private companies to access capital much more cheaply than by IPO
2. It will grant middle-class investors access to early-stage companies as an asset class

On the surface, I strongly agree with both of these goals. Removing red tape from the system will encourage entrepreneurship and ultimately boost the economy, and as a non-accredited investor myself, I’d love to have better access to the VC-type investments usually only available to the wealthy.

But at the same time, the risks inherent in legalizing crowdfunding are enormous. They’re also largely misunderstood.

Most people recognize that crowdfunding can be dangerous to poorly informed investors, but among the people I’ve spoken to, most believe the new law will unambiguously benefit startups. Yes, many startups may be able to raise money that hadn’t previously hadn’t been able to. But crowdfunding is also a Pandora’s box that could seriously harm the community.

Here are the two biggest risks I see from a startup’s perspective:

1) Getting your pants sued off

If there’s one thing startups hate as much as they love crowdfunding, it’s patent trolls. That’s because when your startup gets sued for patent infringement, you can’t afford to defend yourself, even if the claim is totally bogus.

The same will be true if you’re sued for misrepresenting yourself to your investors. And if you’re taking on 1,000 investors who you’ve never met, you’re practically inviting one to sue you. Public companies don’t spend millions in legal fees on their IPO for fun — it’s to bullet-proof their financials and offering docs against litigation if the investment sours. While the details of the legislation haven’t been finalized, it’s hard to imagine that the SEC will — or even could — completely protect startups from “securities troll” litigation attempts.

2) The negative fallout from a few bad eggs

When Bernie Madoff was busted in late 2008, the hedge fund industry went into shock. At the time, I was working for a small fund that had a 12 month initial lockup to provide us a modicum of business stability during an epically turbulent time for hedges. Because our transparency and counterparties made it absolutely impossible for us to do what Madoff had done, it had never been questioned before. Overnight, this provision became unacceptable to investors and we were forced to drop it.

Was it fair that the reputation of hedge funds as an asset class suffered because of one guy? Who cares. The damage was done. The first high-profile instance of fraud by a crowdfunded company (and make no mistake – there WILL be fraud) could harm the reputation of the entire startup community, even for the most honest entrepreneurs.

Some IPO laws represent needlessly expensive bureaucratic red tape. I believe they need to be reformed, and maybe new crowdfunding legislation is a back-door way to do that.

But some laws governing the type, amount, and accuracy of the information released to investors in an IPO exist for a reason: to protect companies, investors, and the integrity of the markets. There’s no substitute for proper due diligence, and doing it right costs money, hence at least a portion of the high costs of going public. So before the startup community pushes for a wholesale deregulation binge, I think we all need to consider whether a crowdsourcing market really can police itself, or whether it will just collectively skimp on diligence and end in a Y2K-style bloodbath.

I’m skeptical, and not for self-serving reasons as a VC who sees crowdfunding as competition. OpenView doesn’t do seed investments, so we’d probably benefit by investing B or C rounds in crowdfunding successes.

I’m skeptical because even half a decade after the tech bubble burst in 2000, Google was still struggling with the fallout when they went to market with their IPO. How much worse would it have been if crowdfunding had allowed even less legitimate companies with less disclosure to blow Grandma’s retirement savings? How long would that nuclear winter have lasted? Would the tech ecosystem even have survived to evolve into v2.0?

I’ve received some great feedback and comments on this controversial topic, including a thoughtful counterargument that I thought deserved to be addressed. Please see my follow up post, “The Free Market Won’t Save Crowdfunding,” and let’s keep the discussion going!

Image provided by: Campaign Asia

All too often, early stage companies attempting to dethrone a strong incumbent market their product as though it is the only solution available. The challenger believes that publicizing how their product solves the customer’s problem will be enough to win the encumbent’s business.

What these companies mistakenly don’t take into account is that the user of this product no longer has those same problems that made them buy the incumbent’s product in the first place.

Depending on the strength of the incumbent’s product, some or all of these problems have been solved.

When Google released G Drive earlier this year, for instance, I didn’t even bother to check out the demo. Why? Because it was offering to solve a problem that I’d already solved with Dropbox. The one difference that jumped out to me was more disk space, and since that isn’t personally an immediate problem, I didn’t investigate further. Switching products requires time and mental effort, and unless the benefits are crystal clear early on, I’m not even going to waste my time with further research.

The majority of B2C users no doubt share this sentiment, and the resistance to change is further exacerbated by the longer sales cycle in B2B. To effectively market against a strong competitor, you’ll obviously need to be an upgrade in functionality or be cheaper than their current solution. But you’ll also have to:

1. Do research to anticipate and preempt the specific problems customers have with the incumbent.

2. Make research into your product as available and easy as possible. Don’t make potential customers have to speak with a salesperson to learn about your product.

3. Lower the cost and risk of switching over with a freemium model or free trial period.

4. Differentiate yourself – incremental improvements won’t overcome the monetary and non-monetary costs associated with switching.

5. Excel at a niche of the larger market. If you can convince customers that your product is better tailored to them than the big guy’s, you stand a chance of stealing their business.

The good news is, startups and expansion-stage companies have, are, and will continue to win this battle every day against house-hold name competitors. But it isn’t easy, and it requires a much different strategy from pursuing those greenfield opportunities where there’s no system already in place.

So you built a better mousetrap. Now comes the hard part.

Image provided by: ubelly

DataNitro is an excel plug-in that allows you to run Python scripts in Excel, and since I’m already somewhat competent in Python, I no longer have any use for VBA. So maybe I didn’t exactly learn VBA in 5 minutes, but I managed to completely bypass it. To me, that’s just as good as learning it.

Remember the DVD player in the Matrix that plugs into your brain and teaches you Kung Fu? DataNitro is just like that, except for excel nerds. It probably saved me hundreds of hours of grueling, self-guided, trial and error in VBA.

I’m not bringing this up as an advertisement for DataNitro, but rather as an observation about the direction of coding as a whole. A few days ago, Charlie O’Donnell of Brooklyn Bridge Ventures wrote a great blog called “The Last Coder,” in which he hypothesized that front-end development platforms will someday make the entire institution of software programming obsolete. As these platforms continue to multiply and spread, power development will require less and less code and be accessible to more and more people.

So will the coder disappear?

It depends how you define coder. In the sense that someone has to spend 15 hours a day crunching zeros and ones in a darkened room to be considered a developer, yes, I do believe Charlie’s right that the profession will eventually erode away as more elegant ‘front end’ platforms replace many coding projects.

But in the sense that I am a “coder” because these platforms enable me to write software quickly and without formal training, I think the number of coders will be on the rise for a very long time.

There was a time when MS-DOS required a sophisticated learning curve even to run a simple program. The shorter learning curve associated with Apple and Windows opened PCs up to the masses. Similarly, as platforms make development easier, many more people will pick it up than would be willing and able to spend three or six months learning VBA.

Additionally, in the same way that scientists don’t lose their jobs as science moves forward, progress in software platforms will allow “real coders” — the ones crunching the zeros and ones — to focus on more sophisticated, challenging, and impactful projects. Isn’t that exactly what you want if you’re a professional developer?

DataNitro is just one of thousands of platforms powering this movement. Off the top of my head, here are four other young companies that act as a code-less interface to what are otherwise painful development projects:

• FRAPI – Build an API instantly
• Monetate – Painless A-B and MVT website testing (an OpenView portfolio company)
• IFTTT – Instant mashups of your favorite personal programs
• Zapier – IFTTT for business apps

What he stopped short of saying, but I interpreted anyway, is that the harder it is to learn your product, the more loyal your customers will be. Could that really be true?

Sure, it meshes perfectly with behavioral economics, which generally concludes that people behave irrationally in the face of sunk costs. It also matches up with my experience in software consulting. One of our portfolio companies, Prognosis, competes in the EHR space with number of cold-war era competitors whose usability, by most accounts, is inferior. Yet one of the main challenges in getting hospitals to switch is convincing them to write off the years of experience they have with their existing system.

But where Nir’s idea doesn’t fit, at all, is with the existing paradigm of user experience. Software is supposed to rely on existing conventions and human nature to require as little learning as possible. Like Steve Krug’s book, it isn’t supposed to make you think. There is no talk in UX circles about a tradeoff between stickiness and usability — usability is better, and therefore stickier. But isn’t an intuitive product mutually exclusive with requiring substantial investment? If it is, doesn’t that mean that a ‘good’ piece of software can’t also be sticky?

In my opinion, there is an innate tension between usability and stickiness. The same cumbersome qualities that make me hate a product in a free trial keep me unnaturally tethered to it, once I’ve actually taken the time to learn and become accustomed to it. I’ve worked hard to get where I am, feel a sense of accomplishment about it, and don’t want to go through the experience again. It’s annoying, but it works. When B2B companies come to the proverbial fork in the UX road and have to choose usability or stickiness for their own software needs, they often choose the stickier option, whether they know it or not.

But then it struck me. By making your product’s sophistication match your user’s as they move along the learning curve, you can win newcomers and keep old-timers from churning, too. There IS a way to have your UX cake and eat it, too, and here’s how:

1. Keep the introductory product simple. Follow standard usability conventions for beginning or sporadic users. Keep it simple and intuitive. But…
2. Provide a return on investment for power users. Advanced features don’t have to be front and center to appeal to power users — as long as they know they exist, they’ll seek them out. Either provide ample documentation, or let them know via an opt-in newsletter or blog.
3. Customization. Your product needs to work great out of the box, but allowing advanced users configuration options will allow them to productively invest time into your product.
4. Cultivate Stored Value. One of the key points in Nir’s post was that data-accumulating software can be especially addictive. I couldn’t agree more. It also has the effect of requiring escalating expertise to manipulate and visualize as the volume of data increases, mirroring the user’s learning curve.
5. Build a relationship. While actual personal relationships are nice, manufactured digital relationships — where a customer support or sales rep has all of the necessary information about who they’re communicating with directly at their fingertips — can amplify the effect. Getting a customer to view their relationship with your firm as an asset will help you keep them.

The key to a sticky product, like Nir said, is to make your user invest time and brainpower into learning it. But your entry-level product doesn’t have to be outrageously complicated to achieve this. A simple base product, combined with layers of optional power features, can lock in existing users but maintain the accessibility to win new ones. The key is to give the user a choice: between sticking with a perfectly usable product, or investing the time and energy into learning a power one that gets them hooked.

If they’re both the same product, you can’t lose.

Image provided by: Today I Found Out

In part one of this 2-part post, I explained CAN-SPAM, the main law governing email spam in the United States. The key takeaway is that unsolicited marketing emails are legal, but only as long as your email meets some basic requirements and your list wasn’t obtained through harvesting tactics.

But that doesn’t mean an email server has to accept your message.

In part because CAN-SPAM is so weak, technology for filtering out spam messages, even if they’re perfectly legal, has become quite advanced. Anti-spamming measures have been developed on three levels:

1. The recipient’s email server has algorithms for detecting and blocking spam based on past activity of your email address, domain, and IP address. If it thinks you’re spam, it will either put you into a spam folder (basically a death sentence for your marketing email) or refuse to deliver your message altogether.
2. Shared blacklists, such as the Barracuda Reputation Block List (BRBL), aggregate and publicize lists of supposed spammers. In Barracuda’s case, the data is provided by their global install base of email appliances. Local email servers match incoming mail against blacklists and use them to supplement their own algorithms.
3. The sender’s email server, in an effort to keep their IP or domain off blacklists, sometimes has security measures to prevent employees from sending spam. While I don’t know much about this practice, I think it’s safe to assume many larger companies would have something in place to this effect.

Once blocked by a server or placed on a blacklist, it can disrupt your communication with legitimate established business partners, and can be pretty difficult to get off. So how do you stay off a blacklist in the first place?

While blacklists and email servers don’t publicize their exact spam criteria, there are a few factors that I’m sure go into everyone’s algorithm:

1) Volume of mail

This one is simple. If you’re sending thousands of emails per day, there’s a good chance you’re dropping spam-bombs.

How to avoid it: Keep your marketing lists small and targeted.

2) Content

Servers will parse your email for spammy content. For example, all-caps or exclamation points in the subject line, or phrases like “exclusive offer” are likely to set them off. Additionally, if they find the same content showing up again and again in different emails, it will flag the message as spam.

How to avoid it: Use targeted content, rather than eye-catching gimmicks or phrases, to make your email stand out. Segment your audience and tailor it to them.

3) Percentage or number of manual spams

You can be sure a company’s email server is paying attention when its employees manually flag a message as spam. One or two of these won’t hurt, but if it’s happening routinely, there’s no question you’ll get blocked.

How to avoid it: The best way to avoid this is an opt-in system. If someone consented to marketing emails, they’re less likely to turn around and mark them as spam. If you aren’t using an opt-in, your list has to be very targeted at people who will be receptive to your messaging.

4) Percentage or number of bounces

When you send an email to a fake or de-activated email, the server responds with a bounce notification. Generating a ton of these is a pretty good indication to the server that you might be a spammer.

How to avoid it: Always know how the emails on your list were obtained and how fresh they are. The older the list, the more bounces you’ll trigger.

5) Callout activity

Validating an email address by ‘pinging’ the server is perfectly legal and, at least in theory, very useful. However, since this is a common tool for spammers when executing a directory harvest, it’s generally frowned upon. Many email administrators have configured their servers to give misleading responses to validation attempts, and attempting it on a large scale will land you on blacklists.

How to avoid it: As tempting as it sounds, validating a list of emails before marketing to them probably does more harm than good in the eyes of the recipient’s server, and it often doesn’t work anyway.

While those are the obvious ways servers and blacklists screen for spam, I’m sure there are more sophisticated techniques that I’m not aware of.

The bottom line is that if you’re sending emails to people who don’t want to read them, you’re risking doing semi-permanent damage to your online reputation, especially if you’re doing it systematically on a regular basis. Servers will tolerate a red flag or two, but since it’s difficult to tell what exactly will flip the switch, realize that you’re playing with fire when you send out unsolicited emails.

Hence the growing prevalence of opt-in or double opt-in policies. Although they aren’t required by law, they’re the safest way to make sure your email gets delivered to a recipient’s inbox, and they’ll have higher conversion rates as well.

Image provided by: The Chronicles of Nik

As a short disclaimer before I start, I’d like to emphasize that I am in no way a legal expert on email or the internet. As little as a few weeks ago, I didn’t know what CAN-SPAM was, and even now, most of my knowledge comes from Wikipedia and questionably reliable forums and blogs. If you have serious questions about the legality of your email practices, please consult the nearest lawyer, which isn’t me, since I’m not a lawyer.

That being said, what I am is an expert in scouring the internet for useful information. Employing these skills, I embarked on a fact-finding mission over the past week to understand what exactly is legal, illegal, or legal-but-frowned-upon when it comes to email marketing.

The result is my Email Spam Law Guide. If you’re thinking of firing up an email marketing program for your B2B business, this might be a good place to start.

What I found is that the laws intended to fight spamming are actually pretty innocuous, and marketers can stay within the law by obeying a few relatively harmless guidelines.

HOWEVER, that doesn’t mean email servers enjoy delivering spam. A number of private-sector mechanisms have sprung up that effectively enforce tighter limits on email marketing than what is strictly legal. In part 2, I’ll tell you about both those techniques and how they could impact your email marketing strategy.

Since the first thing on my to-do list at all times is “Stay out of prison,” I’ll start with the legal definition of spam.

CAN-SPAM

In 2003 George Bush signed Controlling the Assault of Non-Solicited Pornography And Marketing into law. CAN-SPAM, in addition to being a horribly forced acronym, was a piece of legislation that standardized spamming laws nationally. In doing so it overrode preexisting state laws that were in some cases actually stricter than the legislation that replaced them. CAN-SPAM has three basic requirements for anyone sending marketing emails:

1. Unsubscribe Compliance: When emailing someone, you have to provide an unsubscribe option that can be triggered with just an email address (i.e. no onerous information requirements or fees). The request has to be honored within 10 days. It’s like the do-not-call list for phone numbers, except it only goes for the organization you unsubscribed from.
2. Content Compliance: Your subject line has to have something to do with the content of the email. You have to provide an accurate email and physical address.
3. Sending Behavior Compliance: You can’t send emails to a list harvested via a web spider or directory harvest (where you guess and validate likely email patterns, such as “jdoe@gmail.com”). There are some other technical components that won’t concern most people doing honest email marketing.

And that’s really it. So long as your email complies with those three tenets, you can legally blast out emails without any sort of opt-in.

In other words, unsolicited email may be frowned upon, but it is NOT illegal.

Does that give you the green light to do it? Probably not. In the absence of powerful legislation, email servers have built up their own defenses against spamming.

In part 2, I’ll go over what some of these are, how they can hurt you, and the best ways to make sure your emails don’t land in a recipient’s spam folder.

Two of our most common projects are Segmentation Research and Buyer Insights (related to but somewhat different from Buyer Persona research).

As it turns out, there’s some confusion about what exactly separates these two types of research, both in our portfolio and broadly on the internet. I’m writing this blog to clear up that confusion, defining each, and explain why they’re both necessary when you’re developing your go-to-market strategy.

Simply put, the difference between segmentation and buyer research is the unit of analysis:

Segmentation evaluates which organization makes the best customer. For B2B, this is usually a company, non-profit, or political entity. The corollary for B2C is usually a household.

Buyer research, meanwhile, looks within a target organization and evaluates the individual(s) involved in that organization’s buying process. For a software product, this could be the CIO and CFO at a target company.

The confusion often comes from B2C products aimed at individuals where the buyer is an individual with no relevant ‘organization’ around them. In these scenarios, segmentation and buyer research are synonymous and interchangeable.

However, this isn’t always true for B2C products. For instance, although a cable company is undoubtedly B2C, market research can be analyzed both via a segmentation question and a buyer research question:

Segmentation Question: Which households are most likely to buy our product?

Totally Made-up Answer: Suburban households with income above $100,000 and access to one or no competing cable operators.

Buyer Research Question: Who are the key buyers and how do we reach them?

Totally Made-up Answer: Dads listen to the radio on their way to work and want uninterrupted access to the maximum number of channels. Moms primarily use the internet for research and are more cost sensitive. Kids exert zero influence on the process.

This is essentially the same framework we’d use when evaluating a B2B company. We strongly advise our companies to begin with segmentation. Otherwise, the universe of potential buyers (usually 1-3 in each segment) is far too large to effectively analyze in a systematic way. Once we’ve identified the handful of segments that are their best targets, we can dive into those segments to learn more about the buyers.

Ultimately, both types of projects are necessary to build a comprehensive understanding of how your product gets bought and sold. Knowing which organizations to approach, who to approach within the organization, and how to approach them, together forms the foundation of your go-to-market strategy, and segmentation and buyer insights projects are the best way to answer those questions.

Image provided by: Barkhamsted School

As an economics major and the son of a business school professor, I’ve been immersed in theoretical business for much of my life. Oligopolies, Game Theory, and Competitive Advantage have been popular topics of conversation at the Petri household’s dinner table since I was in a high-chair.

But what I’ve discovered in the past 5 or so years working at a handful of small companies and consulting with a dozen or so more, is that their challenges and solutions are strikingly different from the ones encountered in the classroom. Here are five lessons I’ve learned about entrepreneurship that you’d never find in a business school curriculum:

1) You don’t have to be perfect to make money.

Most entrepreneurship case studies go something like this: Superstar CEO comes up with a fantastic and totally original idea, assembles a crack team with awesome experience in just the right field, builds the perfect product and go-to-market strategy to tackle the problem, and dominates the market.

That story can be an intimidating precedent for an entrepreneur to try to break through, and it’s also a completely unrealistic hurdle for success. In fact, deeply flawed companies succeed every day, just by being the first mover, by selling more aggressively than their competition, or by having maybe one or two of the advantages that our case study had. While it’s great to strive for perfection, your company doesn’t have to be a well-oiled machine from day one to make money. You’re certain to make mistakes, and the best entrepreneurs learn quickly from them and adapt.

2) Nobody does just one thing.

Large companies have a fairly predictable workload and enough scale to plug pieces into fairly narrow roles. At a small company, no matter how specific your title, you’ll find yourself fulfilling many different activities they didn’t tell you about in the interview, some beneath your experience level and some considerably above. There’s a different problem every day, and if you’re not prepared to roll with the punches, critical issues will fall through the cracks.

3) There is such a thing as being too thorough.

From a very early age, we’re all engrained with the idea that you can fail at something by not spending enough time on it. In an entrepreneurial setting, however, you’re just as likely to fail by spending too much time on something. You’re a valuable commodity, and if you excessively polish one product feature, sales pitch, or marketing asset, you’re neglecting the other million things standing between your company and success.

4) It’s as much about who as about what.

Academia, on the whole, tends to overrate ideas and underrate people. In a b-school class, the professor will take pains to judge your paper on the quality of the material, rather than their opinion of you as a person. In business, a potential client, partner, or employee makes no such promise. They may flunk you on your clothes, your hair, your handshake, or your mannerisms, and feel no obligation to explain why. Ideas are still important, but personal relationships and charisma are equally so. If you have no interest in selling yourself, you might be better suited for a bigger company.

5) Never underestimate blocking and tackling.

Along the same lines, Business school’s strategy-centric approach tends to take execution for granted. At an early stage company, there are no established best practices to fall back on or experienced managers to show people the ropes. Peoples’ day-to-day responsibilities shift rapidly, and it’s easy to let seemingly easy things — like responding to a support ticket in a timely fashion — fall through the cracks because the systems or management structure aren’t in place to make sure they get done. Execution of everyday tasks isn’t the most exciting or glamorous topic. There probably isn’t a single b-school class in the world dedicated to teaching it. But if you’re working for a small company, you’d better develop a healthy respect for its impact and importance. Coming up with the idea is the easy part.

Ask any marketer and they’ll usually tell you about all the cool things they’re doing with whitepapers, case studies, newsletters, blogs, and infographics.

That’s great, except that from their target’s perspective, all of this content is essentially the same thing. It’s heavily textual, static (i.e. the information doesn’t update, so the shelf-life is short), and often very anecdotal, selectively highlighting only successful customers or use cases.

Because of the ubiquity of content marketing, your audience is barraged constantly with this type of content, and it can easily grow fatigued. I can’t tell you how many newsletters arrive in my inbox every week that I delete before reading. Even if the content really is good, there’s so much fluff out there that it’s hard to tell what’s actually worth reading.

That’s where online assessments come in. They’re a great way to cut through the fluff and appeal to your target buyers.

In our recent text/video hybrid report on creative marketing tactics at B2B tech companies, we featured Hubspot’s Marketing Grader and Zendesk’s Benchmark tool as two extremely well executed examples of interactive B2B online assessments. Add to that list New Relic’s App Speed Index, which might have found its way into the report had they released it a few weeks ago.

Each of these tools stand out in my mind from typical B2B content for the following reasons:

1. They’re interactive. In contrast to a one-size fits all whitepaper, these assessments immediately let the user know that what they’re about to read is going to be customized to their specific circumstances. It’s much more engaging than dry text.
2. They’re targeted. If you focus your case-study on a specific segment, it’s great for prospects in that segment, but it’s irrelevant to everyone else. Allowing the viewer to self-segment based on different characteristics of their business gives the report both breadth and specificity.
3. They’re full of information. A well designed assessment has minimal text filler and is heavy on the information. Usually, the majority of the information is collected from the customer base via an opt-in, which essentially makes it free. Anyone with a blog can write some hypothetical musings about customer service, but Zendesk has the data to back it up, and their readers know that.
4. They’re real-time. As everyone in and around technology knows, the industry moves lightning fast. No matter how much data you cram into an infographic, if that data is static, its expiration date is shorter than a carton of milk. The benchmarking tools listed above extend their lifespan indefinitely by constantly refreshing with the most recent results.
5. They’re viral. Assessments appeal to two emotions that I think are pretty close to universal: Competitiveness and vanity. People love seeing how their results stack up to the competition, so they’re eager to try it and quick to advertise positive results. If their metrics are poor, they’ll probably look for ways to improve them, which may include buying your product. Either way, your company wins.

* * * * *

Online assessments certainly aren’t the only way to demonstrate your expertise or extend the reach of your brand, but in my opinion, they’re possibly the most effective. Using a little software combined with the proprietary data and expertise of your organization you can build something that is at once engaging, personalized, valuable, and timeless.

How many blog posts can do that?

Editor’s Note: For more examples of B2B marketing that stands out from the crowd see OpenView’s report, “Above and B2B-eyond: A Look at the Creative Marketing Tactics Leading B2B Technology Companies Are Using Online.”

For quite a while, I agreed. HTML5 has the ability to detect a viewer’s screen size, removing the need for a specialized app for each mobile device. It bypasses Apple’s listing restrictions and the cut they take on revenues from their store. It saves users from manual updates to their native software. Last but not least, it’s more easily discoverable: via social media — say, a Facebook link — or through a web search.

But recently, when I complimented my friend Andrew, who works as a developer at LooseCubes, on their slick HTML5 website, I got a surprising response.

“Yeah, but I can’t wait until we put out an app.”

What?

If HTML5 is the future, then why would LooseCubes, after embracing the HTML5 revolution, even bother to build apps? Their website looks great from my iPhone, as I’m sure it does from an Android or Blackberry. So why go through the trouble?

My friend explained to me that while HTML5 is a huge improvement over its predecessor, there are still advantages to native software. Here are three:

1. Web apps are at the mercy of your internet connection. You can’t use them offline.
2. App stores are a great promotion platform.
3. Native software takes full advantage of a phone’s hardware. Web apps do not, and never will.

It’s his last point that’s especially powerful.

A web app can’t send you push notifications, and optimizing it for specialized hardware (for instance, an accelerometer) is difficult. More importantly, graphics and animations are smoother using the phone’s API than running off the internet, even in HTML5. Apple and Google have little incentive to close this gap — since increased adoption of HTML5 would come at the expense of their App Stores — and they probably couldn’t even if they tried.

My bet is the widespread use of native apps will persist in select areas. Despite the proliferation of web-based social games like Farmville, games are meant to be native. The same goes for video apps. They both lean heavily on a phone’s graphical hardware, and at least for games, they don’t usually require internet access.

In contrast, there are many purely informational, heavily internet-reliant apps I use every day that I think are better suited for a browser: Wikipedia, Facebook, Twitter, Yelp, OpenTable, and Yahoo Fantasy Baseball, just to name a few. When I switched laptops a couple of months ago, I was shocked and delighted by how little I had to download on my new computer. With ubiquitous broadband internet firmly in place for desktops and laptops, more and more native applications are moving to the browser.

Mobile software will undoubtedly move in the same direction, as 3G, 4G, and eventually 5G becomes available to more people in more places. But the native app will be, I think, surprisingly persistent in the coming struggle for mobile supremacy.

Editor’s Note: For more insights into the latest tech and software innovation, and for more tips on growing your business, sign up for the OpenView newsletter.

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Actually, I tell them, I like all of those things. In fact, I love the company.

I just hate the valuation.

Too many people without a background in finance (and even, shockingly, some people with a background in finance) think that liking a company and liking an investment are the same thing. If I think Facebook’s product is outstanding and their management team is wonderful, I should want to buy their stock.

But as an investor, that’s not how I think.

For every company, no matter how good or terrible I consider the company’s management team, product, and growth prospects, there’s a minimum and a maximum price I think it’s worth. I buy companies at or below the minimum and sell them as they approach the maximum. A good investment isn’t a function of quality, it’s a function of quality per price.

While I’m not involved in investment decisions at OpenView, I think I speak for most Venture Capitalists in saying that when they pass on your company based on the price tag you’re looking for, it’s not necessarily an indictment of you as a person, or your ability to run a successful enterprise. It just means the price tag — set by other investors — is too high.

Because the market value of your company is ultimately out of your control, there’s no reason to take investor disinterest personally. Concentrate on building the best company you can, and usually — eventually — you’ll be rewarded with a commensurate business valuation.

Editor’s note: For more advice on investment and business development sign up for the OpenView newsletter.

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The first task was to replicate the sights and sounds around them. Originally starting with cartoonish 8-color images and clicking noises, this ability has been refined over the years to the point where we can now type in any address in the United States and get an interactive, 360-degree view from that location using Google Maps. 3-D printers allow us to conjure tangible objects out of plastic in minutes with the mere touch of a button. 3-D TVs can trick my brain into thinking a sword is being hurled at me. It’s all pretty incredible.

But teaching a computer to analyze and understand the real world — a.k.a. Artificial Intelligence — has proven much more difficult. A solid 10 years after I first tried dictating a social studies paper to my computer, I still groan when I hear an automated Customer Service message ask me in Robot-speak to please state my problem. I know “she” is going to screw up.

My goal in writing this isn’t to demean the person who wrote that software, but rather point out the enormous complexity of the task. Our understanding of how light and sound interacts with our senses is fairly well developed, so it’s not too difficult to teach computers to replicate that process. But when it comes to understanding how our brain accomplishes fairly menial tasks, we’re pretty much in the dark.

The failure of Artificial Intelligence to deliver satisfactory results in this area has kept it a niche R&D field with large up-front investments and deeply uncertain outcomes. Viable AI ventures are few and far-between in a sea of Social Media and Daily Deals websites. We haven’t yet hit the tipping point where AI becomes good enough to create mass demand, and that mass demand creates massive profits and investment.

In my opinion, however, the tipping point is approaching quickly.

Take Facebook, for instance. I have literally hundreds of pictures of my face tagged in my account. Any human being could look at a handful of these and pick me out of a lineup. But Facebook, with all their engineering talent and computing power, can’t seem to figure it out on their own. In comes Face.com and their Facial Recognition Software, and the rumors of a $100m acquisition by Facebook. For a company with only $5 million in funding, this will likely turn some heads in both the VC and startup communities.

Apple, too, seems to be headed down this path. After acquiring Siri, whose technology was developed by a non-profit on a research grant, it’s likely they’ll be pouring more investment dollars into Natural Language Processing and Semantic Analysis before their next iteration. The same technology can be used in a B2B context to enhance the contact elimination rate of customer service programs, and alleviate my frustration when I hear a robot ask me what I’m calling about.

If you ask me, Artificial Intelligence is about to become a monster business. In the next decade, your software’s ability to interact with the wide world around it, rather than simply produce a carefully structured and sterilized representation of that world, is going to be what makes or breaks your business model.

You better get ready.

There isn’t.

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A product is only valuable if it solves a problem or fulfills a need, and since each person’s problems and needs are different, a product can’t be everything to everyone. A user interface that you, as a developer, like to use may be too complicated for your user, or it may emphasize the wrong tasks. As a salesperson, the pitch that would sell you, or even your user, may not resonate at all to your buyer.

The fact is you, your user, and your buyer are three completely different people, and of the three, your opinion is by far the least important. Companies built around what their employees (you) think usually fail. Swiftly.

Here’s why:

1. You are not your user. Usually, if you work at a software company, you’re more technologically sophisticated than your customer but you also have, at best, a sketchy understanding of how they use your product. Your closeness to the software may also make you overlook UE problems that are incredibly obvious to someone using it for the first time. The common cliché is a developer laboring over advanced customization options while the user is stumped trying to figure out the login page.
2. You aren’t your buyer, either. Most sales people begin their pitch by extolling the virtues of their product. That’s great, except your buyer doesn’t care what your product does well. They only care about how your product solves their problems. In fact, if the deal is at all competitive they don’t even care how it solves their problems — they simply care about how it’s better at solving their problems than your competitor’s solution.
3. Your buyer isn’t always your user. In B2B products, the final decision maker is often a few levels above the person using your product. Why? Because the people who have graduated to management status and are in charge of budgets don’t want to be doing ground-level ops anymore. The buyer listens to the user’s opinion, but they’re usually more concerned with the big picture ROI than the intricate details of the UI.

Obviously these are generalizations, and don’t always hold true. In smaller organizations, the buyer is sometimes also the user, and if your product is designed for software companies, you might, in fact, be very similar to your user. In the beginning, it’s sometimes OK to use your viewpoint as an approximation for someone else’s.

Still, it’s important to be sensitive to the fact that some people don’t agree with you. You may like to search while your user usually likes to browse. You may think a competitive statement, such as “our product is twice as fast as the competition” is convincing, while your buyer finds it sleazy.

As your company enters the expansion stage and begins to get traction in the marketplace, your understanding of your users and buyers will have to mature beyond what you think and veer closer towards their reality. If it doesn’t, you’ll find yourself selling a bad product the wrong way.

Stay ahead of this potential problem by doing primary research early and often. Usability testing is a must in order to understand how users actually think, and interviews with your buyers are equally crucial when designing your go-to-market strategy.

Remember, in the end, your opinion really doesn’t matter. Unless you plan on buying a few thousand subscriptions, yourself, learn what your buyer and user think, and build your company around them, instead.

Editor’s Note: For more great advice and strategy for guiding your business through the expansion stage, sign up for the OpenView newsletter.

1)      Get Users

2)      Make Money

In theory, this is a great strategy. Dusting off my Econ 101 textbook, there’s an entire section on Network Externalities which no doubt has inspired the current generation of entrepreneurs. Once you have a large network of users, you’re supposed to be impermeable to competitors that don’t.

This simple concept is especially popular in the software community, where, after an upfront expense of developing your software, you can add users to your heart’s content at virtually no cost. The strategy worked brilliantly for Bill Gates, who emphasized volume over profitability early on to build an (almost) impenetrable fortress of compatibility. It worked for Google, who won the search war by offering users a clean experience while its competitors crammed ads down their throats.

It stands to reason that it should work for social media, too. Right?

Except… it doesn’t.

Looking out at the social networking landscape, there’s little evidence of network externalities. In two years, Instagram and Pinterest, neither of which appear to have radically different functionality from Facebook, picked up a combined 50 million accounts, many of whom are presumably also Facebook users. Validating Instagram as a potential threat, Facebook bought the company for a shocking $1 billion last month.

On the flip side of the coin, there’s Myspace, the first Social Media website to reach 100 million users and a company once valued at $12 billion, now struggling to stay afloat as its user base erodes.

So what’s happening here? These are social NETWORKS aren’t they, so why aren’t the network externalities keeping up their end of the bargain?

In my estimation, there are a few reasons:

1)      It’s not an either-or question. My computer can only run one OS. That means, unless I’m really fed up with my current solution, there’s no opportunity for me to try out competing products. With social networks, on the other hand, I can set up a Pinterest account for free in a few clicks without giving up my Facebook account. That takes away a lot of the friction that helped Microsoft maintain their empire once they’d acquired market share.

2)      It’s really easy to learn. It’s taken me years to master MS Excel, so the last thing I want to do is learn a new program, even if it’s functionally superior and free to try. Instagram is a relatively simple concept and it’s known for its ease of use, so I’m not intimidated by the learning curve.

3)      We have more time to consume it. With the rise of smart phones, we’re spending much more time on the internet, and Social Media is perfectly suited to be consumed in small increments while I’m waiting for a bus. This means I have more of the one currency that it does cost to try out a new social website: time.

4)      New products aren’t trying to make money off of me… yet. Like Facebook circa 2007, the up-and-coming social websites are solely focused on user growth, so they don’t weigh their product down with ads. There are plenty of Venture Capitalists ready and willing to fund their cash burn while they acquire eyeballs. That means that in addition to being completely free of risk, I can reasonably expect a new product to have a better user experience than the incumbent.  

Does that mean that Facebook will necessarily go the way of Myspace?

No. But unfortunately for them, they can’t count on having the competitive moat that Microsoft has enjoyed. To stay on top, they’ll actually have to serve their users better than the competition, which Microsoft has never really had to do during its 30 year reign of terror. It’s not going to be easy.

It seems to me that a lot of the furor over social media in recent years has been due to an over-appreciation of the network effect. Networks thrive on friction, and the modern-day consumer of internet media is increasingly friction-less. They’re open to trying new products, and not particularly loyal to old ones. If you’re planning on pursuing this strategy at your company, think hard about how difficult it actually is to try out or switch to a competitor, and don’t assume that network externalities will be your one way ticket to Profitability Town once you’ve done the hard work of customer acquisition.

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The temptation is often to automatically go with the biggest, brand name, “Tier 1” VC that wants to fund you. The idea is that their size proves that they know what they’re doing, and their brand name will help you succeed.

Don’t fall into this trap.

While a brand name investor might generate a little more buzz around your funding, your ultimate success is going to be mostly a factor of how well you serve your customers. For the most part, they couldn’t care less who your investors are.

Furthermore, all else being equal, the bigger the VC the less they’ll pay attention to you. Of course, most VC’s will tell you that you have their undivided attention, but the truth is that their time is scarce and your company is only one of many they focus on.

To cut through the B.S. and figure out how much you’ll really matter to your VC, compute the following number:

The size of their most recent fund is usually given in a press release or on Crunchbase, and a proxy for their number of employees can be found on Linkedin. The result is the proportional number of employees the VC has for an investment of your size. If high-level strategic advice from the partner is all you care about, number of VC partners can be substituted for employees.

Either way, higher numbers indicate a VC has more manpower to support you after the investment has closed, and if they score much smaller than 1, don’t expect them to offer you too much of their time.

Granted, there are many other reasons you’d want to choose one VC over another. Maybe all you’re looking for is a hands-off VC that funds you, makes a few intros, and then leaves you be, in which case you should be OK if they score low on the attention formula. But if you’re interested in operational support, you’ll want to know that a VC actually has the resources to carry it out.

Take a real-life case from OpenView’s portfolio. According to Crunchbase and Linkedin, our most recent investment in UnboundID entitles them to about 2.2 of our employees. We pride ourselves on the operational and decision-making support we offer our portfolio, and making sure we have the adequate manpower to provide it is essential. With all due respect to Andreessen Horowitz, who are great at what they do, there’s no way they can pay as much attention to a $1.5 million dollar investment that only scores a 0.05 on the attention scale. Hopefully, that company is going with a16z for another reason.

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While there are a number of sharing platforms out there — Sharepoint, Box, and OpenView portfolio member Central Desktop come to mind—it’s clear from the B2C focus of both products that Dropbox would have been the most likely acquisition target for Google to consider.

In understanding Google’s process, my hope is that expansion stage companies can better sway a larger company towards the decision to buy them out. Below are the questions Google, along with any other company facing this dilemma, likely asked themselves before making their decision:

Do we have the in-house talent to build it?

Very often, especially in tight technical job markets like ours today, acquisitions are less about the product and more about the talent behind it. Facebook, for example, is notorious for buying companies for their development teams, shuttering the existing product, and reassigning them. With arguably the deepest pool of technical talent in the world and a humming recruiting machine, however, Google likely didn’t see this as a major benefit of buying Dropbox.

Advantage: Build

How seamless would the infrastructure integration be?

A company with a ton of physical infrastructure could be a source of integration nightmares for the potential suitor. Since Dropbox runs on Amazon’s S3 cloud storage platform, the integration would have been seamless. This was probably slightly favorable to Dropbox’s chances of getting acquired.

Advantage: Buy

Which Brand is Stronger?

With all due respect to Dropbox, which has built a stellar reputation in a few short years of operation, Google is pretty much unmatched in B2C products. I trust them to come up with an intuitive and secure product with great integration into my existing account.

Advantage: Build

How sticky are the company’s customers?

If the target’s product is deeply entrenched with their user base, it’s much more difficult to build a competitor. While Dropbox does have loyal customers (I consider myself among them), the freemium business model advocated by both Dropbox and Google actually encourages users to dabble in multiple products. If you, like me, are nearing your 2 GB limit in Dropbox, it makes sense to give Google Drive a try for free rather than paying for extra storage.

Advantage: Build

How fast is the market moving?

In a high-growth market with sticky customers, a company may prefer to buy an immediate presence rather than risk falling behind while they develop the product. The cloud storage market is growing very quickly, but because Google likely didn’t see Dropbox’s customer base as extremely difficult to penetrate, they were able to take their time building a competitive product without losing out on their market position.

Advantage: Build

What is our company culture?

Simply put, some companies prefer to grow by acquisition and some prefer to expand organically. Looking at Google’s acusition history, they’ve certainly been very acquisitive, but their purchases tend to be in the 10-100m range rather than the multi-billion dollar price tag Dropbox would likely fetch. Their one recent monster acquisition of Motorola Mobility was somewhat of a special case because of the company’s patent portfolio, which Google desperately needed. The jury is out on whether Google would feel comfortable bringing on that size of an integration project.

Advantage: Neutral

________

Because the logical answers to the above questions above fall pretty decisively in favor of building the Google Drive rather than buying Dropbox, the company’s decision isn’t surprising. But there’s another angle: How, as an expansion-stage company in search of an acquirer, do you help nudge a larger software company away from building and towards buying?

While a lot of the above questions are out of your control, some aren’t. For example, thinking about how to make your customers fiercely loyal to your product — even if the market is growing so quickly that competition isn’t your main concern — can go a long way toward discouraging potential entrants. Establishing your team as thought-leaders in the industry can also make the company more attractive from a talent acquisition standpoint. Finally, making your infrastructure as flexible as possible will reduce friction costs for a potential acquisition. While the end outcome often seems arbitrary, there’s a method to the madness of a software giant’s acquisition strategy.

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That’s not always easy. As any executive knows, it’s one thing to talk about changing your company culture, and an entirely different thing to actually succeed. Here are three ways to more effectively implement an analytical culture at your company:

1)      You need more than just the executives to buy in. While culture change always starts at the top, it can’t end there. The decision makers within your organization who aren’t stats buffs still need to understand the statistical rationale behind your business decisions if they’re going to fully embrace and implement them. Ground-level data collection is also enormously important, and if the people collecting it don’t know why it’s useful, they likely won’t give it the attention it deserves.

The proper solution is educating all levels of your organization about your process for analyzing the company’s data, and giving them as much transparency into those decisions as your competitive intelligence policy will allow. Hiring a few statistical wizards and letting them crunch numbers in isolation isn’t enough.

Additionally, you’ll want to present your conclusions in an accessible way, that doesn’t take a PhD in stats to understand. Leave the models and confidence intervals to the analysts and focus on the big picture.

2)      Start small. Sweeping organizational changes are often initially met with skepticism, especially if they require a large commitment of resources up front. The best way around this is to introduce fact-based decision making incrementally to your company, beginning with a smaller project (or short phase of a larger one) that can demonstrate its value quickly and cheaply. As the philosophy starts to catch on and your employees begin to trust the process, you can increase the scope and length of your statistical projects.

3)      Be constructive. While nobody’s going to admit it, a large part of the reluctance to adopt fact-based decision making stems from the fear that when the facts are revealed they won’t be flattering. This isn’t unfounded. Any successful statistical project will tell you that something you’re doing isn’t working, and some people may feel threatened or attacked by this conclusion.

It’s important that everyone understands that the ultimate goal of fact-based decision making is to make the company and its employees better and more efficient, rather than to evaluate them. While this distinction might seem irrelevant to an analyst, it does really matter. You should start with projects that save your employees time and make their lives easier before graduating to more critical or sensitive topics.

For more on this topic, see Amaresh Tripathy’s blog on Information & Decisions

They have a product, and if they’re lucky they have customers. But most have little or no knowledge of who their customers are, why they’re buying their product, how satisfied they are, or what the company’s best opportunities for expansion are. They operate on intuition, coaching, and whatever meager information they can gather.

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Contrast that with the fact-based decision making at a big, established company like Amazon. The uncertainties are still there, but they’ve been roughly quantified. If Amazon releases a new product, it will sell about X dollars in the first week, give or take Y margin of error. If they enter a new market, they expect to take Z market share. The result is something totally different from the uncertainty that startups face. Rather, it’s something the late economist Frank Knight called “risk,” a quantifiable form of uncertainty akin to the odds in a Casino.

Because risk can be measured, it’s largely benign. If you walk up to a roulette table, you know exactly how much you stand to lose, and can calculate the odds precisely. You can plan for the worst, and abstain if the odds aren’t in your favor.

Uncertainty, on the other hand, has no defined parameters. It’s walking up to a roulette table with no idea how large your bet is or what the odds are of success. It can make or break you, and either way, you’ll never know if you made the right or wrong decision.

It’s uncertainty, not quantifiable risk, that makes being an entrepreneur so difficult. For example, you’d love to know what your success rate will be in a certain segment. But to quantify that risk (we’ll win 5% of these accounts), you’ll need a ton of planning, months of data collection, and a concerted effort to make sure the information is being recorded consistently and correctly. You can’t just wake up one morning and decide to do the analysis.

As your expansion-stage company scales, it’s important to think about this early on. It may be too early to make a decision on customer segmentation, but until you map out what information you would need to make that decision, and put in place a process for collecting it, you won’t be in any better of a position this time next year, either.

So stop everything you’re doing and ask yourself the following questions:

1. What are the major questions I have about my company that I’m currently unable to answer?
2. In a perfect world, what analysis would I need to do or see in order to answer those questions?
3. Is anyone currently collecting that data?
4. Is it being recorded in a format that can be manipulated or analyzed?

It’s likely that there’s some data you could be painlessly collecting today that will be extremely useful tomorrow as you try to convert an uncertainty into a risk. Do yourself a favor and get a head-start.

But then a funny thing happened. I made a few assumptions, ran the numbers, and I think I like it.

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Here’s my math:

A)     Users: 50 Million. Coming into April, Instagram had about 30 million users. That number grew to 40 million in just 10 days after the company launched its Android app. Assuming there’s considerably still growth from Android users yet to come, I think it’s safe to say they’ll hit 50 million in the next couple of months.

B)      Revenues Per User: $1.20 Per Year. According to Facebook’s S-1, the company makes a billion dollars on 875 million active monthly users, or about $1.20 per user per year. Let’s assume, as Mark Zuckerberg probably does, that they’ll be able to monetize Instagram’s users similarly, and profit a dollar per year on each user.

C)      Valuation Multiple: 50x Earnings. Facebook’s expected market cap of $100b is 100x its one billion in earnings. Not to say this is reasonable or unreasonable, but it’s the going rate on social media, and this is what you’d expect to pay for an acquisition in a competitive market. We’ll give Instagram half of that multiple, which might even be overly conservative given its level of growth.

Multiply A x B x C, and you get 2.8 billion dollars.

Hold on a second, did Facebook just underpay for Instagram by $1.8 billion?

For that to be true, one critical assumption has to come to fruition: Facebook has to monetize users of Instagram at the same rate they monetize their own users. I don’t mean to trivialize this challenge, but I don’t think it’s unrealistic, either. At $4 in revenue per user per year, I’ve always thought Facebook underachieves badly on this front, considering how much time users spend on their website. Could the Instagram user base stomach $4 per year in advertisements without stunting its growth? Facebook seems to think so, and I don’t disagree with them.

So while I can’t say I’d spend $1 billion of my own hard-earned cash on Instagram stock, I at least understand Facebook’s reasoning. To take it one step further, given some pretty achievable assumptions about how Facebook plans to monetize the investment, it could even end up being a bargain.

Did I actually just defend a billion dollar deal for a company with no revenues? Get me to the hospital, I must be having a mild stroke.

That is, until now. With Yahoo’s lawsuit against Facebook last month, alleging infringement of 10 of Yahoo’s patents, we may have the software equivalent of the Cuban Missile Crisis on our hands.

Immediately following the announcement, the heat has turned up on the Cold Soft-War. Facebook responded with a countersuit against Yahoo before buying up 750 patents from IBM to bolster its defense case. Yammer CEO David Sacks ratcheted up the acrimony against Yahoo by publicly blacklisting Yahoo’s employees from ever working at his company if they don’t leave within 60 days. But the most significant and tangible event to come of this was Microsoft’s recent deal to buy 800 patents from AOL for a whopping $1 billion in cash.

There’s no question this deal resets the market for Software Patents. The impact of $800m on AOL’s market cap implies that the market previously undervalued their patent portfolio by 80%. And while 300 of the patents were purely defensive non-exclusive license agreements (“promise you won’t sue us for violating any of these”), the 800 they acquired outright could be used offensively in case Microsoft finds itself in its own patent war, especially one with Google over search, advertising, or social media. They’re taking the threat of a patent apocalypse seriously, and stocking up on canned goods and ammunition in preparation.

Whether or not the Yahoo Patent Crisis will spark an apocalypse largely depends on how successful it ends up being for Yahoo. If they lose the suit or settle for less than their legal expenses, other lawsuits won’t likely follow, especially given the negative damage to Yahoo’s reputation. The market for patents would also likely fall from the elevated price Microsoft paid. But if the lawsuit proves to be a bonanza for Yahoo, we could easily see other patent-rich software companies, like Microsoft (which now owns 20,000) or IBM (30,000), looking to monetize their portfolios at their competitors’ expense.

So what does this mean if you aren’t one of the big powers?

While the thought of a patent apocalypse is indeed a scary thought, it isn’t necessarily a bad thing for expansion-stage companies. Established leaders have always used patents to squash start-up competition, so breaking the taboo on bulge-bracket patent suits will give the legal teams that execute them much bigger fish to fry. Additionally, if your expansion-stage company is able to patent an original idea, the IBMs and Microsofts of the world have more of a reason to buy you out to retain that patent, versus just copying the technology and crushing you.

As they say, every mushroom cloud has a silver lining.

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But numbers can’t answer everything, and if you follow them blindly, you can be badly misled.

Too many executives, whether “numbers people” or not, see statistical analysis as a necessary stamp of approval to any business decision.  But the simple truth is that there isn’t a mathematical answer to every question, and if you force one using data that doesn’t accurately describe the real world, no amount of color-coded charts, quadratic regressions, and chi-squared tests will yield an ounce of insight.

These situations are incredibly common in the business world. Unlike physicists, chemists, or biologists, business people are unable to run tightly controlled experiments. We can’t scour the earth for cool problems with clean statistical answers, like academics can. The problems come to us, and they’re usually messy and fraught with biases.

While the statistical discipline has very good tools for identifying relationships within a data set, it’s blind to the quality of the data itself. Here are three common problems that can render a statistically significant conclusion dead wrong:

• Self-Selection: Survey or interview respondents often respond because they have good things to say about the subject. Likewise, firms prefer to disclose financial information when it’s favorable or improving. This type of problem paints a rosier picture, on average, than is really the case.
• Missing Data: More information is almost always available on larger companies and more recent events. When there’s missing information, do you come up with a proxy, estimate the missing fields, or exclude those entries altogether? Any solution you choose will introduce a layer of noise into the equation.
• Tenuous Proxies: Say we’re trying to measure the impact of marketing spend on customer acquisition for a particular industry. Since neither variable is public, we’ll have to use proxies and assumptions to estimate them. It’s important to remember that the ultimate conclusion isn’t measuring the actual variables, but their proxies: the strength of the conclusion relies heavily on how close the two are. Since we don’t have the actual variables, this can be very difficult to measure.

The result is a difficult balancing act: you have to tolerate moderate levels of bias within the data to reach a conclusion, but as the problems pile up, the validity of that conclusion declines no matter how statistically significant it may appear.

Still, an analyst is being paid to solve a problem, and to some, an inconclusive result is the worst kind of failure. It can be tempting to present a conclusion as a home run despite obvious flaws in the methodology. The best analysts properly communicate their level of confidence in the results, and know when to admit that the data at hand is inconclusive, even if it isn’t what their stakeholders were hoping to hear. Doing otherwise can be extremely destructive.

So do I love numbers? I’d say our relationship is rocky. I certainly respect them as a powerful tool to understand the world around me, but am realistic about their limitations. Statistical conclusions are only as good as the data that goes into them, and there isn’t good data for every problem.