December 15, 2008

Y Combinator is Dead?

This post by Jamie Siminoff (CEO of PhoneTag) claiming “Y Combinator is Dead,” offers a good alternative view to my earlier post praising the Y Combinator model.

In my experience with both Xobni and Dropbox, I stand by my earlier claim that “Y Combinator hatches brilliant entrepreneurs.” Both have been funded by very reputable VCs and continue to thrive. But both started before the major economic meltdown.

Today all startups are having difficulties raising Series A funding – including Y Combinator startups. Jamie offers an interesting alternative model in his post that suggests incubators should provide more/longer help for their startups. Venrock’s Quarry is similar to the model that Jamie is proposing. The additional benefit offered by Venrock is that they often provide the Series A round of funding to the startups that they incubate.

Hindsight will tell us which model is best in the current economy – but for now I have no clue.

December 11, 2008

My Favorite Online Marketing Tactic – Doesn’t Work

That’s a pretty safe prediction for two years from now. I’ve seen many hot online marketing tactics lose their effectiveness over the last decade.

The key cause: Online tracking makes it easier for marketers to quickly figure out what actually works. As a result we start piling into the most effective tactics. Eventually they get saturated. An equilibrium is reached where most of the big profit potential is lost. SEM (Google Adwords) is the best example of this. A few years ago I was able to spend 7 figures per month on SEM with a tracked payback of three months. Today very few keyword categories offer that fast payback at any kind of meaningful scale.

The other reason that popular tactics fade so quickly is that popular tactics generate a lot of noise. Potential customers start tuning out the whole channel as it gets cluttered with advertisers. In the 90s, I used to get 20X higher click through rates on banners than what’s typical today. There were several months in the late 90s at Uproar where we ran the most viewed banner on the entire web (according to Nielson NetRatings). Today banners rarely appear in the marketing mix for my startup clients.

And now it appears Facebook apps are quickly fading as a viable marketing channel.

So what can startups, marketers and VCs do to combat the short shelf life of online marketing tactics?

Advice to Startup CEOs: Don’t pay a premium for a marketing veteran’s many years of tactical online marketing experience – only the last couple years really matter. And most of the critical go to market projects are very different from traditional marketing functions.

In fact I generally encourage startups to hire a complete rookie. The marketing leader is one of the most challenging roles for a startup to hire. The best marketing vets are looking for startups that have a bit of “wind at their back.” It’s the rookie that can create this momentum. Their lack of experience often means it’s easier for them to adopt new effective tactics as well as concentrating their efforts on the pre-tactical projects. In exchange for coming in early, give them a legitimate shot at the long-term marketing leadership role. After a year they will be intimately familiar with your customers. And they will likely be every bit as effective as a veteran marketer but available for a fraction of the equity and cash.

Finally encourage your VCs to hold regular marketing summits so your marketer can trade effective customer acquisition tactics with other marketers (share “Advice to VCs” below with your VC).

Advice to Marketers: Don’t specialize in a single tactic. This is counter to the advice of most people, but hopefully by now you understand the flaw in focusing on a single tactic. They fade too fast and then you have to start building a new specialty.

Instead, focus on developing marketing skills that will always remain relevant. These include things like marketing psychology, diffusion of innovation, company building, customer research methods, persuasive website architecture, actionable marketing metrics… Stay on top of the latest tactics, but always balance this with developing expertise that will remain important in the long term. And when you discover effective new tactics, really analyze them to understand why they work. Those principles will remain important and will help you create/spot the next effective tactic.

And encourage your CEO/VCs to arrange marketing summits with other startup marketers where you can learn from each other (and please invite me).

Advice to VCs: Encourage your portfolio companies to exchange their most effective tactics. Most VCs get their CEOs together, but rarely do I hear about VCs bringing together their marketing leaders (mine never did in any formal way). Marketers probably have much more relevant insights to offer each other than CEOs. Effective online marketing tactics are surprisingly effective across different business categories. The collective insight across your portfolio of what works is enormous.

I recently attended one of the rare marketing summits at a VC and found it to be extremely valuable. Expertise in the group ranged from viral marketing to creative ways of generating press. I was happy to share my insights at no cost – well actually in exchange for their insights. I also shared some of my tools/projects that can be leveraged to get better results out of every tactic. I’m sure the other marketers would agree that it was an extremely valuable use of a few hours of our time.

December 10, 2008

Is “Go To Market” Mastery Really Possible?

I had an interesting comment from John Gillett yesterday in response to my 10,000 hour post. As I understand it, the essence of his question is really: is it possible to master the go to market process for startups? In other words, are there enough similarities between startups for a universal approach to be relevant? And if possible, does it really take around 10,000 hours to master it? Others have also asked me similar questions. Since developing an effective, repeatable process is the core goal that drives my hyper focus on taking startups to market, I thought it would be useful to highlight our interaction.

Here is John’s comment:

10,000 hours seems a bit arbitrary, particularly when there are so many different types of tech startups.

Becoming an industry leader may rely more on perception than actual hours spent perfecting the craft. A powerful PR firm may be able to accelerate a launch 100 fold.

I can understand the typical startup cycle being close to 1,000 hours, but it still seems like a relative benchmark that is somewhat useless.

Here is the reply I posted:

John thanks for the comment. I would probably have had a similar reaction before reading Outliers, but Gladwell presents some pretty compelling evidence that mastery often happens around 10,000 hours of practice. I’m not sure if/how this specifically applies to startup marketing, but I do know that I’m still learning a ton with each new startup I take to market and each startup is making faster customer development progress than the last; Eventually this steep learning curve will flatten.

There are similarities in the optimal go to market process at each of the startups – particularly in the sequence in which marketing projects should be executed. It’s important to begin by generating an early flow of users and uncovering how they are gratified when using the product/service, who is gratified and how to position the product to attract more of these types of people. The process for uncovering this information is similar at each company I’ve worked with. Also the metrics systems and process for reducing barriers and improving conversion rates are similar. These and many other projects should all be completed before trying to scale the business. Here’s a snapshot of the current sequence I’m using http://www.slideshare.net/seanellis/marketing-plan-for-web-20-startups-presentation . For the foreseeable future, the process will keep changing as I discover better ways to make faster customer development progress.

December 4, 2008

10,000 Hours of Go To Market Experience: Who Will Get There First?

Malcom Gladwell’s Outliers has come up in most of my meetings with entrepreneurs and VCs over the last few days. The big question we ponder is “how does Gladwell’s 10,000 hour theory relate to startups – specifically executing the go to market process?” If you are not familiar with his 10,000 hour theory, Gladwell asserts that mastery of any field requires about 10,000 hours of focused practice (see my previous blog post for more details). The key to becoming the “foremost expert” in a field is to be the first to reach 10,000 hours of practice. This opens doors to even more experience, further enhancing the expert’s reputation.

In my meetings over the last few days we’ve concluded that no one has reached 10,000 hours of experience in startup “go to market” execution. The reason is that each startup only requires about 1,000 hours (approximately six months) of focused go to market execution before they are beyond the go to market stage. The marketing executive that effectively navigates this stage generally has stock options that vest over four years. They are fully rewarded for their successful execution at the end of this four year period, so very few leave early voluntarily. Occasionally they may get an early exit, but sometimes they’ll stay beyond the four years as well. If we average 4 years per startup, it would take 40 years to reach “go to market” mastery. Marketers don’t focus on early stage startups for 40 years – they either become startup founders/CEOs or go up stream to marketing roles at bigger, safer companies. Of course most startups fail, so you could potentially take 10 startups to market in a much shorter period of time, but after a string of failures the opportunities would dry up.

Why is mastery of the go to market process important? After my two startup marketing leadership roles from launch to NASDAQ IPO filing, I reached the conclusion that the key marketing contribution that led to our success was the first six to twelve months of execution. This is when we figured out our target users and the most compelling value proposition. It’s also when we implemented the measurement systems that allowed us to tweak the business model, products, user acquisition flow, etc. After we completed this process the marketing job transitioned to driving and managing customer growth, which is similar to the marketing role at any established company.

Most startups muddle through the go to market process and as a result fall well short of their potential. In fact I believe that along with funding challenges, poor go to market execution is the key cause of failure for startups. Considering that VCs invested over $25 billion In 2006 and only one in ten of their companies is considered a major success (10X+ return on capital invested), the value of fixing this problem is enormous.

After working on the go to market execution with six startups, I believe I’ve reached about 5,000 hours of go to market execution practice. I also feel like I’m a long way from mastery. There are substantial improvements with each new go to market role – and I often go back and apply those improvements to previous startups I’ve helped take to market.

Occasionally I get very lucrative offers to consult with a later stage startup or even public companies. While I’m confident I can add value to these companies, they will take my focus off the go to market execution and dilute the external perception that I’m focused on early stage startup marketing. Now that I’ve read Outliers, I also realize that they will risk my lead in getting to 10,000 hours of go to market execution first.

December 3, 2008

Malcolm Gladwell’s Outliers: The Source Code for Individual Success

Malcolm Gladwell’s latest book, Outliers, attempts to reverse engineer the world’s most successful people. He dispels the popular notion that successful people are simply more gifted than the rest of us. Instead he attributes their success to a combination of luck, hard work and time. Ultimately, he concludes that mastery of most things happens at around 10,000 hours of focused practice. Being the first to reach 10,000 hours of practice is an enormous advantage and often comes down to luck.

For example, most professional hockey players were born between January and March. This gives them a significant advantage since the most talented hockey players are selected for exclusive club teams when they are around 10 years old. At this time, hockey players born early in the year are around 10% older than those born at the end of the year. Therefore, they are bigger and more coordinated. Once they’ve been selected for the special club teams they receive better coaching and face tougher competition. Most importantly they practice significantly more hours every week – putting them on the fast track to mastery.

The same principle applies to software entrepreneurs born around 1955. These were among the first people to have the opportunity to use time sharing terminals – which made it possible to quickly rack up 10,000 hours of programming time. Because of several lucky coincidences, Bill Gates may have been the only 13-year old in the world with nearly unlimited access to a time sharing terminal in 1968. This gave him a substantial head start in getting to 10,000 hours. Similar stories explain other wealthy software entrepreneurs born around 1955 including Steve Jobs, Paul Allen, Steve Ballmer, Eric Schmidt, Bill Joy, Scott McNealy, Vinod Khosla, and Andy Bechtolsheim.

Gladwell doesn’t claim that successful people lack special talent; he simply concludes that being gifted alone is not enough for success. Mastery requires time, effort and lucky circumstances.

In my early years after college I embarked on a similar quest to understand how the most successful people achieved greatness. I read the biographies of Rupert Murdock, Richard Branson, Ted Turner, etc. Rather than being inspired, I was discouraged to discover that many entrepreneurs (especially Ted Turner) were miserable. I decided that it wasn’t worth trying to become successful.

But after reading Outliers, I realize that the ingredients for success were piling up around me. First I was probably born in the perfect year for an online marketer. Many of the best online marketers I know were born around 1970. Our lives were at the perfect stage in the mid 90’s to risk joining pioneering startups (we didn’t have mortgages or kids to feed) but we had enough experience to be given real responsibilities. Second, I was lucky enough to have the opportunity to run marketing at Uproar.com in 1996, a startup with significant VC funding. If the company had been started in the USA rather than Hungary, Uproar probably would have opted for a more experienced marketer. And finally I became obsessed with online marketing – I burned the candle at both ends pushing the online marketing envelop. I must have been among the first people to get 10,000 hours of experience with metrics driven online marketing.

This early head start helped us build Uproar into the world’s leading online game company using many pioneering online marketing programs. And my initial success at Uproar has continued to open doors to interesting online marketing opportunities that further enhance my skills.

Unfortunately mastery of online marketing is elusive. Online marketing is a moving target where the most effective tactics become irrelevant every couple of years. But I do believe mastery of the startup go to market process is possible. Look for more details on this in my next post.

December 2, 2008

Y Combinator Hatches Brilliant Entrepreneurs

Y Combinator may be the most important driver of high tech entrepreneurism ever. While smart software engineers have historically dreamed of becoming successful entrepreneurs, insurmountable hurdles often stood in the way. The biggest hurdle was fear: “Am I really good enough to do this?” Getting accepted into the Y Combinator program is enough to push many aspiring entrepreneurs off the fence.

The second major hurdle is execution. Y Combinator entrepreneurs are “hackers,” which is another name for scrappy software engineers. Engineers typically thrive on the challenge of “can it be done?” Before Y Combinator, this challenge spawned many useless companies. Y Combinator refocuses “hackers” on a new target which is closer to “should it be done?” Their mantra “make something people want” helps entrepreneurs create useful stuff that solves real problems.

Unlike overly exclusive VCs, the Y Combinator model is heavy on general guidance and light on cash. This makes it much more scalable – they can afford to make decisions after a 10 minute interview. Sure there will be more failures, but many more brilliant minds will be willing to take a chance on starting a company. In fact Y Combinator founders are among the smartest entrepreneurs I’ve met in 15 years of startup life.

Y Combinator gives these aspiring entrepreneurs the tools and subsistence funding to actually get a product to fruition. This significantly increases the likelihood that they can eventually get the funding necessary to build a company. Some will have the skills to lead this company while others will pass the leadership baton to a more capable CEO. But regardless, they will have executed the most important part of creating shareholder value – and if the company thrives, they will receive enormous financial benefit.

If you missed the Startup2Startup interview with Y Combinator founding partners Paul Graham and Jessica Livingston, I recommend you read my guest post recap on the Startup2Startup blog. There are also plans to post the full video of the interview.

Monthly Archives: December 2008