Robert Goldberg's Blog

2006-08-22T10:11:00.000-07:00

Moving!

Wanted to add some features and blog more frequently. Moving to typepad. Please check my new home at http://robertgoldberg.typepad.com/tahoevc/

2006-07-18T10:19:00.000-07:00

Customer Feedback, the Secret to the Big MO

IBD is accepting nominations for the Momentum conference which is going to be a showcase for companies that are showing real growth in the marketplace. It will be interesting to see the variety of companies that present, but even more interesting to see the common themes that emerge. It got me thinking what is momentum after all? In the world of technology start-ups I would argue that it is all about repeatability, predictability, and extensibility.

To gain momentum you need to be able to build on success, step by step. Whether it’s finding a repeatable sales model in a particular vertical or establishing a consistent release cycle for products, repeatability is the cornerstone of growth. Repeatability leads to a predictable business which in turns simplifies planning and a gives a higher likelihood of attaining momentum and continuous growth. Stable, predictable growth establishes a platform from which to expand the business by extending to adjacent markets.

The real question is how to get started on the path to the big Mo. Generating early momentum is often critical to the ultimate outcome. Take that to heart in the early stages of the company and it will serve you well. Your first entry into the market will set the pattern for months if not years to come. Focus on a product and sales process that is repeatable and you are closer to gaining momentum.

In my experience most companies falter early because they fail one simple task; talking to customers. This is a simple concept, but in the heat of battle gets forgotten especially when you are an early stage company that has an exciting product vision and has just raised seed capital. You have deadlines to meet and shareholders to please.

The typical response is to put your head down, focus on development in the hope of meeting self imposed deadlines – but did you validate the market requirements???? I have never seen a company fail because they got too much market validation – too frequently companies fail because they didn’t get adequate feedback from real customers.

Too little market validation winds up with the company having more enthusiasm about the product or service than the customer – a sure recipe for failure. You wind up with an endless cycle of reworking the product based on user feedback that you should have got earlier. To say the least, this is expensive and avoidable. Think instead of talking to customers early and often – this is critical even before you even start to develop the product.

Consider your potential customers; How can you segment them in a way to identify features and marketing techniques? What are the potential channels for distribution? Talk to your customer prospect. Face to face meeting, focus groups, web surveys; use your creativity and get out in touch with your prospects.

Sample each potential demographic and distribution channel so that you can have enough feedback to confidently draw conclusions and make plans. Don’t assume that you need to show a finished or nearly finished product. For web based products HTML mock ups work well, for software and physical products, paper prototypes and PowerPoint are more than sufficient. Don’t invest too much time and energy until you have determined you have a product or service that will generate sufficient demand to justify full scale development.

Take this approach and you will learn if people will buy your product or as importantly - why not? This feedback will help you modify your product or service to gain faster market acceptance. Doing this before releasing the product will shorten the sales cycle time saving time, money and frustration.

Early feedback from different market segments will tell you which verticals are likely to respond to your product sooner and the marketing messages to which they are likely to respond. This information provides critical feedback to your marketing plan and will shorten the time to a repeatable sales process – critical to generating early momentum. You can also use some of this early information later to prioritize and target future adjacent markets that will extend your business and continue the momentum. A topic I’ll cover in a future post.

Generating momentum requires repeatability and predictably; getting real customers with real revenue. Remember it starts with your first customer. Talk to prospects up front and you will be on your way to the big MO!.

2006-06-19T23:11:00.000-07:00

Speaking at SVASE Event Tomorrow

I'm going to be hosting a lunch and speaking about Milestone Investing at the SVASE Startup U event in San Jose tomorrow, details can be found here. Hope to see you there.

2006-06-19T22:57:00.000-07:00

Milestones not Millstones
It’s all about technology, markets and people

Since my post Choosing Wisely – Business Models to Profit By, I’ve had a number of questions on how to choose milestones and goals for your business. As I mentioned previously, it’s important to come to a point of view on what you want your business to be and how you intend to get there. Your point of view may change, but if you start with a well thought out point of view at least you will have the perspective and data to make considered changes.

Milestones are simply interim way points or goals. They should be constructed so that the completion of a milestone provides a powerful indicator that you are on the right course. Missing a milestone requires that you consider the reasons for failure, rethink the ultimate goals of the company, or both.

When I help companies construct milestones I usually like to bucket them into three categories: Technology, Market and People. I also like to consider what stage the company is in, again I usually like to bucket stages into three categories – Proof of Concept, Going to Market and Scaling to Profitability. Different milestones are appropriate for each stage but in general you want to pick things that are pivot points for both risk and opportunity.

In the proof of concept stage technology milestones should focus on proving the feasibility of the core technology. For example, in a software or Internet company, there are often key algorithms that need to be developed. What milestones need to be achieved so that these algorithms provide compelling results to justify the essence of your company’s value proposition?

Market milestones should be chosen so that completion provides substantial proof that a large enough market exists to continue to the next stage. For example, you might complete a compellation of published market research on existing and related markets, gather market sizing information for your target market and conduct primary research and interviews with a representative set of your target customer base.

In the proof of concept phase, it’s important to measure the effectiveness of different people in their jobs, including yourself. When done early, honest appraisals of whether the right people are doing the right job can avoid costly and painful conversations later. Often this can be determined simply by evaluating who is achieving their goals and who is not. It should be obvious who is in the right role, and if it isn’t, well that is an answer too!

When your company is about to transition from the proof of concept stage (we are pretty sure we can build the technology, we are confident a market exists, and we have the right people and they are doing the right job), it’s time to think about milestones that will bring your product or service to market. In this stage, choose technology milestones that lead to a general release of the first product and a development process that allows for quick iteration to the next release or generation of the product based on initial customer feedback.

The most important marketing milestones will provide further validation of the market and identify missing elements of the product through feedback from a broad cross sections of target customers. It’s equally important to have milestones around developing a product specification based on that feedback as well as a marketing plan that includes initial sales or customer acquisition targets. Choose milestones and market metrics that prove to you and your Board the company is establishing market traction.

In the go-to market stage the company will hopefully be scaling quickly, requiring people to do a variety of jobs and exercise additional skills. Implement the milestone process deeper into the company will allow you to develop a broader evaluation process for more people than you put in place in the proof of concept phase.

Once you have firmly established yourself in the market (good initial customer base, broadly used by consumers etc.), the next stage is scaling to profitability. For technology milestones you will want to consider milestones around product cycle times, cost to deliver and other goals that will allow you to deliver a cost and feature competitive product.

Marketing milestones will largely revolve around scaling the sales or customer acquisition process economically. If you are an Internet company you should carefully monitor customer acquisition costs against lifetime value of the customer and drive towards making the customer profitable. In a more traditional software or hardware company, focus on milestones that guide you to a set of customers and sales processes that are repeatable.

At this point in the company’s evolution you should be scaling rapidly and it’s likely you will need to augment the team. Sales and Marketing are likely places to focus, but you should also evaluate needs across the company and establish timelines and milestones that insure you have critical human resources in place at the right time.

I’ve suggested a few ways to create a framework and establish goals/milestones for your company. Each company is unique and you should adapt or create milestones and goals that work for you and your particular situation. The important thing is to “Just Do It!”. Creating Milestones will help you avoid building a Millstone around your neck and contribute to building a successful company.

2006-05-17T07:06:00.000-07:00

Choosing Wisely – Business Models to Profit By

(Cross Posted with an Article Written for IBD Networks)

Hopefully my posting last month, Business Model Friend or Foe, convinced you that if you are starting a Web 2.0 company, a business model can be your friend. This month we will dive into how to begin building an appropriate business model.

The best place to start is with the simple question - How does my business ultimately make money? Now I know what many of you are thinking, I don’t have worry about that - I’m going to sell the company to (fill in the blank). Trust me, you don’t want to depend on that. I predict public media companies are going to be more sensitive to having acquisitions become immediately accretive. Even if they don’t, I guarantee that you will be acquired for more if you are generating revenue. So you should at least consider the question - How does my company make money for the eventual acquirer?!

While pondering this question there is a simple equation to keep in mind that fits most Web 2.0 companies.

Gross Profit = (Amortized Lifetime Value of the Customer) – (Customer Acquisition Cost) – (Operating Costs)

Obviously, you want to maximize the first variable and minimize the other two.

Let’s start with the last variable first, Operating Costs. These costs will be dominated by salaries and benefits, capital equipment and bandwidth. Although you will be in a rush to bring your company to market, take the time upfront to consider the architecture that will minimize your server and bandwidth requirements and scale efficiently. The choices you make around architecture will live with you for a very long time. Two of the better illustrations of this are Google and Friendster. Google gained considerable cost and competitive advantage by creating an innovative, scalable and cost effective architecture. Friendster however made technical choices that proved not only to be expensive, but also hampered scalability and innovation - ultimately playing a significant role in the company not being able to continue to grow.

When it comes to salary expense consider the Build Before You Burn posting. Try to defer adding headcount as long as practical and make every hire count, hire people that are over qualified for the job you need them to do today but who can scale to what you need them to do in a couple of years.

Next let’s consider Customer Acquisition Cost. How are you going to drive consumers to your service/product and how much will it cost? There are many ways to do this and more are being invented every day; a few of the more popular methods are listed below. As you build your business plan, consider modeling several methods as you will not want to be dependent on a single marketing channel. Be conservative and realistic about the costs.

Viral Marketing – Being free it is obviously the most cost effective method for Customer Acquisition, but it’s also the most difficult to predict and control. Viral marketing is not a strategy you can depend on.
Search Engine Optimization – Potentially the second most cost effective method, but getting trickier and more competitive.
Search and other Performance Based Marketing – Again potentially effective, but the market is getting more efficient and competitive so you will likely have to pay more over time.
Tailgating – This is when you use free placement on another company’s site to drive traffic to you. This tactic that was successfully used by YouTube on Myspace and a number of companies on Craig’s List.
Affiliate Programs – similar to search marketing
Partnerships – these are difficult to forecast but potentially large drivers for the business.

At this point you have identified most of the costs associated with your business. Now you need to assess how long the customer will use your product or service. Be conservative and expect this to be a key number that will grow over time, but may start out lower than you think.

Now you have a pretty good view of the lifetime cost of a customer and how much revenue you will need to achieve to offset the expense and turn a profit. As with customer acquisition, there are many ways to monetize the customer and inventive entrepreneurs dream up new variations every day. The important thing is to develop a plan, execute on it and try several different methods. A few popular methods to consider are:

Advertising – Consider building targeting mechanisms into the product or service at from the beginning to achieve better monetization rates.
Ecommerce – What products might your customers be interested in purchasing and how can you construct your site so that it maximizes potential sales?
Lead Generation – Are your users potentially someone else’s customer too? Building in features that qualify and drive traffic to partners can be very lucrative.
Premium Service/Subscriptions – Most Web 2.0 products are free, but are you providing too much for free? Is there a part of your product that should be free and a part you could charge for as a premium upgrade?

Now you have all the pieces of data you need to develop a business model that becomes profitable over time. The process of developing the model and refining it as you execute should be iterative – feedback what you learn through execution back into the model. Develop a point of view of how your business becomes profitable and the steps you need to take to achieve profitability. It doesn’t mean that you won’t change your point of view over time, but it’s important to have path to profit so that you know when you’re off course and need to correct.

2006-05-10T16:34:00.000-07:00

Sea Change for Traditional Media?

Yahoo and GE/NBC made a very interesting merger announcement today. They are going to combine their Spanish language websites and share advertising revenue. Most folks seem to be reporting it as media companies “growing interest in the Spanish language market”. I agree, but having worked at NBC and NBCi actually see it as potentially quite a bit more than that. Many traditional media companies and NBC in particular have been slow to embrace the internet and even slower to embrace new media partnerships like the one that announced today. Knowing how GE/NBC makes decisions this announcement represents a huge change. I think it’s a major shift in mindset for them that indicates more openness to partnerships of all kinds. This trend is already under way at other media companies like Fox and Disney, but now NBC seems to be very serious about leading the way

This makes total sense to me. Traditional media companies have a long been adept at producing great shared experience content and aggregating large audiences around that. And there’s going to continue to be a large (albeit shrinking) market, for that. Yahoo and other online media companies including startups have led the way in interactive and long tail content and services. It’s becoming apparent that it’s tough for either to have leadership in the other category. Yet there is tremendous value to be created for companies and consumers by combining the two competencies. Partnership makes sense and I think we are entering a time when attitudes are changing and it going to become much easier to form partnerships that exploit the core competencies from both camps. And not just big companies like Yahoo, but for start-ups too. Perhaps Stu should add a TV/Movie 2.0 category to his list.

For entrepreneurs this is fantastic opportunity. It may now be seriously worth spending the time to consider how you might create and get value from the large audiences that traditional media companies aggregate. If you’ve got any great ideas let me know, I may be able to help with some introductions.

2006-04-20T15:44:00.000-07:00

Media Companies – Content in the Windshield, Advertising in the Rearview Mirror

In the recent weeks we have seen several ground breaking announcements regarding new content distribution policies from traditional media companies the likes of Disney, NBC and others. They have no doubt woken up to the dramatic shift in media consumption habits that threaten to undermine their distribution franchises. Users are increasingly spending more time and consuming more media online than through traditional outlets and if these outlets don’t figure out how to give users what they want they will become obsolete as distribution mechanisms. As Fred Wilson points out, “this is big big big”. And I agree this likely represents a major turning point. What puzzles me is on one hand Disney is smart enough provide time shifted free content on the internet in a form that likely to delight users, but on the other is going to tick off those same users because they are going to force them to watch the advertisements that can’t be skipped. And an even more ridiculous, but similar minded, is the announcement from Phillips that they patented a technology to lock user’s television sets during commercials so they have to watch the commercials.

The internet has opened the Pandora’s box of user choice when it comes to media consumption and I think this is even truer about advertising. Consumers don’t mind being marketed to; they just mind being marketed to badly. So why with all the richness and dimensions of creative freedom that the online experience has to offer why are marketers and media companies sticking with old habits and worse trying to force users into them. This isn’t just about embedded commercials in TV show downloads, we see it every day whether it’s some annoying pop-up, or a incredibly intrusive Coldwell Banker ad that seizes control of My Yahoo for the past three days. We can do better than that! I think we can make marketing and advertising less offensive more effective and even fun and useful for the consumer. We have been seeing evidence of this innovation in advertising for some time. Key word and context based text ads were that for sure. Others include recommendation based advertising on sites like Insider Pages, and even interesting online infomercials at ShopNBC. Even traditional media is looking at different models as this article on the increase in product placement indicates. But I think the best and most innovative is yet to come. Maybe even a marketplace for online product placements!

Dollars are flowing to online advertising at an every increasing rate because marketers are realizing that is where the audience is migrating. There is a fantastic opportunity for start-ups to accelerate this and reap the benefit. Several companies, including Clickshift whom I am involved with, are taking advantage of this opportunity by allowing marketers to buy and track advertising more easily. Another set of companies are beginning to emerge that provide unique marketing products and vehicles to take full advantage of the online experience and that are providing value to the consumers along the way. I have already seen several very interesing ones and if you have interesting ideas in this space would love to talk to you and help if I can.

2006-04-13T14:48:00.000-07:00

Fewer Board Seats – The Next Bay Area Fashion Statement?

The National Venture Capital Association (NVCA) published a report yesterday on CEO and BOD relationships that is causing a bit of a stir. Many people are commenting on the fact that there is a disparity in views between CEO’s and VC’s on the ideal number of Boards that an early stage VC should sit on. My friend John Rodkin, whose Board I sit on, had a first hand perspective in recent post.

According to the NVCA report the VC’s view is 4.6 and the CEO view is 4.0. It seems to me that isn’t a large disparity. The thing I found more curious is that my VC brethren are collectively reporting they are only on average are on 4 Boards (5 in the Bay Area). I looked at the number in amazement; given the people I know in the industry it seems way too low. Over the past few days I held an unscientific survey with a number of CEO’s and VC’s and they have a similar impression. So it raises the question, what is going on? Could people be underreporting?

I remember not too many years ago it was a badge of honor in the Venture community to be on numerous Boards. It was a sign of the economics of the time where spreading your bets as widely as possible was the ideal investment strategy. Times have certainly changed especially in early stage investing. It’s not a very scalable business and in my opinion seems to require more time per company not less to make an investment strategy work. So is there a change under foot? Is the new fashion statement in the industry how few Boards you are on? I hope so; I think it would be better for the entire ecosystem.

2006-04-12T22:27:00.000-07:00

Web 2.0 Business Models, Friend or Foe?

Why Making Money is a Good Idea

Lately I’m seeing more and more Web 2.0 catch phrases in business plans and pitches. Here are some examples:

“if we build a better application users will find us”
“we have a viral application that will have exponential user acquisition growth like (insert your favorite social networking success story)”
“all we have to do is aggregate a large enough audience and (insert your favorite big media or online company) will acquire us and they will figure out how to monetize the audience.”

For me this is déjà vu all over again. We can all recall similar attitudes, familiar market conditions and even identical applications, services and content from the Web 1.0 era. Apparently I’m not the only one noticing this either. My friend Mark Pincus has a nice post noting similar observations. The famous philosopher George Santayana once wrote “Those who cannot remember the past are condemned to repeat it”.

But wait you say, things are different now. Certainly there are more people with internet access on a computer or mobile device, increased penetration of broadband, virtually ubiquitous wifi, new user modalities are being more easily adopted. Syndication technologies are making distribution easier and real cash flows and profits are being generated by a growing number of companies. New development and deployment technologies tools have lowered the barriers to bringing new services and content to the market.

The barriers are so low that there is an explosion of new web 2.0 companies; countless new companies each week. Hundreds of bloggers devote themselves to keeping up with the dizzying pace of innovation. It’s made it almost impossible for even those of us “Inside Baseball” to keep up. Imagine how challenging it is for the average consumer.

So how do you compete in this noisy environment? Obviously you must have a compelling product or service, but that is just a way to convert and retain users, not acquire them. The one exception is if you truly have a “viral” application that markets itself. Before you jump to the conclusion that “yeah, I got one of those”, sit back and consider the number of successful companies you know that were truly viral. The count will probably be less than the fingers on both hands. Now consider the number of successful internet companies you know of, that count is going to substantially exceed ten. Now consider what the common denominator might be in all those companies. I think upon reflection you will find that it was a well thought out business model where the life time value of the customer substantially exceeded the cost to acquire them.

In today’s crowded environment even if your product is viral, you are going to have to compete for users with other companies offering similar or seemingly similar products. You will have to spend considerable marketing dollars to compete for the minds of those users. The vitality and viability of your business will not only depend on being able to differentiate based on features for the consumer, but critically on your ability to acquire users for less and monetize for more than your competitors.

The conclusion I’ve come to is that even if you think its going to be viral, it probably isn’t. Far better not depend on it and plan to build the business the old fashion way. Create a vision and business model that has a realistic chance of being profitable.

This will give you the economic power to build your business faster than your competition. Having a business model and marketing plan that converges on profitability is key to achieving that success. One of my fellow VCs, Will Price, has an interesting post, Marketing Best Practices, on how to construct a marketing plan that addresses some of the issues. I'll review various Web 2.0 business models and their virtues as a future topic. Until then, consider building an appropriate business model for you business.

When things get tough, (or even if they don’t) that business model could prove to be your best friend.

2006-03-30T13:41:00.000-08:00

Build Before You Burn

Avoid the trap of burning through all your capital before proving the business model

This is a repost of an article I was asked to write for IBDNetworks:

Starting a company demands blind enthusiasm and an ability to ignore the laws of “physics” lest you be daunted by the obstacles of reality. Being a start-up CEO requires an almost impossible balance of irrational exuberance needed to overcome obstacles coupled with fiscal conservatism.

While optimism and persistence are necessary to grow the company, you have to remain anchored to the realities of company progress and the market. Lose this balance and you will find yourself wandering in the wilderness trying to figure out whether the lack of revenue growth is a result of product or market issues. Underperforming against sales objectives inevitably leads to the company burning through hard raised capital sooner than expected, annoyed investors and the never exciting prospect of a down round.

So, how do you avoid this dilemma and maintain the balance?

Companies that succeed start with a thoughtful business plan that includes business metrics and establishes milestones that are proof points for growing the business. This is the best place for you to start. Organize the metrics and milestones around major risk areas of the business; aim to prove out the key questions about the market, technology and development.

Typical milestones and metrics include technology proof of concepts, product release dates, bug rates, customer acquisition rates and costs, as well as average order size and revenue growth. Organize your operating plan and budget so that you can see how much cash is required to reach each key milestone that proves out the business.

Now comes the tricky part, you need to suspend your optimism. In the real world things never happen as quickly as desired or planned. Most operating plans are based on perfect execution with only modest contingency. Plans assume technology will get developed on budget, products released on schedule, fast market adoption and sales grow as forecast. In a mature company and market this can be true, but in a start-up it rarely happens.

If you make these assumptions and ramp spending ahead of hitting milestones, you may get lucky, but more likely you will miss milestones and burn through cash faster than expected… we’ve seen this movie before and the ending isn’t pleasant.

Take the typical example of a product taking longer to develop than planned. This leads to a delayed product launch and lower sales revenue than planned. If you ramped the sales and marketing expenses in anticipation of product shipment, you are left with lower revenues and higher expenses. You have a team of highly compensated sales and support staff on payroll without the planned revenue to offset expense. You are digging an expensive hole in the ground that will be difficult to fill. The company is now significantly off budget on both top and bottom line.

A better alternative is to line up growth in expenses with the achievement of milestones. You should plan expense ramps so they are gated by milestone achievement. In the above example, you would not significantly ramp your sales force until you delivered the product and proven market acceptance by sales into several key customers at the anticipated price point. If you are late on product delivery, you will still miss the top line, but your bottom line won’t look nearly as bad, in effect buying yourself more time to make progress.

If by a stroke of skill, luck and good fortune you find yourself making the milestones, it’s always easier to accelerate expenses than it is to cut them back

You shouldn’t make these decisions in a vacuum. This is a perfect opportunity to engage the experience and objectivity of your Board of Directors and Advisors. You should carefully construct both groups so that each individual brings unique operating insights that strengthen your company. The right people will be able to provide good feedback on the appropriate milestones and help calibrate expectations on how the company will achieve them and how long it will take.

Remember to build and prove those milestones before you ramp your burn… the movie will have a happier ending!

2006-03-30T11:13:00.000-08:00

Venture Capital - Back To The Future

I've spent 25 years building technology companies from both sides of the table. Most recently was an early stage investor managing the investments and portfolio for Idealab. I’ve had the privilege to work with and helping number of fantastic entrepreneurs and came to the conclusion that the world could indeed use another venture firm. A venture firm that leverages the operating and life experiences of the partners and focuses on great returns by making the entrepreneur and companies successful. As I was coming to this conclusion I had the good fortune to partner with a longtime friend and associate who is likeminded, similarly experienced and all around great person, Stu Phillips. Stu and I are thrilled and proud to have co-founded Ridgelift Ventures, a new venture firm we are building from the ground up to service the needs of and partner with early stage companies and entrepreneurs.

The funny thing about it is that when we describe what we are up to many folks familar with the history of the venture business have described it as "Venture Capital, back to the future". We take that as a compliment!

I’m hoping to blog about the experiences of starting this new firm, my views on the market and various challenges facing companies, not to mention a few other random opinions. Hope you enjoy.