Adam Smith's Blog

How MIT Didn't Prepare Me For a Startup, Part 1

I was at MIT for a few days last week for the MIT Startup Bootcamp.  One thing I love about MIT entrepreneurs is how scrappy and motivated they are.  Compared to the iconic facebook chasing social media west coast entrepreneurs, these guys are Rocky Balboas.  They stay in the game when others would have given up, and they tackle substantive problems.

MIT graduates still come out with several learned habits that will work against them though.  Hopefully I'm wrong and it's just me, and I wouldn't be surprised, but I do think these are more general.

One such habit is to obsess over everything.  At MIT there's a very finite set of material to study at any time in any given class.  The hard core students among us make sure that the curve is attrociously high.  You might spend 20 hours studying a small set of material.

So the onus was on expertness.  Of everything.

This doesn't work in an early stage startup where everyone has to be a generalist and work on seven different projects per day.

You don't want to be an expert in your series A docs.  If you are negotiating the finer points in a legal negotiation, you are losing.

If you are worrying about your computers costing $800 versus $1200, you are losing.

I know the MIT obsessive in you wants to optimize everything, but just don't.

On the other hand, hit REALLY high notes on the important things.=

HubSpot is a startup that's all about bringing new Internet marketing to the long tail of small and medium businesses.  It's a huge opportunity and a huge deal.  Their biggest challenge is educating the 100 million small business owners about this new world.

For HubSpot, educating their market is incredibly important to their success.

So they put on a conference.  Their founders wrote a book.  They've released several free and easy tools like TwitterGrader and WebsiteGrader.  They take this stuff seriously, and they should.  Their MIT'ness is shining through!

So, for folks like me, half the battle is identifying where to hit the high notes and where to swing for the B team.  And when it comes time for the B team, swallow your pride and show 'em how impressively unimpressive you can be.

Some Thoughts: the Online Backpacking Travel Industry

A friend recently wrote and asked for opinions about a web site idea he had.  The idea was "yelp meets international backpackers" - reviews for restaurants, places to stay, etc.  The tripadvisor for post college travelers.

I thought I'd share my reactions, just for fun.  Guessing and dreaming is always a kick!

Howdy,

Rock on dude! I've always been curious about the backpacker traveling industry so this is a cool way to find out more about it.

I looked on compete.com and compared the traffic of hostelworld and couchsurfing. They each get about 100,000 unique visitors per month. Hostelworld apparently has 20 employees based on their home page. I'm not sure if they are all local or international / what their average wages are, but I'd venture to guess that their burn rate is about 2M per year, and I'd guess that their revenue is just north of that...maybe 2.5M or 3M per year, optimistically. If they have 1M users per year (somewhat optimistic based on their monthly traffic, but (a) they probably have lots of turnover in their user base, and (b) multiple people using the site from the same hostel probably only counts as one 'visitor') that's about 2.5 dollars in revenue per user per year (ARPU), which sounds about right given how close they are to the transaction.

Couchsurfing died a couple of years ago in a major data loss and only started back 'recently' so their growth is a little bit misleading. Anyway couchsurfing isn't in the middle of a transaction so they almost certainly have a harder time making money. They ask for donations essentially.

Much better to be airbnb than couchsurfing, if you're in it to build a big business. Airbnb is couchsurfing but with financial transactions. They got started with $15k from the same investors who gave Xobni our first money, so I don't know them but they are very close in my social network.

Anyway, it's just helpful to understand the comparables so you know what you're getting into!

Yelp on the other hand has 25M unique visitors per month, and growing! The yelp CEO mentions international growth here: http://news.cnet.com/8301-13577_3-9884023-36.html. More likely, though, they are more focused on generating revenue from those 25M users much more than growing internationally.

Anyway, I would focus on the following questions:

1) how will you acquire new users?
2) if successful, how will you make money?

The risks there seem large, but they always do at the beginning of any successful venture. :)

Quick Software Company Idea: Remote Real Time Help

Lucky moms have offspring with computer skillz.

These gifted kids often grow up to become adults.  When they do grow up they often use tools like VNC, copilot.com, or logmein.com to remote control their parent's PC when they get the distress calls about, as Joel Spolsky says, half grey screens.

It seems mistaken that remote PC support tools are used almost exclusively by either (a) IT help desks in enterprises, or (b) kids helping out their parents.

Instead, why aren't there services that use computer-savvy in India and these screen sharing tools to help newbies get things done on their PCs?  There could be a big "Get Help" button next to the Start button in the windows taskbar.  Clicking it instantly connects the user with someone in India via screen sharing and voice chat.

The next time these users accidentally minimize ("lose") their browser, they can get instant help and a 30 second demonstration on window management.

If they forget how to download photos from their camera, they get instant help.  Round the clock.

I'm not incredibly optimistic about the size of the market or the existance of cost effective customer acquisition channels.  Those two questions loom the largest in my mind.

If successful, this idea is most likely to become a lifestyle business rather than the next IPO, it seems.

Steve Ballmer, International Security, and Us Little Folk

Here's a snip of consciousness from a late night last week...

It was the first week of my first semester at MIT.  At the time every class was full of excitement from the pass/fail grading, new friends, and fresh love interests.  I went to my political science class, American Foreign Policy, and this one was no different.  I spotted the cute girl from my dorm and took a seat.

The brilliant aprofessor, Stephen Van Evera, started talking about political science as a science.  It’s a different kind of science, he said.  In contrast to physics or chemistry, we’re dealing with:

• Low “n” (few data points),
• We cannot perform experiments,
• Our independent and dependent variables are often qualitative, and not to mention
• If accidents, personalities, and serendipity shape history, how can general theories explain the past?

“Consider Annie Oakley’s central role in world history,” our notes said.  Annie Oakley was a famed rifle shooter; probably the best in the world in the early twentieth century.  She was in Europe and Kaiser Wilhelm of Germany challenged her to shoot out a cigarette he was going to put in his mouth.  She hit it right on target but supposedly regretted for the rest of her life not taking him out.  He was largely responsible for World War I.

In such a science we’re basically left with history to learn from, and history is noisy.  It’s a primitive science.

 

I noticed a parallel when watching Steve Ballmer’s talk to Stanford student entrepreneurs.  Ballmer was talking about business strategy and mentioned a case study about the Kodak-Polaroid wars in the 1970s:

We studied some case about Kodak and Polaroid. And it talked about what the market leader should do versus the weak number two player in terms of how you vary cost and investment, and expenses and business models. I still quote from the darn case all the time to our people in high share businesses and our people in low share businesses.

It’s an interesting case.  If you read it, think through your thoughts and then you can read on the web about what actually happened after 1976 where the case study leaves off.

But more than not I just get the sense that business strategy and international policy are both hard.

For example, I wonder if Ballmer thought he could easily kill Google in 2005.  Again, low n.  Microsoft has killed many companies in the past, but Netscape seems to be the only one of recent memory that was a sizable competitor.  Microsoft was able to beat Netscape but largely because Netscape self destructed with a complete code rewrite and misguided aspirations to kills the Windows franchise.

Well Google isn’t biting that bait.

But most of this doesn’t matter for small time software entrepreneurs like us.  In a USA versus USSR situation you better believe people are doing their game theory and acting at least somewhat rational.

Same thing with MSFT – if they’re doing a bear hug you better believe they’ve crossed their t’s.

Okay, okay – certainly all governments are stupid in some ways and big companies can be too.  But you don’t see countries like the USA running 500% daily inflation rates or razing whole neighborhoods and leaving people homeless, as we see in smaller regimes like Zimbabwe.

That’s where we are, my friends!  We’re in the millions not the billions.  Polaroid and Kodak case studies are less likely to be helpful than making a good product and waiting for your competition to self destruct.

User Counts Considered Apples and Oranges

Pop quiz time!  Sharpen your pencils and put on those reading glasses.

    1. Would you rather have...
 
        A. A company that has 1.5 million active users
        B. A company that has 110 million active
        C. Two million dollars

Smells like a trick question, doesn't it?

In this case (A) is Salesforce, a company with 1.5 million users, all of whom are paying about $60 per month.  They're a public company and currently valued at $5 billion.

Behind door (B) is Myspace, which is probably worth somewhat less, even though they have 73x the number of users.

Behind door (C) was just a distraction meant to throw off your spider senses.

The truth is that unless two companies are in the same space it can be distorting to compare their user counts.  I know everyone knows this in theory, but can't tell you how many times I've heard people compare user base sizes at the meetups we have in San Francisco that we call "parties."

The truth is there are lots of ingredients that mix together to give an approximation of how a company is doing.  The biggest ones include:

• Number of users,
• Value of user demographic,
• Engagement,
• Type of engagement (e.g. work versus entertainment),
• Attrition rate, and
• Growth rate.

Once a company matures and has gone through a few iterations of its revenue generating products, there's another metric that boils down lots of these indicators into a common demoninator.  It is:

• Revenue!

Xobni has many users but is pretty great at many of the other pre-revenue metrics too.  That's why I'm excited to get started with generating revenue!  It's too bad all good things take time; my inner child at christmas is anxious and excited!!

Over and out,
Adam

What Open Source Can't Do

Host software services. This is a pretty big deal for entrepreneurs looking for business opportunities. Let’s look at some examples.

LogMeIn, which filed to go public in 2008 is basically VNC with a web only client side and central servers that will facilitate NAT traversal across firewalls. Various VNC developers had written software to do this but nobody was willing to maintain the servers. That’s created a business opportunity and a competitive advantage against open source alternatives.

Fog Creek Copilot took advantage of the same opportunity, and in this case they actually used VNC software.

What about a place to host your MP3 play history for other people to see and for other software to mine? Audioscrobbler started to do this, but morphed into a startup called Last.fm.

I’m sure open source blogging software was around when Evan Williams launched Blogger.com. …and look what happened to Blogger.  I wonder what percent of blogs today are ran in the old fashioned way: someone went to SourceForge.net and installed it on their shared server, versus using a company set up to host the  blog for them. I’d bet in favor of the hosted service.

It’s too bad, really. There’s no doubt we’d have better software today if open source projects could get servers and operational resources for free. We’d probably all be using an IM client built around Jabber.

But it’s an opportunity for entrepreneurs, and one that will grow in the age of web services and web experiences. Ask yourself: what open source software exists that solves a big problem in a large market?  Can you add value by hosting it in the cloud?

Xobni's Burn in the Early Days

A friend just asked about spending at an early stage startup.  I thought I'd post my response in case it's useful to others.

hey adam - what do you think your personal burn rate has been during these stages:

seed stage
- a dollars / month on rent
- b dollars / month on everything else personal

vc stage
- x dollars / month on rent
- y dollars / month on everything else personal.

Seed stage (a) should be easy; it’s just the rent for your area.  In Cambridge we had a 3br apartment near Harvard Square for $2200 per month, but we subletted out one of the rooms for $800 per month and had Drew working from our living room for about $400 per month.  In Crystal Towers we paid $2600 for our 2br and then we had a stint of working out of my single which was also about $2600 per month.

I don’t know Seed stage (b) as much because I just didn’t keep track.  But I can triangulate based on our out of cash dates.  We were making $12,000 last four months, though that includes some consulting revenue from Matt working a weekend or two per month @ NASA for $55 per hour.  It was super low.  We ate bagels in the morning with cream cheese, and made turkey sandwiches with avocado for lunch.  Dinner was usually the Italian sandwich/pasta place next door.

Our burn was so low partially because we were working so hard.  When you’re working seven days a week for 14 hours per day that leaves little time else to get out and spend money.

Needless to say, we weren’t drawing a salary.  The company was essentially paying for everything.  Our philosophy was that we put our bank accounts into long term storage, like a secret agent on a 10 year mission would.  We didn’t withdraw from or deposit into our personal accounts.

Once VC stage hit we were slow to accelerate burn, which was smart in some ways and dumb in others.  Matt still didn’t want to spend the money for window AC units (dumb).  We raised our salaries to $72k (smart).  We continued to work out of my apartment until we outgrew it by headcount, not by bank balance (smart).

Matt was a champion for conserving cash.  Him plus our lowly roots made us, as a board member put it, “remarkably capital efficient.”

It caused me some cognitive dissonance, though, to see different spending habits WITHIN rounds.  When we were launching at TechCrunch 40 I had a hired hand we flew in sleep on my couch at home, but a year later while we were still series A we wouldn’t have hesitated to put him up in a hotel.  The people in the company had changed; it wasn’t related to being in series X.

So I guess to answer your VC stage (a) we got a lease for 3200 sq ft for $5000 per month by looking on craigslist.  A steal.

For VC stage (b), we paid all personal expenses by salary.  The salary could be low because we were working so much of the day.

That’s the prevailing effect.  High salaries in a startup are probably exactly correlated with low time in front of a computer.

First Reactions from Salesforce Expo

I felt like I was entering another world today when I walked into the Expo floor at the Salesforce “Dreamforce” conference.

The expo is a room full of vendors that are trying to sell their solutions to Salesforce users.  I was certainly the most underdressed person in the room.  Everyone was in suits, and I was reminded of the cultural rift between sales and tech people.

You can tell how alienated these two groups of people are by listening to how they talk about one another.  One person giving me a demo of their solution said “Then we let Todd loose on the problem!”  If one group has some amount of disrespect for the other, it’s probably the developers with regards to the sales guys.  Sales people certainly respect programmers, even though they don’t understand what they do.

But the Salesforce conference is the land of the sales guy.  I find it both intimidating and exciting.  They have energy and enthusiasm.

Unfortunately they seem to be hurting when it comes to innovation.  I twittered that ninety percent of the solutions venders were either very labor intensive businesses (consulting) or were selling software that ended up creating more work for the user.

For example, there was a software company that helps you bring your email conversations with customers into the salesforce database.  This is a hole in the salesforce workflow, for sure, but their solution was a little convoluted.

Each user had to forward incoming email to this system, and BCC the system on all outgoing emails.  They have an Outlook addin that will automatically BCC the system on your outgoing emails.

Then there’s a tab in the Salesforce UI they add for you to create contacts around new, unknown email addresses.

It’s all very convoluted.  It doesn’t “just work,” yet most of the offerings of 3rd parties had this flavor.  I think that’s why there’s a long tail of vendors; nobody dominates because nobody is adding value in a systematic, high quality way.

I can also understand why.  Most products for sales people are driven by sales people to begin with, and most sales people don’t have good product and technical instincts.  Most people who have those instincts don’t understand sales people, and they especially don’t understand sales managers.  It’s all very depressing, but exciting at the same time.  There’s a lot to be done.

Early Stage Investors, Getting Deals Done

This post is a response to Matt Maroon's post today called Poker People. Matt talks about how straightforward poker players are with each other as compared to Silicon Valley investors.

I've been listening to this song by Kanye West called Last Call. It has a nine minute outro where he tells the whole story about how his career took off. It's worth a listen / read the lyrics. (We can mix things up a bit, right?)

Kanye went through a lot of struggling and many of his deals fell through. It sounds like the rapping industry, like early stage investing, is not as straightforward as the poker world. Just interesting as another data point.

Early stage investors are definitely in a hostile environment. The signal to noise ratio is remarkably low. I was speaking with a VC the other day who said he reviewed 1000 business plans in the last year. Imagine that!

It's no wonder that investors take their time. That said, I do agree with you that negotiations are often fumbled. I've never met Ram Shiram, but he seems like an upstanding guy:

"Unlike most investors (who wait a week, talk to their friends, bring you back for multiple meetings), Ram said 'Okay, I'm in' before I was done with the presentation."

- The Mint guys

That said, Ram had the advantage that he was coming after another round was recently closed, so Mint already had social proof.

Paul Graham, as you know, is also upstanding. Don't know about Sequoia, though I'd expect them to also be straightforward. Same story with Fred Wilson; I haven't convinced him to invest in me yet but he seems like a genuine and straightforward human.

I've also been reading and listening to lots of Warren Buffet, and he also seems to think heavy negotiation doesn't matter. He invests in companies for a lifetime, so he understands that business fundamentals are more important.

I don't know effective strategies for getting investors to be straight up with you. Probably

(a) having a reputation / not a first time entrepreneur / being a known quantity that they'll have to contend with in ten years,

(b) being likewise straightforward with them, and letting them know that you don't want to negotiate heavily, e.g. offer terms that you think are fair and indicate that you think they're fair and you don't expect to end up with something substantially different, and

(c) picking a lead investor who's a minimalist when it comes to negotiation and letting others invest on pre-negotiated terms.

Good luck!

The Most Inspirational Part of Andy Grove's Autobiography

...is when he is a refugee in Austria, escaped from Hungary. He badly wants to go to the United States. I can relate; there have been three or four times in my life when I really wanted something, in the way that you dream about it every night and you put infinite care into every part of getting it. Applying for Y Combinator, to start Xobni, was one of those times for me.

For those of you unfamiliar with Andy Grove, he was the third employee at Intel and its President (and later CEO) for over twenty years. He's a prolific thinker and businessperson in the valley.

Andy is 20 years old. He had just interviewed with American students from the International Rescue Committee (IRC). These students are picking refugees to bring to America based on English skills, education, etc. He was to find out the results the next day...

"They had read off a list of names. According to people who heard the list, I wasn't on it.

I felt as if someone had socked me in the stomach, then my heart started beating so hard that I could barely breathe. "Where are the IRC people now?" I asked. Someone said they were conducting another series of interviews at a school some distance away. I took off like a madman. I ran all the way through the cold, dark streets. My heavy shoes hurt my feet as I ran, but I didn't care.

Sweat was pouring down my face by the time I reached the school. There was a familiar long line of people waiting to be interviewed. I didn't wait. As the next person emerged from the interview room, I brushed past the person whose turn it was supposed to be and pushed in to stand in front of the table.

The IRC representatives were a different group of students than the ones who had interviewed me the day before. They stared up at me blankly. I didn't give them time to stay anything. I swiped the sweat off my face with my hands and, still panting, started talking in English as fast as I could.

I explained that I had been interviewed yesterday, that I was not selected, but that I really, really wanted to go to the United States. One of the interviewers asked me why. I told him I had relatives in New York City who would take me in, that I was a chemistry student, that I thought I would become a good chemist, and that I belonged in the United States. The words poured out, not eloquently or coherently, but I talked and talked as if I could overwhelm their objections by the sheer volume of my words. I almost didn't dare to stop talking, but finally I ran out of things to say. I stood there, panting slightly and still sweating profusely.

The students looked at each other and smiled, then one said, "Okay, you can go to the United States."

I was speechless. I couldn't believe my good fortune. I wanted to hug every one of the young men sitting on the other side of the long table."

User Bases, Pricing, Revenue, and the Value of Users

Suppose you wanted to make $1 million per month by selling software. You can either go for a few lucrative customers or lots of low paying ones. A half minute in Excel and you have a table.

Dollars per user per month		Customers needed for $1M / month
$1		1,000k
$5		200k
$10		100k
$50		20k
$100		10k
$1,000		1k

Ten minutes in MS Paint and you’ve got a nice graph.

The sweet spot for high margin software offerings seems to be in the sub-$10 per month range. Rhapsody charges $13 per month. Yahoo Mail is $1.60 per month. Mozy is $5 per month. [1]

Enterprise customers pay in the same range for commoditized products. MS Exchange costs about $10 per user per month. FogBugz costs $20 per user per month. I’m sure enterprise antivirus is a brutal market for providers, but I don’t have numbers because they don’t have public pricing.

Enterprise customers are willing to shell out the cash in non-commoditized product categories, though. Salesforce.com charges about $100 per seat per month, but they’re going to have to drop their prices soon because of pressure from Microsoft and others. Bit9 is a new kind of enterprise security, so they’re set for a couple of years.

Anyway, so this is the range we’re interested in:

How do we get 100k paying users? Just for fun let’s assume that you have a freemium model. Most users aren’t going to pay, but some will because they get the bike horn that makes the moooo sound.

The rule of thumb is that about 1% of free users will convert to paying customers. The number varies greatly by vertical, product, etc., but let’s just go with 1%. Some quick math and you have another table.

Dollars per user per month	Paying customers needed for $1M / month	Users needed, 1% conversion
$1	1,000k	100 million
$5	200k	20 million
$10	100k	10 million
$50	20k	2 million
$100	10k	1 million
$1,000	1k	100,000

So if you charge $10 per user per month, and 1% go premium, you need 10 million users to hit $1M in revenue per month. For reference, Outlook has 500M users, Skype has 200M users, and Thunderbird has 8M users.

Skype had about 50M users when they were bought. At that time there were about 4M people simultaneously online, so only a fraction of those 50M were active. Why did they get bought for billions? My guess is that a large portion of active users were paying customers. They were obviously still in growth stage. They also enjoy high margins and had recurring revenue for each user.

So what would $1 million of revenue per month do for you, anyway? $12 million in annual revenue, to be sure. Beyond that you’re back in the land of heuristics. Google has a P/E (price to earnings) ratio of 50. If you got the same ratio with margins of 50% then your company would be worth a nice $300M.

Margins vary hugely by business. Grocery stores get about 2% margins in a good year. Software, luckily, traditionally has high margins because the cost of supporting an additional user is so low. 50% sounds extreme, but consider Skype. They don’t have infrastructure costs, and they probably have no more than 50 or 100 people. That’s the kind of company Xobni can be. This 50% margin on $12M annual revenues can support a burn rate can support a head count around 30 or 40 people. That’s not a bad place to be when you hit the $1M per month milestone.

Other public tech companies have similar but not higher ratios. Redhat is at 65, Yahoo is 50, Sun is 40, Oracle is 30. Microsoft is 20, but damn do they have lots of revenue! Salesforce.com is 1053, but until recently was infinite. They’re still selling the dream.

These numbers can end up all over the board. Zimbra sold for $350M on revenues of about $15M, and probably way lower profits. The list goes on. Growth and strategic value to acquirers seems to have the biggest impact. [2]

With some more elementary school math, we can use these numbers to derive a value per user. An average user on the $10 per month row gets us ten cents per month, or $1.20 per year. That’s sixty cents of profit. With a 50 P/E ratio, that’s $30 per user, not far from Fred’s numbers.

P.S. Xobni is hiring. We are currently looking for great software hackers and a senior QA lead.

Notes
[1] The sad part about these prices is that both Rhapsody and Mozy are low margin businesses. Rhapsody is net losing money per user. Yahoo Mail is a high margin business, but it doesn’t matter because the price is so low.
[2] If you want more examples, look here for a list of MS acquisitions, and have fun googling.

Raising Money, Post Script

I forgot an important thought in my previous post, Raising Money.

Sam Altman: "Every morning wake up and say to yourself: 'They need me more than I need them.' Entrepreneurs are the limiting reagent in the startup equation, not investors."

Oh so true.

I previously wrote to upcoming Y Combinator companies about:

1 - Having courage to face reality and change direction as appropriate

2 - Raising their next round.

My Startup Age

My startup self was born on March 14, 2006. It started asexually, created by its only parent, Y Combinator. I was such an infant. I didn’t know how to do anything other than write code. I could write code really well, but that was it.

During my early years I ran into walls and tripped on toys. We spent five months making a product that nobody really wanted. We missed a key hiring opportunity. I was the only one doing software development.

My teens were filled with growing pains and an identity crisis. Talking to investors constantly, doing a financing, setting up an office, and starting to act like a “real” company. *Wince*

My startup persona is a little older now. I’m learning more than ever, and making more mistakes than ever before. But I am taking more measured risks and making fewer rash decisions. I have some familiarity with the startup world, and have an easier time facing reality. I feel like I’m in my early twenties startup wise. There’s still a long way to go, and it will probably never stop.

People like Paul Graham, Josh Kopelman, and Rob Hayes have been around a while and pretty much know how to kick ass at everything. They’re senior citizens.

Vinod Khosla is 100 years old. You know he knows how to do everything, from chasing ladies (raising money) to retired travel in foreign countries (sitting on the boards of Fortune 500 companies).

I might be completely off the mark when I say I’m in my startup early twenties. Making a statement like that is a huge risk. There’s a reasonable chance that I’m way off the mark, and that five years from now I’ll be laughing at myself. But, hell, guessing is fun.

What You Should Be Measuring

The first screen on any web analytics package is visitors over time. That’s a horrible graph! Traffic over time is really produced by two forces, new visitors and stickiness. These two forces are what really matter.

Stickiness
The left and right graphs below are the familiar visitors over time. The middle graph is stickiness; it says how long the average user continues to visit. For example, the blue line expresses that five days after their first visit, only 10% of users are still coming back. The magenta line is better; five days after their first visit, 70% of users are still visiting.

Three Web Sites Imagine three web sites – blue, magenta, and black.

Blue is a photo social networking site that requires visitors to sign up before seeing anything. The average new visitor sticks around for 0.13 days, so their Total Visitors closely resembles New Visitors. A couple days into launch they meet with investors and yell “Look! We’re getting loads of traffic!” The traffic is all from Digg, TechCrunch, and Reddit, though; pretty soon they will be old news and their traffic will die, as seen on the Total Visitors graph.

The best stickiness you can get is a constant 1.0, right? Then you would retain all of your traffic and total visitors would be the integral of all new visitors over time. [1]

No, you can do better! Black is facebook. Not only does the average new visitor stick around, but she brings friends and your traffic explodes! (2009 update: the cool kids are now calling this a "viral coefficient".)

The median web site is actually worse than all three shown here. The median TechCrunch'ed web site will have 5% of new visitors show up the next day. It's a sad state of affairs.

The Secret
The secret is that New Visitors aren’t that hard to come by. If you’re a startup building a web site, you can get coverage on blogs. If you have the right luster you can get on Scoble, The Today Show, and ABC Nightline. If you’re in a boring market then you can use adwords. If you’re competing with Girl Scout cookies then you can hang a sign outside the Safeway.

It’s easy to get excited by huge traffic spikes when you first launch. You haven’t accomplished anything, though; tomorrow the spotlight will be on another startup. You need both new visitors and stickiness to build a successful business. Stickiness is harder to get, but nobody measures it!

What This Means
All subscription businesses run on one metric – Average Revenue Per User (ARPU). [2] When a decision is to be made, the first question to ask is How will this affect our ARPU?

If you’re building a web site, stickiness should be your key statistic. You should write code to measure it before launching. After you have launched, put it on an LED display outside your elevators.

Announce it at all of your meetings. When making a decision, ask How will this affect our stickiness?

And actually measure and follow up! You make what you measure.


Stickiness Built In
Some products have stickiness built in. Social networks encourage you to bring in your friends. Desktop applications have a persistent presence after being installed, so the user doesn't have to remember a web site name. PayPal has some of your money in your PayPal account, so of course you'll come back. Interesting writers like Joel on Software or Paul Graham promise to give you new thoughts occasionally, so you're compelled to always come back. And so on.

So, how can you make yourself stickier?


Notes
[1] The math is simple; total visitors is just the convolution of new visitors and stickiness. For those who had the delight (or misfortune) of a Signals and Systems class in college, this is just a system where new visitors is the input and stickiness is the impulse response.
[2] Thanks to Joe Kraus for the example.

Visceral Advice

I’m now sure that most advice is wasted.

I’ve ran into several problems recently, after which I thought Gosh, so-and-so’s advice was right! The problem is that I never remember so-and-so’s advice when I’m actually in the situation. There’s a bug somewhere between hearing the advice and recalling it in the situation.

I’ve been trying to fix this bug. I’m going to try to imagine two things whenever I hear advice: the experience that generated it, and myself in a situation that calls for the advice.

I think this exercise will help me generate better questions for the advice giver, too.

Startup Advice and Lookup Tables

(This post is partially derived from some things I said at Startup School 2007.)

Startup founders really need advice, especially first timers. It’s like you’re put in a big dark room with booby traps, and your only hope of survival is to draw upon the wisdom of those who came before you.

The good news is that you’ll be bombarded with advice. It comes from everywhere – investors, advisors, blogs, books, users, and rap artists. [1] Most startup advice, though, is not relevant to your current situation. You might be thinking about finding a cofounder, but the blog you’re reading is discussing corporate bylaws.

What you’ve got to do is build up a hash table in your head to store the out-of-context advice. The hash table is a map from situations to what you should do in each situation.
The person giving advice has a hash table in their head, mostly built by learning the hard way. The point of advice is to copy their hash table over to your hash table. [2] This copy is very hard to do. How can you internalize all of that knowledge?

I can give you two hacks.

First, use repetition. Download the audio versions of Paul Graham’s essays, burn them on a CD, and listen to them over and over again. Read books once, identify the ones you like, and then read those again and again, every six months.

The second hack is to get the stories. Punch lines are harder to remember than plots like “We faced this problem, chose this action, and it blew up.”

My two favorite startup books are 100% stories. Jessica Livingston’s Founders at Work is filled with interviews of successful founders recalling the Good Ole Days, in full color.

My other favorite startup book is High Stakes No Prisoners by Charles Ferguson. [3] It’s the story of Vermeer, the company that made Frontpage and sold to Microsoft for $140M. The book is only moderately insightful; it is a real win because Charles tells the story in gross detail. He names names, and trash talks everyone for their ugly actions, including himself. It’s remarkably raw.

No Storage
Of course, the real win is if you don’t have to do the hash table copy from books and other data sources. Instead, when you face a challenging situation, just ask your advisors. Essentially, do a lookup in their hash table instead of making a copy.

Having access to these kinds of resources is incredibly valuable. It’s yet another reason that you should be in Silicon Valley to start a startup: experienced advisors are at hand. [4]


Notes
[1] For example, Master P relates some wisdom: “Nigga told me, ‘C, leave that dope, cause rappin is yo thang.’”
[2] This blog post is an example of such a transfer. Most of my thoughts are unoriginal, though, so you’re getting a second hand copy.
[3] Used copies are available on Amazon for seventy nine pennies.
[4] Having great investors also helps. And, okay, maybe Boston qualifies too. : )

Why programmers are bad at spin

Programmers survive by paying attention to the ugliness in their code. If you wake me up in the middle of the night and ask what I’m dreaming about, I’ll probably tell you what the three ugliest parts of our code are, and how I’m going to fix each of them. So when someone asks me about the code, my instinct is to describe the bugs. They’re just the first order of business! I think that’s why programmers have a hard time putting a positive spin on things, as compared to salespeople. We have a natural tendency to look for and focus on the things that are not perfect.

The Life of an Entrepreneur, in 33 Seconds

I was listening to my MP3 collection, and heard one of the theme songs from Aladdin. Its lyrics at the end of the song personify the life of an entrepreneur:

One jump, ahead of the hoofbeats,
One hop, ahead of the hump,
One trick, ahead of disaster,
They're quick, but I'm much faster!

Here goes,
Better throw my hand in,
Wish me happy landing,
All I've gotta do is juuuuuuuump!

Here's the audio: One Jump Ahead

Reinventing Ideas

About two years ago, I was in the shower. [1] I had an idea: genetic algorithms modify data so as to optimize for something you care about. Lisp encourages programmers to think of programs as data. Why not use genetic algorithms to find the optimal program to achieve something? For example, find the program that is the best at playing checkers! [2]

I enthusiastically proposed the idea to my machine learning professor at our next meeting. She said Ah, that’s a great idea. It’s called evolutionary programming. People have written PhD theses on it. They haven’t gotten much traction because the search space is way too large, unless you’re working on a small problem with a specialized programming language.

Well, then.

I felt proud to have thought of the idea, but moreso I felt disappointed that the idea had already been explored and found fruitless.

Whenever I have a new idea, I find myself hoping that I’m the first to think of it. You've got to check with alumni, though, to make sure you're not spending cycles rediscovering something that's already known.

We've met several times with Eric Hahn to discuss what we're doing. Eric is the universally acknowledged email expert in Silicon Valley. He did cc:Mail, Lotus, Netscape, Lookout Search, and probably a few others. He has been a great source of wisdom when it comes to our product.

The other lesson from this experience? Take plenty o' showers.

Notes
[1] Okay, wise guy, not that that was my last time to take a shower..
[2] Paul Graham has spoken to this exact method of coming up with ideas. It's actually kind of eerie. He talks about making familiar mental gestures against a new substrate in the shower. In my case, I was in the shower, thinking about programs as data, and the genetic algorithm gesture got invoked.

Y Combinator, Should You?

I encourage most startups or would-be startups to apply to Y Combinator, our first investors. Most people are really excited about the possibility of getting YC funding.

Of the people who are lukewarm, the number one objection I hear is that the valuations are too low. The number two objection people give is that "We’re too late stage for them."

Baloney.

When someone says that the valuations are low, they're comparing YC to a traditional investment. The rule of thumb usually doesn't apply because the stage is super early (more on this later) and YC isn't investing very much. But even from a higher level, valuations are a tactical matter; you should be thinking about grand strategy when making this decision. If Y Combinator funding increases your expected outcome by 2x, you should be willing to give up 50%, right?

I have a lot of empirical evidence about the entrepreneur’s upside so far. On average, Y Combinator will increase your expected outcome by at least 5x. They usually take 2-10% of your stock in exchange. That's a great deal! (I think it’s really 20x or higher, but I’m being on the safe side.)

How do they increase your outcome so significantly? It’s not about the money at all; it’s about the advice and connections. These things seem fluffy before you’ve experienced their significance. I applied to Y Combinator mostly to be around Paul, not to get introductions to important people. I didn’t have any use for important people. Boy, have things changed. I can also say very empirically that the network really matters. More details and proof on that in a few months.

YC doesn’t just casually introduce you to investors, reporters, and potential employees. They really work their tails off to make it happen. Your job is to only give equity to people who are going to contribute to the company. You don’t want to give shares to investors who are just going to give you money and not help you out. You want to give shares to investors who will give you their cell phone number, who will write emails to recruits encouraging them to join, and so on.

I mentioned that YC also gives you great advice. There was a YC dinner last summer when we went to Paul and said Paul, we're ready to launch. He said, very simply, No you aren't. I went home demoralized. As Steve Jobs said, It was awful tasting medicine, but I guess the patient needed it. We weren't ready to launch.

I could go on and on about this, but I’ve got to get to work on the second objection: We’re too late stage for YC.

This objection might be true for some. YC doesn’t invest in $20M series B rounds. Usually, though, I hear this retort from people who have been working on the product without funding for one or two years. They’ve built a lot of technology, and are afraid that their valuations won’t reflect that.

I can see why people might think this way. For years YC’s web site said that they take 5-7% of the company. Only recently did it change; now it says 2-10%. (You can use the Internet archive to see old versions of their site.)

What’s going on here? YC is seeing more teams that have already made something, and they’re accommodating those situations. Their #1 goal is to work with great people and companies, not to own the largest possible percentage. So, no, you probably aren’t too late stage for them.

The founders of Weebly were working on their site for a year before taking YC money. They were on TechCrunch the day of their YC interview. They still took the money, and I am sure they haven’t regretted it.

Top Mistakes in Year One

Sam Altman from loopt was the speaker at the Y Combinator dinner last night. (Sam is a close friend and one of the best entrepreneurs I know.) During Q & A, Paul Graham asked: “What do you wish you’d known when you were at these guys’ early stage?”

I asked myself the same question. What do I wish I could tell my past self?

I think we’ve done a great job so far. That being said, if I had known these things when we began, Xobni might be worth twice its current value.

Equity
First, offer significant equity to rock stars you find early in the company. When we met Gabor Cselle in August, we were in love. We asked our friends how much we equity we should offer, and the feedback was all over the board. We took the wrong advice and offered him too little.

We recently corrected that mistake, and Gabor is now joining the company about seven months later. I’m really happy about this, but we left a lot of value on the table by not getting him earlier.

Conflicts of Interest
Matt and I passed up three introductions to a VC firm because of their investment in another email company.

The truth is that there are going to be other companies in your space, but if they’re not competing directly then it might be foolish to turn down a meeting with their investors. As John Doerr said, “No conflict, no interest.”

We eventually realized we were wrong. We took the fourth introduction, and haven’t regretted it. So don’t be so paranoid about conflicts of interest as long as you’re not a direct competitor.

Idea Due Diligence
We knew we wanted to leverage hidden email data. The most obvious thing to do with hidden data is to display it with graphs and tables, so we spent the first six months working on that product.

It turned out that Xobni Analytics didn’t generate enough recurring value for individuals. Whoops.

We didn’t know how to judge an idea, so we started with the most natural idea. Instead, we should have forced ourselves to answer “Why do people want this?”

This goof only slowed us down by about 30% because we used bottom up programming. Most of those six months were spent building out the baseline platform that we’ll need for any product in our space.

Saving Grace?
The common theme of these mistakes is that we eventually woke up and recovered. I’d love to say this implies that we’re brilliant at spotting our mistakes. Instead I’m compelled to ask myself: what big mistakes are we making now that we don’t know about?