An Entrepreneur

Internet Startups: 5 Information Arbitrage

Wed, 09 Mar 2011 18:30:00 -0800

In economics, arbitrage is the practice of taking advantage of an imbalance in price between two markets. That arbitrage is almost no risk and short lived.

I define arbitrage as the practice of discovering data and then extracting previously unavailable information from it to create market opportunities. So, in my opinion, the economics definition of arbitrage is just one example of arbitrage. But, to not confuse the two, let me call my definition Information Arbitrage.

Information Arbitrage just provides an opportunity. So, it is naturally more risky. But it is also long lived and can even become your source of defensibility.

To benefit from Information Arbitrage, look for industries where: (Similar to “Data Opportunities” discussed here )

even more data can be generated
data can be captured more efficiently
data can be better analyzed to produce actionable information.
data can be processed faster (real-time)

Internet Startups: 4 Objectivity

Wed, 09 Mar 2011 17:51:28 -0800

Go against convention

Listen to conventional wisdom to understand:

a market and your potential customers and competitors.
the potential flaws in the conventions that you can poke holes in. (convention != disruption)

Example, while Xbox 360 and Playstation 3 were batteling out in the red ocean of graphics and high-def, Nintendo Wii was setting the rules in the blue ocean of casual gaming.

Learn about an industry like a child (Why? Why? Why?). Dont be afraid of asking stupid questions.

But, be objective

Objectivity is what differentiates a disruptive idea from a simply bad idea.
Test your idea in the market with solid research and non-negotiable metrics to make a go-nogo decision. And don’t be afraid to pull the plug.
Example metrics: We will personally work with 10 B2B customers for 3 months. After 3 months, more than 5 should want to pay us to continue working with them.
Example metrics post launch: Are we break-even (EBITDA >= Expenses) after one year? Are we getting customers in greater numbers or cheaper than before?
As technology and consumer needs evolve, will your solution serve a big enough market? Or will the market become big enough by then?

Idea, Execution, Marketing

Sat, 05 Mar 2011 10:54:41 -0800

Idea

Solve a pain (product-market fit).
Learn continuously and early, when the cost of change is small.
Talk to customers - Go where they hang out (For example, if customer is a small startup, go to hackernews and “offer” them a service).
Adwords testing with fake landing pages (simple, to-the-point, get email for prospects).
Be very focused on a niche (Facebook started at just Harvard).

Execution

Do just one thing for customers, but do it very very well.
Fake it till you make it (Simulate some features till they are ready).
You can never make something “too easy”. Assume that reducing every additional step for the customer doubles your customer-base.
Always ask for very basic feedback (For example, Dropbox’s simple question - How’s Dropbox? (a) Awesome (b) Needs work).
How do customers look at your product (hint: not like you do)?

Marketing (and Sales)

Your small customer base may also mean you have a “scarce resource” (Ex, Gmail invites).
Leverage your connection to a bigger trend to get people’s (especially bloggers’ and early adopters’) interest.
Build connections with bloggers today. Help them with something today to get a return-favor next year.
Are you doing enough for your power-users to turn them into evangelists?
Referrals - Encourage word-of-mouth by giving something valuable to the referrer.
Provide easy import functionality from Facebook, Twitter, Email etc.
Understand if your business can really get virality (Do people really wanna tell their friends that they signed up on eHarmony?)
Understand your CAC and LTV.

Internet Startups: 3 Pain

Tue, 01 Mar 2011 23:10:00 -0800

There’s no happy without sad, no good without evil – You need pain as a catalyst to overcome reluctance to change. A pain can be an inconvenience, added cost, missed opportunity, obsolescence etc.

Mathematically, Pain to resolve > Cost of resolving <=> Adoption

You can’t really understand customers’ pain till you really understand your customer.

Making an opaque part of an industry transparent and cost-effective usually solves a pain.

Some questions to consider:

Does the industry have a supply / demand imbalance? (Groupon / Echo)
Is there significant price elasticity?
Is there fragmentation in the market?
Are there too many steps in the process?
Is there little automation in the process? Time consuming, tedious, error-prone.
Is the customer over-paying for something?
Is the customer not making as much profit as she can?
Is the pain significant enough for the customer to pay for it?
Is the customer solving the pain through some home-grown solutions?
Is the market big enough?

More questions to discover articulated customer needs:

http://namityadav.com/post/3166857651/marketing-developing-new-products-3-customers

Note: Replicating a US business (and its business model) in other countries is getting easier because markets, customers, and their pains are very alike everywhere.

Painful industries

Based on the American Customer Satisfaction Index, some industries have been historically bad in customers’ eyes (Their scores in parenthesis):

Newspapers (65)
Subscription TV (66). Major offenders – Charter, Comcast, Time Warner
Airlines (66). Major offenders – United, Northwest, US Airways, Delta
Gas Stations (70)
Social Media (70). Major offenders – MySpace, Facebook
USPS (71)
Wireless Telephone (72). Major offenders – AT&T, Sprint
Hospitals (73)
Health Insurance (73). Major offenders – United Health, Aetna, WellPoint
Internet News (74). Major offenders – CNN, MSNBC

Internet Startups: 2 Data

Tue, 01 Mar 2011 18:06:00 -0800

With all the data available to us today, very few decisions should be based on faith.
Look for industries where data is fragmented and needs aggregation.
(a) Find the decisions and actions that your business has to take. (b) Then find the answers based on which you can take those decisions and actions. (c) Then design your information system to get those answers.
Get data from people & give them something useful in return (Think Google’s services). Data is the currency that runs businesses.
“tackling Big Data will determine the winners and losers in the next wave of cloud computing innovation.” - A GigaOm article.
Data can provide defensibility (Ex, Groupon’s future direction) by acting as a source of customization, uniqueness, innovation, etc.
Data can be used as a marketing tool: OKTrends, Admob Mobile Metrics.

Data Opportunities

Infrastructure - Serve the infrastructural needs of big data. For example, storage, management and security of data in cloud-based systems. Ex, Imperva.
Capture – Collect data more efficiently, cheaply, or from new sources. Ex, Google Analytics.
Structure – Translate and structure data for use / analysis.
Analysis – Extract meaningful information from data that help customers in making important decisions. Future opportunities lie in predictive analysis. Ex, Netflix recommendations.
Visualization – Present data in a simple and friendly way. Ex, Hipmunk, Flipboard.
Real-time – Use real-time data to remove inefficiency and unreliability. Ex, Echo.

Internet Startups: 1 Disruption

Tue, 01 Mar 2011 14:33:53 -0800

Disruption is an innovation that improves a product or service in unexpected ways and lowers price or brings value to a different set of consumers.
Sometimes disruption comes directly from technology. In other cases, it comes from strategy and business models (which may or may not have been enabled by technology).
Disruption may consist of off-the-shelf components put together in a simple fashion to bring value to a new market, or more commonly, to the lower end of the market (un-served or under-served). If the rate of improvement is significant, the solution then moves up-market.
Disruptive solutions initially have lower gross margins and smaller markets.
Example, Digital music’s disruptive effect on music CDs.

Disruption through technology

How can I use technology to disrupt an established industry?
Can I make an opaque part of an industry transparent and cost-effective?
Is the industry fragmented?
What will the customers need one/three/five years from now?
Can disruption be brought through a hybrid of technology and human processes?

Notes:

Use a rapid application development tool to quickly launch a solution and see if/how customers use it.
Define market segments in terms of “different people”, not in terms of “product usage”.

Learnings from Math Shapes game

Mon, 28 Feb 2011 00:14:00 -0800

Here is a summary of the regressions performed on the data we’ve collected on Math Shapes so far. Can not share the regression results for obvious reasons, but most of these are very significant statistically (t-test: more than 4).

13% Parents are interested in a “Reports” feature (They at least take the time to press the reports button once). (( Freemium ))
6.4% Parents press the “More games” section. (( Cross-selling ))
Of all the players who completed the previous game level, only 35% will complete the next level (True for at least the first 6 levels). (( Level-design ))
40% Parents will enter the names of their kids even without trying the game.(( Privacy ))
3.2% Parents want to tell others about the game (Word of mouth is the hardest number to generalize, though). 7.7% of those will complete a Facebook post (ie, take the time to login to Facebook to post your message). That’s 0.2% of all Parents. (( Facebook share ))

Network Structures: 7 Stimulation

Fri, 25 Feb 2011 08:41:52 -0800

Spillover

Is it true that to obtain brokerage benefits, one should build connections with brokers? Many business practices, like mentoring, assume this spillover benefit.
There’s a strong correlation between rewards and indirect network constraint (ie, your connections are brokers).
However a lot of that correlation may be explained by the fact that those having low indirect network constraints also have low direct network constraints. The partial or pure effect of indirect network constraint may be negligible.
Effect of indirect network: Global process - High; Local process - Low; Personal process - Negligible

Stimulation

Agency Question: How much do individuals matter relative to their social structure.
Network advantage is not a result of having the right access. Individual’s reaction to network is the critical performance variable.
Bent Preferences are evaluations shaped by social comparison. What will I get in comparison to what I already have and what my peers have?
Network fear: The feeling of loss as peers overtake you are more severe than the feeling of gain in overtaking peers. However, the feeling of loss fades as peers continue to do well (because they are no longer your peers?).
Brokers are more motivated by gain than fear of failure. Maybe because they don’t have as many direct peers?

Network Structures: 6 Outsider

Thu, 24 Feb 2011 20:10:37 -0800

In business, insider-outsider distinctions manifest in casual conversation as gossip-enforced stereotypes about “those people.”
Outsiders should consider a third kind of network (other than Broker and Closed) — Partner (Hierarchy) network.
In a partner network, a strategic partner lends you access to others/nodes. She is your sponsor, and has a frame-of-reference effect on others.
For insiders, correlations of Rewards and: Network Size (+ve), Network Density (-ve), Network Hierarchy (-ve).
For outsiders, correlations of Rewards and: Network Size (insignificant), Network Density (insignificant), Network Hierarchy (+ve).

(Image: Three kinds of networks: Broker, Partner, Closed)

My Network

Thu, 24 Feb 2011 14:10:00 -0800

LinkedIn’s InMaps is a great tool to visualize your own network. Although when lines appear if one can reject the null hypothesis of “no connection” between two people, you end up getting a lot more connections than reality.

And here is my Facebook Network which is very concentrated considering I gave-in to the privacy hell that is Facebook only when I joined Booth.

Network Structures: 5 Balancing

Thu, 24 Feb 2011 13:58:01 -0800

Balancing Brokerage and Closure - Where

In stable networks, the primary focus of balancing is on “Where”
Performance is highest for internal closure (cohesive group) and external brokerage (diverse external contacts).
This makes “Business Networks” valuable (example, Chicago’s Commercial Club).

Balancing Brokerage and Closure - When

In dynamic networks, the primary focus of balancing is on “When”
The focus on brokerage and closure can be alternated through (a) oscillation or (b) learning-curve cascade (Focus on closure mostly with dramatic shift to brokerage for short durations in between)
Example: University of Chicago’s economists. In-depth research (Closure), Workshops with experts from other areas (Brokerage). The combination makes it a “Nobel Prize Factory.”

Transition from Closure to Brokerage

For both, early adopters and laggards, closure fades more slowly than brokerage spreads. This is because closure is based on existing relationships and lack of structural gaps. The rate of fade is greater with early adopters than laggards.

Entrepreneurial Selling: 5 Doing the deal

Wed, 23 Feb 2011 13:49:16 -0800

Close

Be concise and don’t “talk over the close”

Reset expectations

First day, determine the criteria for evaluating the work. This gives clear goals to focus on together.
Next, send a survey with the criteria that was selected, and ask a few additional questions to further refine it.
Finally, send the last survey. This one will be an in-depth survey, with all the criteria, focusing on the overall experience of the customer so far.

Entrepreneurial Selling: 4 Making the match

Wed, 23 Feb 2011 12:52:00 -0800

Two main points: Determining fit & Proposing

Determining fit

Always open meetings with Purpose, Benefit, Check. Pivot meetings with a “Yes, and” (Think Improv)
The biggest hurdle in a sales process comes between Low-interest and Strong-interest (ie, at the point of determining fit).
Determining fit = Preparation + Great questions + Confirmation
Close ended questions get a “yes” or “no” response. Open ended questions require more thoughtful response. Great questions elicit analysis or feelings.
When you ask great questions, they turn vague issues into concrete needs. They determine consequences of inaction. They mean less talking and still being in control.

Proposing

Sales hurdles are potential deal breakers. Objections are just minor inconveniences.
Sales doesn’t mean manipulation. Sales means finding a match.
Prepare for as many objections and hurdles as possible.
Handling hurdles: Encourage -> Confirm -> Provide Solution -> Check
MathZee’s hurdles and how to handle them:

Unwilling to pay for games - Set up different pricing models, like freemium.
Credibility of math curriculum and its effectiveness - Explain math standards on website, write blog posts, share testimonials and success stories.
Too much gaming for kids - Explain value proposition, qualify better.
Too much time spent on gadgets - Qualify better.
How are you different - Share testimonials and success stories.

Entrepreneurial Selling: 3 Engaging prospect

Wed, 23 Feb 2011 11:38:51 -0800

Two main parts: Lead generation & Qualifying

Getting a meeting: Internal referral (84% success), External referral (44%), Cold email + call (24%), Cold call (20%)

Conversation progression

Sales Trailer: 1 line, PG-13, Fresh, Exciting, Can be purposely vague. MathZee’s trailer: We transform math into interactive play.
What does that mean: 2-3 lines, Differentiators, Value proposition
How do you do this: 5-6 lines, Objections, Story
Conversation

Qualification

In qualification, we are looking for the following information:

Is there an established budget for this? From where is the budget coming?
Is this person the decision maker?
What is the timeline for a decision?
How visible is this project to the leadership?
What risks do they see in this project?
What can derail this effort?

Once it is clear that the prospect does not qualify, stop wasting their and your time and move on.

Entrepreneurial Selling: 3.1 Cold Calling

Wed, 23 Feb 2011 11:17:54 -0800

Cold calling typical hit rates: Talk 12%, Internal referral 5%, Blunt we’re not interested 30%
Be happy. People like to talk to happy people.
Prepare well about the client — their financials, recent news, etc.

Gatekeeper

As soon as you hear someone’s name, say “Hi (name)” so that you remember it during the conversation.
If EA hangs-up with a “We’re not interested,” then call again, “Looks like you’re pressed against time today. Can I send you a short email showing how we can increase your revenue / save your costs, and you can decide if it is worth forwarding to (the prospect)”
If you get the EA on a bad day, “Sounds like you’re pressed against time today. I can call you some other day.”
To skip the EA, try calling very early or after office-hours. Also, try the name directory.
Respect the EA and their time. “Karen, tell me what the right thing to do is — should I send an email to him? to you?”

Prospect

In the first call, your only goal is to have a short conversation and schedule a follow up call or meeting. This indicates that you are not a typical salesman.
Quickly get to the point about how you will save cost or increase revenue for them.
Listen. Try to understand their priorities for the year.
Don’t sell. Let people buy.
Celebrate small victories to be prepared for tomorrow.

Entrepreneurial Selling: 2 Targeting

Wed, 23 Feb 2011 10:50:00 -0800

Example: A startup may have a CRM solution that it wants to sell to companies that have sales teams. They should narrow down to: Companies with sales teams -> Companies with 1-2 sales people -> Web savvy companies -> Web design houses -> NY based.
The top-down market analysis helps startups evaluate opportunities. However, keep in mind that the size of the target market is not the key, the economic value of the problem it fixes is. Example, for a corporate education startup, top-down analysis is: Education market = $1.3T -> Corporate = $65B -> Health-care, Financial services = $9B -> Specific companies = $4B.
The actual sales forecast should always be bottom-up. Example, for the same corporate education startup: Sales resources = 2 (CEO,VP Sales) -> Number of calls & Conversion rate = 100, 10% -> Sales cycle & deal size = 6 mon, $150K -> Annual sales = $1.5M
Targeting is a living process. “All in all, it is easy to see why pragmatists are not anxious to reference visionaries in their buying decisions. Hence the chasm. This situation can be further complicated if the high-tech company, fresh from marketing successes with visionaries, neglects to change it sales pitch.” - Moore, Crossing the Chasm

Entrepreneurial Selling: 1 Introduction

Wed, 23 Feb 2011 10:36:00 -0800

Selling needs a bit of knowledge, a bit more skills, and a lot more discipline.

The six steps of an Entrepreneurial Selling Process:

Targeting
Engaging the prospect
Making the match
Doing the deal
Relationship management
Measurement

Sales Learning Curve

Initiation phase needs a renaissance rep (often the founder). This phase lasts till revenue per sales rep is less than the cost per sales rep. The rep’s focus is on “learning” about the customers, their needs, and how they use our product. The rep needs to have a tolerance for ambiguity, deep interest in the technology, and be resourceful and flexible.
Transition phase needs enlightened reps. This phase starts at the break-even point and lasts till the traction point (for example, when revenue per sales rep is twice the cost per sales rep). These reps should design a repeatable sales model while the renaissance rep continues learning. The sales and unit-economics models should be refined so that by end of this phase, growth can be achieved by simply adding salesmen.
Execution phase begins when the product has achieved traction and there are clearly defined models to begin hiring coin-operated reps. These reps require nothing more than the models, territories, a price book, and marketing materials to bring in orders.

Sales Mistakes

Biggest mistakes that Salespeople make:

Don’t understand client’s business or buying process
Don’t listen to client’s needs
Don’t follow up
Are pushy or disrespectful
Don’t explain solutions adequately
Make exaggerated or inaccurate claims

Social Media Management – Seesmic, Tweetdeck, Hootsuite, Sproutsocial, Postling

Tue, 22 Feb 2011 20:39:00 -0800

As big and small businesses started noticing the growing popularity of social media and its direct impact on the top-line, a new opportunity emerged for the entrepreneurs — “Social Media Management.” Many high profile startups built services that provide a central place to connect a business or brand with the customers in a manageable fashion. To me, social media management means reaching and listening to the customers “wherever they are”. Because of the distributed nature of social media, the need for a central place becomes very obvious. I try to manage MathZee’s presence on Facebook, Twitter, YouTube, etc on a need-basis. However, even for a small business like ours, it becomes very difficult to stay on top of all of them. So, I took a look at some Social Media Management solutions. By the way, I am not sure if “Social Media Management” is the right name for these solutions, because social media is inherently unrestrained, and not really manageable. I prefer the name “Social Relationship Management” that Virtue uses.

Companies like Virtue and Involver ask you to contact them for live demo / account sign-up. They usually target big customers (as their current customer-lists also show) and don’t have a cheap self-service model that would be affordable for small businesses like ours. So, I moved on after spending just a few minutes on their sites and decided to look at Hootsuite, Tweetdeck, Seesmic, Sproutsocial and Postling.

Tweetdeck, Hootsuite and Seesmic are perhaps the three most popular services in this space. I considered Sproutsocial because Lefkofsky and Keywell keep reminding us about it in their brilliant entrepreneurship class at Chicago Booth. :-) And Postling because, well, it was started by the founders of Etsy. Here are the trends for all these companies:

Sproutsocial has no free plan and Postling’s free plan is very limiting. Small businesses are always wary of signing up for a subscription service without a strong proof that they’re getting more value than the cost. First you should prove to the customer that you clearly provide them value V. Only then can you charge them an amount A which is less than V.

So, that left me with the big three – Tweetdeck, Hootsuite and Seesmic. (Sorry Lefkosfky and Keywell)

Tweetdeck

I use various devices to stay connected, and I hate having to install apps on all those devices. So, Tweetdeck’s no web support was going to be a deal-breaker till I saw their Chrome web app. They support multiple accounts, which is always a plus. And they support scheduled tweeting, again a plus. However there is no way for us to add our blog’s RSS feeds to automatically post them on Facebook and Twitter. But the deal killer was that they do not support Facebook pages. Tweetdeck is really a personal tool. It is not meant for businesses.

ps, I hate websites that don’t make it very obvious on the landing page what the business or product is about. I mean, “Say Hi to longer posts with Deck.ly?” What does that even mean? And I hate apps that choose appearance over usability (I am looking at you, white text on black background!). So, Tweetdeck out!

Seesmic

I had high hopes from Seesmic just because it was started by Loic Le Meur. Seesmic supports perhaps the most social media platforms. It also supports most devices, although I knew that I was going to use the web version the most. It was very easy to set up and use. However, I couldn’t add RSS feeds to automatically post on Facebook and Twitter. And I didn’t see support for multiple accounts.

Hootsuite

Hootsuite was a pleasure to use from the beginning. The user interface was well designed, and the entire site made sense as soon as I signed up. They support multiple accounts, but the free version only supports 5 accounts. The pro version is $4.99 per month. Although this may be a deal-breaker for some, this was okay for me. If I find this solution useful enough to have more than 5 accounts on it, then I will be happy to pay the reasonable $5 per month. The free version also has ads, which may be a turn-off for some. Hootsuite supports scheduled tweeting. Finally, the free version supports upto 2 RSS feeds for automatic URL-shortening and posting on Facebook and Twitter, which was sufficient for my immediate needs.

In the end, I decided to go with Hootsuite for the reasons mentioned above. Not only was this exercise of finding the right Social Media Management solution fun, but it also allowed me to act like a SaaS customer and think about my decision making process.

A successful Facebook post

Tue, 22 Feb 2011 17:46:28 -0800

These are some notes that I’ve made from my experience of running MathZee’s Facebook page. A successful Facebook post should:

have an image. Image posts get more response than video or plain-text posts.
be on a weekday morning. A lot of people use Facebook at work.
have very little to read, otherwise the post will be ignored in the stream. The image and title should be explanatory.
provoke the reader to write a comment. Comment > Like > Ignore.
show enthusiasm. People respond positively to enthusiasm.
provide value to the reader. It should not be about how great your brand or product is.
be infrequent. The only time people unlike a page is when they think the page is bombarding their stream.

Network Structures: 4 Gossip

Fri, 11 Feb 2011 23:00:49 -0800

The power of casual conversation

Confirmation bias: People are likely to believe stories that are consistent with their preconceptions.

Socialization: Like grooming among primates, gossip among humans creates and maintains relationships. The information passed is just an unintentional by-product.

Identity: Insiders define and strengthen who they are (the insiders) by negatively stereotyping others who are on the boundary of the group.

Social construction: When insiders have ambiguous information about an outsider, they imitate the opinions of other insiders and create a mental image of the outsider. (I’ve never talked to James, but I know, for sure, that he’s a bad person).