January 30, 2011

66) SV Angel & Y-Combinator

危 wēi  danger

Y-Combinator, a startup bootcamp of sorts, provides seed money (generally less than $20k), advice, and connections to startups.  It has grown rapidly since its launch in 2005 and has had some high profile wins, including Posterous.

But the news this weekend that SV Angel and Yuri Milner are offering every Y-Combinator startup $150,000 in convertible debt, with no cap and no discount is still surprising.  Convertible debt is a common tool for early stage investment because it allows deferral of tough valuation decisions but investors usually include clauses to ‘sweeten’ the fact that they are investing earlier, for example a discount on equity at later stages and a cap on the valuation of their equity.  In this case there are no such clauses – there is no discount or ceiling whatsoever.

SV Angel is offering all 40 startups in this 3 month Y-Combinator cycle a free $150k loan.  Why would an investment firm ever offer such a large investment to 40 startups, some of which it presumably knows nothing of, with no preferential terms for investing earlier?  Surely this is investor suicide?

机 jī opportunity

The more I’ve thought about it the more smart I think SV Angel is being: this deal is all about access.  Paul Graham, the founder of Y-Combinator has always said “This is a hits driven business”, and SV Angel’s offer gives it access to the ‘hits’.

Counter-intuitively, the generous terms really help with this.  If the firm was offering onerous conditions surely only the least promising startups would accept the investment and the ‘hits’ would slip through the net, a sort of negative selection bias.  However, under these terms I imagine all the startups will take the investment.

So, this offer effectively becomes a broad bet on Y Combinator startups, and a means by which to access the ‘hits’ (and potentially invest in them in subsequent rounds).

When Y-Combinator launched in 2005 it invested in 8 startups, in the current cycle there are 40 – this growth rate and the high profile ‘hits’ to date , including Scribd, reddit, Justin.tv, Dropbox and Posterous make this a smart bet.  The offer may even improve the outcomes for Y-Combinator startups if it enables them to focus on the important stuff, like finding a business model, rather than worrying about fundraising.

How About…

  • Remembering to look for the hidden cost of driving a hard bargain – are you creating a negative selection bias?

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Techcrunch article here

November 29, 2010

65) Dropbox Votebox

危 wēi  danger

I’ve written about Dropbox before here.  The file storing, sharing and syncing service is great, not least because of its simplicity.   In fact, I often reference it as an example of a company that did a great job of launching with ‘just enough’.  Too often companies kid themselves that they need more features, often to avoid launching (a strange defense mechanism?) or addressing negative feedback.  I’m not alone in loving the service, Dropbox now has more than 4 million users and its reach is truly global, as shown by this cool video showing its client activity:

With this success the feature requests came flooding in via email after launch, how would Dropbox ever be able to prioritise the right features?

机 jī opportunity

Dropbox’s solution is Votebox, a section on the website that lets users suggest and vote on what features should be developed next.  Votebox retains the simplicity of Dropbox while doing more than a basic forum – it enables users to nominate new features and vote on those that they would benefit from most.  Dropbox allocates regular users 6 votes per month and ‘premium’ users 9 votes per month.  Votebox also makes clear what the team is working on and celebrates new features launched.

The system is effective because:

  • Dropbox only works on the features most beneficial to its users
  • It stays true to its premium users (by enabling them to have more votes it ensures that it doesn’t just cater for the needs of the non-paying users)
  • It shares what it’s working on, reducing duplication of requests
  • The commenting feature enables debate by users, iterating feature ideas
  • Finally,  it acts as a marketing tool – reflecting the company’s continual development and often referred to by existing users – a quick Google search for ‘Votebox’ shows the number of users trying to drum up votes for their feature request.  @Dropbox:  why not make this easier and allow people to ‘share’ their requests and votes through social media?  Ironically, should I have put this idea on Votebox?

How About…

  • Remembering to only ever launch with ‘just enough’?
  • Creating an intuitive system for users to offer feedback and feature requests? GetSatisfaction (more consumer facing?) or ZenDesk (better as an enterprise solution?) might  offer simple solutions
  • Assigning importance to different user types?

—

October 25, 2010

64) The 4-Hour Workweek: Escape 9-5, Live Anywhere, and Join the New Rich

危 wēi  danger

Timothy Ferriss, an American writer, educational activist, and entrepreneur wrote a semi-autobiographical self-help book in 2007 that was well received by friends and family.  Ferriss’ working title, ‘Drug Dealing for Fun and Profit’, wasn’t as well received.  He decided to proceed with the name anyway, liking it because it polarized opinion.  However, once he had secured distribution, Wal-Mart vetoed the title’s use so Ferriss was back to the drawing board.  He found it relatively easy to whittle the list down to 12 but found it tough to select a final name: everyone had an opinion on the best, including his agent and distributor but none agreed.  Surely he would be best going with his gut feel and upsetting either his distributor or agent?

机 jī opportunity

Instead, Ferriss decided to look for some data. He took 6 prospective titles that everyone could live with:  including ‘Broadband and White Sand’, ‘Millionaire Chameleon’ and ‘The 4-Hour Workweek’ and developed an Google Adwords campaign for each.  He bid on keywords related to the book’s content including ‘401k’ and ‘language learning’: when those keywords formed part of someone’s search on Google the prospective title popped up as a headline and the advertisement text would be the subtitle.  Ferriss was interested to see which of the sponsored links would be clicked on most, knowing that he needed his title to compete with over 200,000 books published in the US each year.  At the end of the week, for less than $200 he knew that “The 4-Hour Workweek” had the best click-through rate by far and he went with that title.

His experimentation didn’t stop there, he decided to test various covers by printing them on high quality paper and placing them on existing similar sized books in the new non-fiction rack at Borders, Palo Alto.  He sat with a coffee and observed, learning which cover really was most appealing.

My colleague in New York, Joe Gerber has been using this approach recently with real success, it’s a reminder to me that every part of a business (including the virtual) can be prototyped.

How About…

  • Prototyping every part of your business before launch?
  • Placing advertisements into existing online networks before launch for feedback?  e.g. as Joe says how about using Foursquare to figure out “if this is worth stopping for?”

—

source video: http://vimeo.com/3934635

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