The Brutal Economics of Running a Startup Accelerator
Note: A version of this post appeared in my semi-regular column on AlleyWatch.
Startups, ever wonder what it’s like on our side of the curtain?
The topic they asked me to speak about was the economics of running an accelerator program. So if you ever want to know what keeps us up at night, here’s your chance:
The Three Dimensions of Pain (Points)
Note: A version of this post appeared in my semi-regular column on AlleyWatch.
“You need to sell painkillers, not vitamins.”
I’m sure you’ve heard that one before. Vitamins are nice-to-have; painkillers are must-haves. Vitamins are hard to sell; painkillers are (relatively) easy to sell.
But have you ever really stopped to consider what pain is? It’s not as simple as it sounds. In fact, there are at least three dimensions of pain you should understand.
The first dimension is intensity. Is it a hangnail or did you just smash your thumb with the hammer? Because fixing a hangnail is never going to make your customers’ top 5 priority list. And given how time-starved we all are and how many excruciating problems we might have, most of us will never make it to item #6.
Most home automation solutions I see fall into this bucket. Turning your bedroom lights off from your office just isn’t a pain point for most people. The same goes for adaptive lighting solutions that vary brightness and color to fit our circadian rhythms better. While the health benefits are real, for most of us, a cup of coffee in the morning and manually turning down the dimmer at night seem to do the trick just fine.
One of the reasons Twist is so compelling is that it hijacks a real pain point with its wireless speaker embedded light bulbs. Wireless speakers rarely are genuinely wireless – you still need electricity – but Twist solves that problem by screwing right into a light fixture and gives you healthy lightning and the backbone of a home automation system as the cherry on top.
The second dimension of pain is prevalence. How widespread is this pain point? Many founders I meet are passionate about the problems they solve because they lived it themselves. This means they are intimately close to their customers… except when they are the outlier. If the pain isn’t shared widely, your market size deflates like a leaky balloon.
Find-a-roommate apps generally fall into this bucket. For young founders in cities like New York & San Francisco, this can be a real problem but it’s irrelevant to married couples and in most cities where the cost of living makes renting your own place affordable. Plus, most singles have friends so finding a compatible stranger isn’t necessary. ** It is a testament to how valuable intent to move data is that these apps get any attention despite the limited prevalence of the pain point.
** I wonder if founders who gravitate to these kinds of apps tend to be less socially connected?
Most of the civic engagement solutions I see also fall short on this axis. The founders are often very engaged in their local communities and don’t want to miss out on pubic hearings about zoning, municipal services, etc. Most of us just don’t care. The vast majority of citizens cannot even be bothered to vote in local elections.
What made PublicStuff and New York City’s 311 call-in service (now an app as well) successful was that they found local issuers that we all actually care about – fixing the pothole on my block, seeing if I can leave my car where it is because alternate side of the street parking is suspended due to some holiday I’d never heard of (but now suddenly love). These are prevalent civic problems.
The third dimension of pain is frequency. The classic edtech example is finding the right college. A near universal, massively intense pain point with lifelong repercussions… but it only happens once in a lifetime.
In real estate, the equivalent is services that make buying or selling your home more efficient or that help you get a better price. Selling a home is incredibly stressful and one of the largest financial transactions in most people’s lives, this is an 8 or 9 on prevalence and takes intensity to 11 but it only happens a few times in your life. The implication is that finding the customer will either be difficult, expensive, or both. This is why real estate brokers can pay over $100 per click to Zillow for leads on clients in prime zip codes.
So if your startup fails on frequency, you’d better have creative, scalable ways to acquire customers or ways to monetize those customers so much better than your competition that you can afford to outbid them.
Ideally, your startup scores high on all three dimensions. At worst, you score very high on two and have a sound plan to get around the headwinds caused by the one you are missing. But if you don’t, please do yourself a favor and go back to the drawing board. You’ll be saving yourself a world of hurt.
Business Etiquette: 4 Things That Mildly Annoy Me
Note: A version of this post appeared in my semi-regular column on AlleyWatch.
Every morning I start my day with Dilbert & coffee and one of my favorite secondary characters in that strip is Phil, the Prince of Insufficient Light. Unlike Satan, Phil punishes people for small crimes by “darning them to heck”.
There are hundreds of articles in the business and startup press written about best practices and big mistakes to avoid, but surprisingly little about the small faux pas that, while they don’t immediately doom a relationship, will get you started on the wrong foot.
So in that spirit, here are four things that mildly annoy me and if you don’t stop doing them, I will sic Phil on you with his “pitch-spoon”.
1. No or uninformative subject lines
I know you think you get a lot of emails, but wait until you see my inbox. Anyone in the VC or accelerator business gets hundreds of emails each day from prospective startups, would be service providers, colleagues, portfolio companies – and that’s not even counting newsletters and personal correspondence.
Blank subject lines are like unattended bags at a train station; are probably not important but have a slight chance of being a bomb. You force me to open it just to be safe, when I have too many more time pressing emails to handle. Stop being lazy and toss me a bone here.
Meaningless subject lines are even worse. I can see you didn’t simply forget to use a subject, but how does “Hi!” help?
I’m a little less judgmental about ambiguous subjects like “Intro request” or “Follow up”. You are actually trying but don’t quite get it. When I’m staring at a screen with a hundred emails on it, how do I know what company or project this is about? If I’m later searching for this email, how can I tell at a glance that this is the right one? Consider these alternative subjects instead:
“X would like to meet Y (Co Y)”
“Follow up – Event Z, X (Co X) / Y (Co Y)”
These tell me at a glance who is involved. In the second example though, the event can be a phone call, meeting, conference, etc. and by including it in the subject you are giving me critical context.
Note: I’m not including misleading subject lines here because tricking me into opening your email crosses the line from mildly annoying to really pissing me off.
2. Poorly executed quasi spam
While we are on the subject of email, I’m getting a lot more unsolicited email for b2b services. Some masquerade as one to one emails but obvious lack of any clue as to what Dreamit and I do. This combined with the unsubscribe link at the bottom are dead giveaways. (Btw, if you are going to spam me, goddammit have the balls to commit and drop the unsub!)
At this point, I can even tell just by the formatting of the email that it’s a mass email. There is something about it that’s just looks to… formatted.
Some of these quasi spams even pretend to know me. They say things like “I’d like to follow up with you on…” as if it’s possible I’d suddenly remember a conversation we’d never had. Some claim to be connected to me through “a mutual friend” but when I reply asking who, there’s no one. A few even make up names of this mutual acquaintance.
Now, I meet a lot of people so it is possible that I don’t recognize the name right away but it’s not hard for me to check LinkedIn and search Gmail to get to the truth. I might let the first group get off with a quick Delete, but the pretenders made me think and for that, they get the Report Spam finger.
A refreshing few openly and candidly admit to being cold emails. If they are targeted (or lucky) enough to actually be relevant to me, I might even respond.
Note: One of these days, I may write a post on how to do the quasi spam right, but for now, on with my rant.
3. Generic Cold LinkedIn connection text
Would you go up to someone at a conference and say, “We should network”? Of course not. (Although, believe it or not, this did actually happen to me once.) You try to figure out enough about the target – from their name tag, where you are standing, any other scraps of context you can dig up – to lead with something that might, just possibly, interest them enough to want to continue the conversation.
So why on earth would anyone send a LinkedIn request to someone they didn’t already know with just the genetic “I’d like to add you to my network” message? If you have an idea why it might make mutual sense for us to connect, why not take the extra seven seconds to spell it out? Because if you direct me to crawl through your LinkedIn profile in order to read your mind, it ain’t happening. As you’ve probably noticed, I resent being made to think.
4. Calls without prior scheduling
Phone calls disrupt my flow. So if you call me without prior scheduling you’d better be my wife, kids, mom, or someone who I really, really want to talk to. Otherwise, you are one step below a Jehovah’s Witness knocking on my door. At least they care about my soul; you just want to sell me something.
Tip: if you are not sure, text me first. “Ok to call about xxx? Somewhat time sensitive” is not too much to ask for.
Please help make my days mildly less annoying by sharing this with the people you know who most need to read it… and I’m sure you know exactly who they are.
The Art Of The Exit: For Non-CEOs
Note: A version of this post appeared in my semi-regular column on AlleyWatch.
Like most entrepreneurs, I wasn’t CEO of my first startup. While I had a fair share of the company, I owned far less than the CEO who, in addition to having had the concept, also initially bankrolled us.
For the most part, this didn’t matter. Like most good founding teams, we had complimentary skill sets and mutual respect so decisions were by consensus. This worked fine until one of us wanted to sell.
For context, the company effectively started in early 2000. We were hit hard by the dot com crash and one of the lesser casualties of September 11 was our term sheet. So we stopped taking even meager salaries and bootstrapped to profitability in 2002.
The next few years, we lived the dream. Ridiculously high growth, increasing revenue per customer as we upsold new modules, competitors folding. Fun times.
Nevertheless, by 2006 I wanted to sell. Six years was a long time but my decision was mostly about the trends. Our growth rate, while still high, had started to come down and the vibe at trade shows was that we were past the early adopters; still plenty of prospects but slower to sign. At the same time, our competition was trying to lure our best customers away by undercutting us. We were doing the same, of course, but once a steal becomes an attractive trade off relative to greenfield prospects, something fundamental has changed.
That said, our growth was still really, really good and the market was *hot*. On the numbers, we could have got 6-8x times earnings. Plus, we had a good chance to attract strategic buyers and their valuations can get crazy (in a good way).
The CEO wasn’t interested. He believed that our new products would fix growth so we could get the same multiples on a higher base in another year or two. Knowing what we knew then, he might have been right.
But he wasn’t. Next year growth was a bit lower. Still really high but now we had two years declining growth. Uh oh.
So he agreed to shop the company. Unfortunately, the banker we brought in now thought we could get 4-6x earnings from a financial buyer but there were still strategics….
After a year leaving no stone unturned, the best offer we got was… 5.5x. No strategics. Between the market cooling, taking time to digest their previous acquisitions, and our growth slipping, they didn’t bite.
The CEO didn’t want to sell. I knew it would be years before he shopped the company again and, even when he did, the odds of getting a better offer hinged on an increasingly unlikely turnaround so I still wanted out. But I didn’t have a large enough equity stake to force it.
So I told the CEO that, if the prior offer was too low, he should be thrilled to buy me out at that price. I also told him that I was ready to move on even regardless. Ultimately, he agreed to buy me out in exchange for my finding and gradually training a replacement.
I got my final check on Jan 2, 2009. He looked me in the eye and said, “Maybe I should have sold.” Fast forward seven years, still no sale.
This clearly wouldn’t have been possible without the cash. Plus, were I not a core team member, he might simply have wished me well. Ironically, it wouldn’t have worked had I had more shares – another cofounder with more shares couldn’t exit for this very reason! Not enough cash to buy out his stake.
Lessons?
- For your first startup, a solid double or triple in a few years often beats holding out for the home run that may never happen. Life is a lot easier with a win under your belt.
- Use inside information. If you’re seeing the road getting bumpy, act on it.
- Don’t fill an inside straight. The irrational optimism that got you this far has no place here.
- Respect the market. It may be hot now but it can change at any time. You wait on it; it does not wait on you.
- Respect the market. (Yeah, I know…) Barring #2 above and filtering any of that through #3, if you ran a good process, the price you get is likely fair.
- Governance matters. Understand who can stop or force a sale under various scenarios. You may not be able to change this, but you don’t want to be surprised.
- Be creative. Not all exit doors are clearly marked.
- Recognize your leverage – in some cases, weakness can be strength – and be willing to use it.
Now go be awesome.
As Angels See It 