Startup-CEO.com (Eli Portnoy)

No one is infallible when it comes to business. I learned this lesson pretty early on when I started my first business. With the naivety of a college student, I approached DVA (my first company) thinking that business was like a mid-term or a final exam, and that success was clearly quantifiable and directly correlated to intelligence and hard work.

Business is impossible to predict, mistakes are expected, and success is a combination of hundreds of variables – some within our power and some not. 

With that in mind, it is easy to understand why the masters of business over at Wall Street place so much emphasis on diversification. It is definitely not for a lack of confidence in their abilities. They understand that mistakes are expected and success is impossible to predict; the more they spread out their risk the better the chances of riding the winners.

If risk is difficult to quantify for Wall Street which is dealing with established companies with recurring revenues, proven concepts, large customer bases, and experienced management teams, then it is beyond impossible to project at the start-up level. 

Because start-up risk is so volatile and difficult to predict that Venture Capital firms have become masters of diversification. They understand that a portfolio of one or two companies, even if they are the “next big thing” is crazy. Every single day incredible ideas are born and die and professional investors mitigate the heavy risk inherent in the game by diversifying into multiple positions.

So what about the entrepreneurs, us poor souls who invest our live savings, multiple years of sweat equity, 18 hour days, and shattered social life’s all for a single lottery ticket with such bad odds that even the very best of the best of investors aren’t willing to commit even 20% of their resources to? 

There is no conclusion to this post, only an open ended question that I am sure my fellow start-up founders can appreciate and relate to. We are so caught up in our own confidence that we are blinded by the realities of the space we operate in.

My only advice is that when starting a business, be careful not to commit yourself to a single aspect of your business. You will need to iterate and evolve, so don’t even start unless you can afford to fail a few times within your business. At the end of the day, this might be our form of diversification.

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Josh Kopelman at First Round Capital wrote a very interesting post about monetizing consumer internet services with a subscription model. He maintains that going from free to even one cent is such a large step, that most services should remain free and look for advertisers to subsidize their costs and generate revenue.

This is an interesting idea, and I wholeheartedly subscribe to the notion that charging even one cent is extremely difficult when you have a two tier model. At the same time though, I think the advertising game is a dangerous one for most emerging companies. Most web services currently sell standard advertising opportunities for between $1-3 for every 1,000 impressions. This means that a site with an average of 10 page views per customer is generating about 1 – 3 cents per user. So a company needs to scale their service by 200 times to generate the same revenue as a single customer paying just 2 dollars. That’s like going from 100,000 to 2,000,000 users.

The point I am trying to make is, not that advertising is a bad model, but that there are few web businesses that can attract such large volume of users to have it make sense. Depending on the business it might be easier to maintain a smaller user base and monetize them at 200 times or better than what advertising would bring – even if it means sacrificing 150 times more users.

Josh Kopelman cites Free 411 as an example of a service that grew to 5% of the total market by not charging. That’s great from a growth perspective, but the question remains: are they able to monetize that huge volume even remotely as well as the pay-for-use directories?

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I get a lot of business plans sent by friends and acquaintances asking for my opinion and it almost seems like it is an unwritten rule of the business plan to list “first to market” as a competitive advantage.  What a myth! Being first to market usually means that everyone else can copy your idea and improve on it, while you undertake all of the risk.

Alta Vista came before Google

Broadcast.com existed way before YouTube

Rio preceded the Ipod

Amazon wasn’t the first bookstore selling online

Friendster was first to MySpace’s second

These are just the examples that I can think of at the top of my head for the technology/internet space. There are hundreds of others. I would probably say that copy-cats have a better success rate than market innovators.

So where does that leave you and your brilliant innovative idea? Isn’t the internet supposed to erect natural monopolies because of a “network effect” and the centralization of information? How do you protect your business if being “first to market” is not enough?

Execution!!! Build out your idea in the best way possible, because even though being the first to market your idea isn’t enough, being the first to own your market is the real key.

The internet absolutely allows for very serious natural monopolies, but to enact them you need to own the market first. Meaning you need to be the top dog in your space, be the Google, YouTube and Ipod of your space. Because only by being number 1 can you enjoy the competitive advantages that come with the network effect.

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Throughout the building of Emerging Demographics, my advisory board has played an instrumental role in helping me mitigate my inexperience. An advisory board, if constructed properly, can be the main difference between a successful company and a “learning experience.” This is especially true for young entrepreneurs who need to rely on others for a knowledgebase of experience.

The 5 steps to building a strong advisory board:

1. Asses your strengths and weaknesses:

A board of advisor’s primary responsibility will be to advice you, the CEO, on key decisions. Therefore, understanding your strengths and weakness is paramount to constructing an advisory group that will help guide you in areas that you need help with. Knowing that you are not a great marketer is not enough, you need to dig deeper and think about all issues relating to managing a business. Do you have the financial acumen, do you have the operational experience, can you manage diverse personalities, do you have the technological prowess, do you know enough people (i.e. connections), and just about all other aspects of business.

2. Understand your business

Not all businesses are the same, and therefore the experiences needed vary widely. While a financial guru is always a big help in establishing a business, a manufacturing guru probably won’t help an emerging blog network. The point is, try to find advisors in similar industries to your business or with an understanding of the market you operate in.

3. Identify advisors

At this point you already have a clear guideline of the needs that must be met by your board of advisors. So the next step is to find people who can help fill those needs. There are a couple of things to consider for each candidate, firstly do you work well with them. Second, do you respect their opinions? Will they be able to provide you with enough time? And finally, are they just a big name or will they add insights, advice or direction? Being a big name might be something you need, but again, at this point you understand what you are looking for and are just trying to fill the needs in the best possible way.

4. Balance the group

Hopefully at this point you have a few candidates who are willing to join the board, and now your job is to create a good mix. No point in having two great marketing advisors when you don’t have someone who can help you with accounting. Try to maintain a good balance and don’t be afraid to leave a hole or two, as you will undoubtedly encounter potential advisors over the next few months that can join the board then. Filling a position for the sake of filling it, is much worse than not filling it at all.

5. Bring ‘em on

All that is left now is to officially invite the chosen advisors to formally join the advisory board. Before you do so, make sure you have a very clear understanding of exactly the roles they will play and communicate very clearly what the responsibilities and parameters are. I am no expert on what kind of stock and warrant grants are appropriate to give, but you can read more about it on Brad Feld’s excellent blog.

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Every start-up idea that I have listened to, at some point touts patenting the technology as a defensible measure against competition. At the same time, every investor who has any experience in the world of web technologies says that patents are basically useless and businesses should have other competitive advantages.

From my experiences in this arena, and from fighting from deep within the trenches, I can tell you that most business method patents won’t help you fight off competitors. As it is, companies competing for the same space usually take very different approaches. Secondly, as I have written about before, ideas are really just 5% of the difference between success and failure. It mostly comes down to execution, distribution and market trends, not patents on an idea.

So then why patent your revolutionary new technology? It comes down to scalability, fund raising, and ego.

Scalability:

If you do come up with the next big idea, and you are able to execute and build a huge business, then you will look back at the 20k you saved by not patenting your technologies and most likely cry. Patents might not help you get to superstar status, but they can help you stay there by threatening potential competitors with the threat of a lawsuit (something you can’t do as a start-up with a limited budget).

Fund Raising:

Even though VC’s say they don’t care about patents, they most certainly do. Approach any of them with a pitch and if you don’t have at least a provisional patent they will want to know why. It seems like a lot of times, investors feel more secure in their investments if there are tangible assets that they can turn to for protection.

Ego:

Who doesn’t like to think of themselves as a creative genius who has a patent under his or her name? Though I am pretty sure it feels a lot better to have built a viable and successful company than it does to have your name on a useless patent.

Conclusion:

A patent doesn’t make a lot of sense in the near term when resources are tight for a startup and it won’t get you to the big-time. But not filing for a patent can turn out to be a huge short sighted mistake that investors will hate.

So go ahead and file for a patent, but understand that it is a long term move that won’t help you fight off those competitors until after Google buys you out…

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I am a huge fan of the work Michael Arrington is doing at TechCrunch.com. He is documenting the rapid evolution of the technology and start-up space, and doing it well. I have no problem with the process he uses to determine which companies to cover, and I do appreciate his talents as a filter. I know I wouldn’t want to read a watered down site that mentioned the 20 or 30 new companies that launch every day, because if I did I would just read a press release aggregator.

My Problem with TechCrunch is that it often feels like Michael and his writers are only spending 10-20min reviewing a website and spouting uninformed opinions. If the point of filtering content is to deliver only quality postings, then he should do his homework and understand the companies he covers before writing praise or criticism.  

Today Michael wrote about Tinbag and completely trashed it, saying “This is a model that flat out failed at Google” and “Normally we’d pass on writing about a startup like Tinbag, but I want to point out that if Google failed at a business model after 4 years of trying, there’s a good chance you’ll fail with a look alike service, too.” 

I checked out Tinbag’s site and discovered a very different business than Google’s failed model. Google and Yahoo approached the Q&A market like they do the web, as a central depository of information. They see it as one big forum of answers. The Tinbag model however, allows “experts” to create mini e-commerce sites and charge for support. The site isn’t trying to help you find answers to single questions (heck from what I can see it doesn’t even let you pay by the answer – instead you have to buy a monthly pass), rather it’s trying to help consultants and experts formalize a way to charge for support they already give and monetize their time.

I am not saying I love what Tinbag is doing, but I do think it’s different enough from the other stuff that’s been tried to at least warrant that the Techcrunch team read and visit the website before writing such a scathing review.

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Life at a startup is really a balancing act. There aren’t enough resources, yet opportunities abound. The most important and difficult responsibility I face as a CEO is determining where to allocate our time, energy and money.

Fred Wilson recently spoke about “saying no”, and I see that quiet a number of other bloggers echoed what he said, such as this post by the CEO of Judy’s Book. 

Understanding the value of each opportunity is crucial, as is having a very clear idea about what the end goal is. But saying No isn’t hard when you have limited resources, tight deadlines, and big milestones – the real issue is to understand what is critical to the business/service/product and saying “Yes”.

I usually compare this balancing act to a teenager who has been saving money for the last three years. He worked part time and in the summers and has finally accumulated $400 to spend on a computer. My guess is that when it comes time to buy a computer, he will have a very easy time saying no to the printers, DVD players, and wireless keyboards. 

When there aren’t enough resources to spend saying no isn’t really a choice.

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Happy New Years to everyone. Yesterday NY Daily News ran a feature on 30 entrepreneurs under 30 and they highlighted my work at Emerging Demographics. Thanks for the recognition and congratulations to the other 29 selected.

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A great post by Fred Wilson explaining the differences in cost between a start-up today and six years ago.  Some points are similar to my previous post on the subject.

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Many business ideas stem from an “aha” moment when a founder is frustrated with a certain task and thinks of a solution. This leads to some great products and innovations, but doesn’t necessarily lead to great businesses. A business is an organization that sells a product or service, and so to be a successful business you need to have something that can be sold and the foundations for a selling mechanism. 

So if you have the next great idea, run it through these filters:

Who is my customer and will they pay for my idea? 

All businesses have customers. Some pay for a service, some buy a product, some use your service, some buy advertising, but to be a businesses you need to have customers.

Understanding who your customer base is makes it easier to determine if they will be paying you. 

Am I competing on price or benefits?

There is a tendency when developing business ideas to assume that a business can attract users by competing on price. This works in a vacuum, but not in a competitive business environment. Unless you have a tremendous technological advantage that you can leverage to create significant savings (think VOIP), competing on price will not work. Most users will be unlikely to make a change to an unknown startup for a little bit of savings, and if they do, then your competitor will lower their pricing. 

Features however, makes it much easier to attract customers and if they are significant, can also make it very hard for competitors to quickly match.

If everything goes right, what are my competitor’s barriers to entry? 

Assuming your idea checks out with the above questions and you are ready to rock and roll, you should probably take a step back and view the idea from a long-term perspective. You are about to dedicate much time, energy and money to this venture and you want to make sure it wont be easily killed by a larger competitor. So ask yourself, if it all works out how difficult will it be for someone else to enter my space.

This is the hardest question to answer because the best defensible strategy is good execution, and there is no way to know how you will execute until you do.  Nonetheless, the better the barriers the better the idea.  I will write more on this issue on a latter post 

So now you know you have a great idea for a business and it makes sense to start doing more research and diligence.  Good luck!!!

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