Looking for an Idea or a Partner for your Startup?

Nicole Glaros who blogs her ideas at NearlyNicole has an idea and is ready to join forces with a developer willing to start a venture. Nicole is very practical in recognizing that there is nothing sacred about ideas and readily shares her ideas with others. Compare this to most people who wants you to sign an NDA for even a coffee chat.

Nicole's idea is to create a hosted solution for shared file storage with security, synchronization, collaboration and Tagging.

Why join a startup

I wrote two articles, one on what you need to know about the startup before you join and the other on how the discipline of business thinking matters more than the idea. Here is a simpler advice that I received in a conversation with Professor Rashi Glazer of UC Berkeley, on taking any job i general:

First ask yourself, do I want to want to work for the company that wants me? Why do they want me? What value can I add to the company? If you cannot figure out your value added, ask them how you can add value. If there is no value added, why take that job?
The other thing to keep in mind is, you don't work for the company, you work for your boss. How do you think you will make her/him look when they hire you? If you cannot make your boss look good, what is the point?

The other advice I received is from Lynn Upshaw, another marketing processor at Haas School and a Brand Consultant.

There are things you need to care about joining a startup for your first job or when switching careers. In a small shop you do get to do a variety of things. But you have to ask who is around me who has been down this path and can teach me. If you have no one to learn from within the organization and you are learning from outside as you execute, you are not learning much. For all the bad rap on large organizations, they have lots of people who have been this path a few times. If you reach out to the right people you can learn a lot faster.

Doc, Can you save our business plan?

I wrote this post on startups and business plans in my school's blog :

Glazer: I just told you what the problem is. Your market description and competitor section do not agree. Any market that is growing at the rate you describe is going to have competitors. Saying there is none convinces the VCs that either you did not do your work or that the market isn't really there. If you think it is indeed a new product with no competitors think about the substitutes. No one is going to believe you when you say there are no competitors. When there are no competitors there are no customers too.

Investing in the thinking process not the ideas

In the last post I asked whether VCs invest in startups based on the pedigree of the founders. That is not the right question. Definitely pedigree reads like a pejorative term. Professor Rashi Glazer of UC Berkeley says,

VCs do not invest in the current idea you have, they know the statistic that 80% of the funded startups ended up doing something different than what they were funded for. They invest in the business process and thought process the founders demonstrated and they know that the right thinking process will allow the founders to adapt when the situation changes.

In a way it is people the VCs invest in, because the thinking process cannot be separated from the people but it is not tied to just one set of people. Your past victory gives you the benefit of doubt.

Startup Strategy

In the Web2.0 world there are many ideas that are slight variations of the same. This variety creates excessive fragmentation of the very small lead users and the large middle is in no hurry to take sides, they wait around for consolidation and a clear leader with critical mass to emerge.

So what creates the next YouTube? Is that strategy? Network effect? First mover advantage?

Do startups need a strategy?
Or more specifically do they need one to be successful?

In the Web2.0, Social networking, free business model wave, can a startup succeed without a strategy?

Strategy is creating value by unique positioning.

If you take the list of startups that apply to Techstars or participate in Startup Weekend, they all perform similar activities in almost identical ways implying that their positioning is very similar with no discernible unique value. So a winner, if any, among these is determined by the pedigree of the founders and by the operational efficiency of their current startup.

Is this the right approach to select a startup to fund?

Thinking of joining a startup?

So you are thinking of joining a startup. May be you are fresh from school or have great experience working in a big enterprise and want to take a larger role in a startup. Here are a few questions you want to find answers for, from the founders and/or by yourself. As I wrote last time, entrepreneurs by definition have unbridled optimism and may tend to assign a lower probability to certain risks. It is up to you to build a better model.

These may seem like a lot of questions to answer for a job, but think of yourself as a VC, except you are investing with your time (part of it compensated) and opportunity cost.

Market:

1. Which market is the company's product and services addressing?
2. At what stage is the market in? Is it growing? mature?
3. Are these the only players developing such products?
4. How big is the market? What percentage does the company say they can capture? Is that realistic? What are the probabilities of different scenarios?
5. How is the company's market share growing since inception?
   
6. Who are the competitors? What is their market share? How is their market share been growing?

Products:

1. What is the product/service? Can YOU explain than in plain English?
   
2. Is the company's products ahead of its time? Is there a network effect?
3. What is unique about the product/service? If they can do it why not many other people can do the same?
4. How is the company differentiating their product/service from the competition's? How do the product/services compare to competitor offerings?
   

Customers:

1. Who are the customers?
   
2. What segments is the company addressing? Is the segment growing? If the startup is offering products for a shrinking segment, you can make a prediction about their growth limit.
   
3. How do these segments make purchasing decisions? What drives their decisions? features? quality? price?
4. Is there a customer? Can you find out from them what they think about the products? Startups usually have early adapters, can you find out from your network?
   

Business Model:

1. How is the company making or plan to make money?
2. Do you think this is sustainable and scalable?
   

Marketing and Sales:

1. What is marketing and brand strategy?
2. Who is selling the product? What are their qualifications?

Finance:

1. How is it currently funded?
2. How will it be funded in the future? What are the sources and what is the probability of getting funding from these?
3. What is its current cost structure? i.e what are the expenses? Is that sustainable?
   
4. Is the company leveraged heavily?
5. Can they generate capital to make big investments?
6. Are they cash flow positive? Is more cash coming in than that goes out?
   

After all this is your career decision. When no other information about a privately held startup is available, you have to do the legwork.

It is different in my case ... Self Bias

Before you make the big decision to quit your job to start your own venture or to move to a different city to start fresh, be aware of the highly biased opinion we have about our abilities. The very trait that defines an entrepreneur, unbridled optimism, works against them preventing them from interpreting the data in an unbiased manner.
Wharton professor Gavin Cassar says,
"It's been shown in many studies that people are overly optimistic. Individuals form an inside view forecast by focusing on the specifics of the case, the details of the plan that exists and obstacles to its completion, and by constructing scenarios of future progress."

Even when the entrepreneurs use metrics and accounting systems to budget and forecast, their self bias make them overestimate the opportunities and diminish the risks. As Cassar says, "it is important to recognize that financial projections of success are merely projections based on beliefs, which are sometimes based on overconfident or optimistic assumptions".

The other aspect that leads one to quit the current job and enter self-employment is due to incorrect estimation of costs, more specifically ignoring the opportunity cost of doing so. Focused on the earning possibilities and the project cost of making those earnings, individuals ignore the income they were leaving behind and whether the new income compares well against what they were letting go. The opportunity cost is not just your pay check, it includes the health insurance,4 01K matching, holidays and vacation pay and other fringe benefits.

The question is, when the startup bug bites you would you recognize the need to do the costing and earnings estimates right?

Featured Startup: LogRhythm

InformationWeek features Boulder's LogRhythm in its April issue. Founded in 2003 by Chris Petersen and Andy Grolnik, LogRhythm delivers software for interpreting your raw data.

By automating the collection, organization, analysis and archival of all log data, LogRhythm enables enterprises to easily comply with log data retention regulations while simultaneously gaining valuable, timely and actionable insights into security, availability, performance and audit issues within their infrastructure.

The field of of analysis is crowded and there are many open source options. The challenges are in developing the market and educating the customers that they need such a tool. Customers need to see the direct relation to revenue from a log analysis tool. "We show them other ways they can use the product, and the ROI goes up," Petersen says in his InformationWeek interview. The bigger problem is making sure the right type of events are logged so they can be analyzed for decision making.

There is a big opportunity to offer log analysis in Software as a Service (SaaS) model. End users will have less resistance to use the analysis tools on a per use basis instead of investing in one. There is no need for ROI calculations and depreciating the software cost over years and worrying about installations and upgrades. If the platform and APIs can be standardized, individual developers can add value added components that end users can 'rent' on a per use or per month basis. I do not yet know of a log analysis tool offered in SaaS model.