ICYMI the Startup markets are getting hotter in the Data Science space. Every time I turn around, some small company got millions of dollars in startup funding. It used to be a company with an algorithm or data science library but now it’s Data Science platforms.
The above image from FundersandFounders.com really captures a successful startup from inception to IPO. Most interesting for me is how the ownership “pie” is cut over time. If you’re the Founder, you first start out with a 50/50 share with your Co-Founder. Then you get some Seed money, say from an Angel Investor like Howard, which takes a small % of ownership.
As the Startup grows and matures it should attract more VC money and the ownership pie changes. With every VC investor, you sell parts of your company. This is incredibly important if you want to maintain control of your company and should be carefully analyzed.
My personal opinion is that you can do all this without VC money but it will be harder and take a longer time. It could take decades and in this industry time is not your friend. The market is so hot that your competitors will fill your weaknesses in the market within a quarter or shorter.
So in essence you really need startup funding from VCs to be agile and build/keep your market share. Just keep an eye on those term sheets and make sure that the “pie” is big enough for everyone.
I’ve been following Howard and Fred on and off over the years. They’re old Web 2.0 veterans like me and have kept a blog going for over 10 years. It’s always nice to see continuity and recently I found a great interview of Fred at MIT on Howard’s blog. It’s just under an hour and gives advice to students interested in the Venture Capitalist (VC) field.
What caught my ear (and Howard’s too) was how his wife (Gotham Girl) is his biggest cheerleader. What does he exactly mean by that? She was the one that supported and believed in him to go out into Venture Capitalism.
With any big risk you take in life, it makes your life so much easier to have someone behind you, cheering you on. Like Fred, my wife is my biggest cheerleader. She encouraged and supported me to step out of the Engineering world and into the Startup world.
You won’t believe how much that mattered to me then and how much it still matters today.
Fred’s actual talk is about 25 minutes or so, but the Q&A part is gold. I’m going to watch this a few times just to glean as much wisdom as I can!
Other Interesting Bits
The Founder(s) need to be like salespeople, they have to sell their idea to VC’s, customers, etc
You need to build up well diversified startup portfolio, some will fail and you’ll lose your seed investment
It’s a good idea to help negotiate the Series A and even B rounds, because that’ll help you get your exit
I recently read a great article on the Freemium model that resonated with me. It kept me thinking for several days afterward about how some startups with freemium models “made it” and how others failed. The difference between success and failure has become a very fine line indeed.
I completely get it, it’s all about how many users your product or service has. The rationale has always been that more users == more revenue and many startups created wonderful free products (i.e. Dropbox) around that idea. Free isn’t so bad if you’re trying to build a startup yourself. I know many entrepreneurs who build startups on open source or free products. Open source and free is the backbone for a vibrant startup community but there are so many companies hawking their “free/open source” stuff that I wonder how they make any money at all.
You need to make money, especially if you’re a startup. If you don’t, you’ll need cash and lots of it. Whether it’s attracting talent or paying your receptionist, you’ll need cash for just about everything you do.
The only problem? Getting that cash is harder to get now more than ever.
The Dot Com Years
I remember vividly the Dot Com years when Venture Capital threw billions of dollars against good startups (Amazon) and half-baked startups (Pets.com). When the VCs got burned, they started demanding more robust business plans and a path a profitable path to exit. Startups took notice and started to think about how to convert users to customers more either right away or at some point in their experience with the product.
If you have users and figured out a way to convert a portion of your users to paying customers then you’ll likely get some funding. If you haven’t figured that out then you’ll probably end up making a Deal with the Freemium Devil
A Deal with the Devil
Freemium is like making a deal with the Devil. You want to get more users and minimize your acquisition costs so you put out a free version of your product or service. If all goes well, you’ll start seeing an increase in your user base. So then the problem becomes how to convert those users to paying customers.
Most of the time you gave away all your product’s functionality for free and now you want to charge for it. Your users panic and drop off because you suffering from the “why pay for milk if you can get the cow for free” syndrome.
Maybe you reserved some functionality as an upgrade for users to pay at a later date. That’s smarter thinking but what if that upgrade is really lacking? The users can get by using your free product without ever having to upgrade!
It’s so confusing what approach to take, which way is right?
Tailored, hyper-specific free products of lead gen
Product qualified lead (PQL) engines
Anti-lean startup approach
The free trial is just what it sounds like, a free trial that’s limited to a time period. The danger of this is that your sales reps keep extending the trial period for some apparently “big fish” users. In the end, they never convert! Free trials are very successful if it’s a great product, at a great price, that’s easy to use and demonstrates significant value for the user on day 1.
The tailored, hyper-specific free products of the lead gen method is a relatively new one that I’m seeing being adopted with some success. The ones I run across give you access to a REST API but limit it to maybe 1,000 calls a day. If you want 10,000 calls a day then you pay some $. If you want 1,000,000 calls a day, then you pay more $$$$. It’s a pay-as-you-go type of model and I really like it.
The PQL model is something I’m very familiar with and I’m seeing its success first hand. This is a robust land and expands model that typically provides all the functionality of your product but measures product use. The goal of this is to identify a subset of users that exhibit a strong propensity to buy from casual users. While every PQL model is different it comes down to identifying the right leads for your sales team to go after instead of every lead that comes through the door.
The Anti-lean startup is an interesting model and I’ve seen some startups do this approach. It’s definitely a great way to generate a buzz for your product. Hopefully, customers will line up at your door with money in hand BUT it’s got to be a great product. This one puts a lot of pressure on the Startup to get it right on the first get-go. The biggest risk is that this product remains in Alpha mode and never truly gets released!
Before you put a free or open-source version of your product out there, think about how to convert your users. Be smart about this. It’ll save you a lot of headaches in the future when you want to get VC money.