Peter Christensen

Joining Jason’s Jihad – Why Startups Shouldn’t Have To Pay To Pitch Angel Investors

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This is a repost from Jason Calacanis’ mailing list. While this kind of confrontation is certainly not my style, I strongly agree with the principle. I’m glad there are people out there like Jason that don’t care how dirty their hands get. Whatever you think of Jason, he is a friend to entrepreneurs.

[reposted in its entirety below, slightly reformatted]

[ disclaimer: written with boiling blood ]

Background/Disclaimer

When confronted with an abuse of power, an injustice or a scam I’ve developed a really effective technique: I blog, tweet and whine about it passionately for as long as possible. Basically, I do this until people get sick of me (some of you reading this have at various times told me this–I’m sorry!). I’ve learned over the years that this process is wildly effective in the long-term and has the added bonus of being great therapy. It’s a way for me to relieve the dissonance associated with the injustice, perceived or real, that I see.

So, I fight.

You see, where I grew up, you said what you felt and let the chips fall where they may. If you liked the Giants in a room full of Jet fans, well, tough s@#$t Jets fans (and Jet fans have a horrible existence anyway). My Irish mom and Greek dad are as opinionated as they come, and our dinner table was filled with healthy debate. So were the steps of the Brownstone where my brother and our crew sat all summer long in the 70’s and 80s, battling over the finer points of Star Wars, Yankees, X-Men and Howard Stern.

It probably didn’t help that I grew up in my dad’s bar. I watched him put an end to countless bar fights by clever debate techniques (i.e. “is this really worth fighting over when we could be all be enjoying this amazing bottle of wine?”). Of course, when that didn’t work he would slam the offender’s heads into the mailbox on the corner of 89th and 3rd avenue. It’s probably still got the dents in it, I should go check. Ahh… the good old times.

I’m from the bottom, so I still feel like I’m from the bottom. In fact, my biggest fear in life is that at some point I’ll stop feeling like that. This is a long way of explaining to you guys where I’m
coming from when you see me wound up like I am today. Father forgive me for the rant I’m about to go on … you see, I’m simply programmed to fight.

My Latest War: Angels charging startups to pitch

Recently, I was made aware of a group of angel investors that were charging startups to pitch them.

Yes, you heard that correctly: the rich people (angels) are charging the poor people (startup entrepreneurs desperate for cash to fuel their dreams) to hear their pitch. No, I’m not kidding. This is actually happening — and it’s widespread.

Last week, a number of the TechCrunch50 companies informed me about firms calling them to present at their “Angel forums” — only to discover that they would face fees ranging from $1,000 to $6,000 for a 10-15 minute pitch slot. After additionally investigation by the Jason Nation (the top 10% of the maniacs who follow me on Twitter), I was sent details of one epic bastard that wanted $10-$25,000, plus a couple of percentage points of the value of the deal (you’ll find out
who later in this email).

When I heard this, my blood started to boil immediately. So, I did what any maniacal, self-absorbed CEO from Brooklyn would do: I started a jihad against this dispicable form of payola and the people doing it. It’sonpeople … it’s on like a Donkey Kong.

Why it’s wrong to charge startups to pitch

I’ve been in the startup scene since 1994 and in those 15 years I’ve met, interviewed — and in some cases, pitched — the most powerful investors in technology. None of them have ever charged me a dime for doing so. Why? BECAUSE THEY ARE RICH!

It’s low-class, inappropriate and predatory for a rich person to ask an entrepreneur to PAY THEM for 15 minutes of their time. Seriously, what is the cost to the party hearing the pitch? If you answered “nothing” or “the cost of two cups of coffee” you win the prize! Evenif you rent a hotel room and put out breakfast for your fellow angel investors that’s like $20 a person. You mean to tell me that a room full of rich investors can’t afford to pay for their own God-damned $20 in bad coffee, stale pastry and stained ballroom rugs? Really?

To be clear, I am making this a class war becauseit isone: cash-poor startups are bringing RICH angel investors an opportunity to become EVEN MORE RICH. As such, the rich folks should pick up the non-existent to minimal costs.

Why startups fall for “angel group” payola

Now, you ask: why would any self-respecting entrepreneur pay thousands of dollars to rich people just for the opportunity to pitch? Well, the truth is that the more mature — or flat out better — startups would never pay to present. The best ideas by the best entrepreneurs get socialized instantly. As an new angel investor myself, one who has only done two investments of $25,000 and $50,000, I can tell you that I already get flooded with pitches. I can’t even imagine the volume of pitches real angel investors like Matt Coffin, Sandy Climan, Sky Dayton, Tony Hsieh and Ron Conway get inundated with.

This means that the only people who would pay to present are the entrepreneurs who are either “less good” or less connected. Now, I’m being diplomatic here in saying “less good,” in many cases, these aren’t just folks who lack a track record: they’re simply pursuing a bad idea.

In other words, if this was Hollywood, the folks who pay to present to investors are ugly, unpopular and lack talent. I know, that’s harsh but I’m afraid it is true. If you’re idea is good it will spread–even if you have no track record. If you’re only option is to pay to get in front of these folks you’ve probably got an idea that is weak or bad. Not always, but probably. Or maybe you’re a little naive or desperate to get things going–I don’t blame you for this startups.

Now, before you go saying “Jason is connected and he has access to angels” remember that I hustled my way into this industry from nothing. I networked at free conferences and figured out a way to get on the radar of uber-angels like Ted Leonsis, Fred Wilson and Mark Cuban. They paid attention to me because I had good ideas. If my ideas had sucked, they would have ignored me. Period.

These pay-for-play scams remind me of the “modeling agencies” that charge people for representation, acting lessons and to have their headshots done. Trust me kids, Brad Pitt and Kate Moss did not pay to get representation–they didn’t have to. If you’re paying to get an agent, it’s because you’re being scammed.

What about ‘presenting fees’ acting as a ‘filter’?

The folks who run these scams are going to feed you some line of B.S. like “we use these fees to filter out people who aren’t serious.” They’ll say something like “if we didn’t charge these fees, we
wouldn’t be able to filter through all the applications.”

Really? Well, the angels investors I know are really busy and they don’t charge fees. If Mark Cuban and Ted Leonsis — two really busy dudes running a dozen projects each — don’t charge why they hell do you? Oh yeah, right, you’re predatory DBs looking to double dip!

Classy.

It’s your job as an angel investors to do the filtering and that should come out of YOUR RETURNS on your investments. If you have to charge it’s because either a) you’re a predatory DB or b) you suck at investing so much that your returns can’t pay for the time that you spend evaluating companies.

… or maybe c) you are actually a good person who has just never thought about how smarmy it is to charge a startup for your time? I’m willing to suspend judgement for a moment and consider all of those options.

What do we want?

At this point I’m calling on all angel groups who are charging to do two things immediately:

1. disclose what fees they *were* charging, displayed prominently on the top-level of their website.
2. immediately state that they willnever charge these fees– again, displayed prominently on the top level of their website.

If that is done, well, then this battle is over. We’ve accomplished our goal and everyone can get back to their day jobs.

However, if this is not done immediately, my group of startup CEOs and angel investors will begin targeting specific groups for elimination. We will launch competing, fee-free events directly opposite your events. We will encourage angels investors, service providers and startups to boycott your events. You may even find our street teams outside your events handing out flyers.

This isn’t a joke and this is a threat: stop charging startup companies to present or we will do everything we can to put you out of business with a competing, free option.

Now, if you think this is too hardcore and you don’t like my style, well, I can understand that. If you would rather take this offline and try to work something out, well, that’s not available as an option. There is not going to be any kind of negotiation and I’m not going to meet you for coffee.

Also, I don’t care what you think of me and I certainly don’t care if you email my investors (like one group has started doing) to tell them I’m out of control. The people who invest in me know exactly who they are investing in. In fact, one reason they back me is because I am a little out of control. Deal with it.

Angel Groups We’re Investigating

1. Keiretsu Forum ($1,000 to $8,000 to present according to sources)

The first group that was brought to my attention is something called the Keiretsu Forum. They have chapters all over the world, it seems, and they’ve been doing their program for a long time. I’m told by people that they charge between $1,000 to $8,000 to present and that a lot of good folks are involved. This is not publicly available information: they hide it! Now, if there are so many ‘good people’ involved, well, that’s great because good people will understand where startup companies are coming from when they demand that Keiretsu Forum drop their fees. If you have information about this group, please email it to me at jason at calacanis.com. We especially want to hear
from folks who have been asked to pay or who have paid. Send us the documents please.

2. Maverick Angels ($500 to $1,000 to present).

This group is a splinter group from Keiretsu we’re told. They hide their fees in a “boot camp” to prepare you to pitch (what a joke). If you have details on this group, again, send it to me.

3. PrivateEquityForums.com (stunnning $14,500 to $25,000 plus 3-5% of your raise to present!)

We’ve received information that Mike Segal of Joshua Capital Partners runs this forum that is looking for up to $25,000 and/or 3-10% of how much you raise! I’m in shock by this one… could this possibly be true? Do you know anyone who has attended this event or, worse, actually paid these fees? If so, I need you to email me immediately.

4. Tech Super Club ($595 to present).

This seems like a small event, but folks tell me they are charging $595 to pitch to angels.

5. Angels Den UK (£850 + 5% of raised funds)

Across the pond we have another reported payola scam that is looking for big upside in introducing you to angels. Disgusting! Send us the details of this one if you have them!

In Summary

To recap the email quickly:
a) There is no circumstance where an angel investing group should charge a startup to pitch
b) We’ve launched an investigation into these groups and need any information you have
c) If you would spread the word about this issue by discussing it with angel investors and startups we would appreciate it
d) We are demanding that angel groups waive all fees starting today
e) We are going to crush any group that doesn’t comply with our demands
f) There is no negotiation
g) Angel forums upset by this email: Jason doesn’t care what you think of him and could care less if you email his investors, his mother or the Principal of the Internet to complain about his bad behavior (plus these folks get emails all the time and are used to it).

JCAL out

P.S. 1. If you have any thoughts on this please hit reply and tell me (I read them all).
P.S. 2. If this email was the final straw and you want to unsubscribe just hit reply and put unsubscribe in the subject line. 🙂

END
______________________________

Verifying Theories

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There’s little that’s more satisfying than having a theory you’ve come up with be validated. I mean this in a very informal sense – having predictions come true is what the human brain is based on. You learn a little, you make a prediction based on what you know, and if the prediction comes true, it is kept and used as knowledge to make more predictions. (Read much more about this in one of my favorite books of all time, On Intelligence).

This can be anything – if you figure out that you have to take your cookies out of the oven one minute after you first smell them, if you find the right way to factor a polynomial, if you adjust the way you hold your elbows while shooting a free throw. Of course, it applies to business and life too. Those are two of the four biggest driving forces in humans (the other two being family and religion).

I just had a great experience where some predictions I’ve made about how to live my life and run a business have been confirmed. Now that GeekStack is moving from stealth to pre-launch publicity I’ve begun to deal with potential customers, investors, and partners, and I’ve had to figure out how to best deal with that (it’s a big change from working with just compilers). My verification came partly from first-hand experience, and partly from confirmation from a trustworthy source. What was the trustworthy source?

Quick quiz: What book has been recommended to me by more technical and startup people than any other book? SICP? TAOCP? A business book like Crossing the Chasm? Nope, nope, nope.

How to Win Friends and Influence People.

How much cheesier and scheistery a title could possibly exist? With a title like that I don’t know if he’s going to rob me or sell me a time share. I put off reading that for so long despite repeated recommendations from many people I respect. Life today is cynical and sarcastic and I’ve been a big part of it.

But part of me wanted out – I wanted to be positive, uplifting, constructive, and luminous. From the opening pages of the book, you can see that this book encourages all of those things. It isn’t New Age fruitiness, and it isn’t manipulative scheistery. It’s the refined process of decades of teaching public speaking and success in business relations. It was heavily researched and refined over many editions. For each princple it lays out, it gives anecdotes from people who took the Carnegie speaking classes, from historical figures, and from contemporary business people. The focus isn’t on doing things differently, it’s on completely changing your outlook on life and people and specific ways to implement that new self.

So what part of it confirmed a prediction of mine? After reading the first few chapters, I tried to implement as many variations on the basic principle as possible. The general idea is to care for other people enough to treat them well, reward them for their good works, and praise generously. So after getting results from doing those things I thought of, both from others and within myself, it was icing on the cake to read about those same principles later in the book! It made me feel like I really got the point of the book and that I wasn’t just following a checklist but becoming a better person.

(But despite all the goodness, it still sounds cheesy to modern cynical me)

What Would A Chicago-style YCombinator Look Like?

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YCombinator and other uber-early stage investors have made a splash in the investment and startup worlds since 2005. They give a small amount of funds ($10,000-$25,000) and mentoring to get founders to build a demo/beta product in a short period of time (usually 3 months). They attract founders that are typically younger and less experienced than those that would apply directly for angel or venture funding. The initial thought about YCombinator was that the founders would be too inexperienced or there wouldn’t be enough money to make something worthwhile. Instead, they attracted some very smart founders and connected them with investors who got some good exits. Now with exits like reddit, booming businesses like DropBox, and efficient cash machines like Wufoo, YCombinator is attracting better and better founders and getting increasing attention from investors and acquirers. I’m less familiar with the other incubators like TechStars, SeedCamp and Alpha Labs but they seem to be following similar trajectories as YC, with the location disadvantages of being outside of Silicon Valley made up by the trailblazing success of YC.

It has always bugged me that there was nothing like this in Chicago. Chicago has a sneakily large tech community. All the businesses here need lots of IT talent, but the lack of large software product companies means there is little recognition of all these workers. When the programmers are second, third, (or worse) class citizens at a company they aren’t driving the culture. In the tech community, the most prominent companies are 37signals and Threadless, each of which have dozens of employees. Google it’s not, HP it’s not, MSFT it’s not. So despite the fact that there are hundreds of thousands (?) of tech workers, many organized and active user groups, and some visible companies, all of which would make a good setting for a seed investment program.

What would it take? One or more people who are connected to the local tech and broader financing communities and a million dollars or so dollars. I’m not exactly sure about the time requirements because I don’t know how much time they spend each week while YC is in session or how much time they spend during the off season, but it is probably more like a seasonal than full time job. If each round consisted of ten companies given $20K, then you could launch 5 seasons for a million. Two or three million would give more runway to get an exit to replenish the fund. Surely there’s someone in Chicago with a couple million bucks that would like to be the Brad Feld or Paul Graham of Chicago.

But a recent study by [NAME] of all of the seed programs found that in order to be successful, you can’t just copy the model – you have to provide something unique. YC has four years of track record, hundreds of companies, trust from investors, and some of the most charismatic and talented mentors. They also draw from a worldwide audience, so if someone in Pittsburgh or Denver wants to build a quick demo and gets admitted to YC and AlphaLabs or TechStars, they would probably go with YC rather than their local program. So if you want to matter and get access to high quality founders, you need to offer a differentiated experience.

So what could a Chicago program offer? Not access to investors – Chicago is so remote from the VC and angel communities as to be basically off the map. Not access to tech media. What does Chicago have? Businesses! Not just big non-tech business, but the whole principle of the companies is to do business. Simple formula – create value and sell it for less than it cost you to build. While Steve Blank and Eric Ries have gotten a lot of play lately with the #leanstartup principles, but it’s the same principles that 37signals and Threadless were built on a decade ago. Maybe it’s because of the Chicago Big Shoulders legacy, or just becasue the lack of VC funding means there’s no other choice. But bootstrapping is part of the Chicago culture and the best distinguishing feature Chicago can offer.

So how could you structure a seed-size investment with a bootstrapping focus? Take the same $20K for two founders but space out the disbursal *so it’s not enough to live on*. Maybe $2K a month over 10 months, or disburse more money when you hit pre-agreed metrics, or some twist like that. This would serve two purposes – first, to put the heat on to deliver some value immediately and get paying customers right away, and build off of that. People would have to either have jobs, a pre-built demo, or some deep domain expertise and connections. Second, it would send a very clear message that it is NOT for speculative technology products. Not that there’s anything wrong with those, we just don’t do them here. Chicago has little to offer those kinds of founders and it would be a disservice to them and the city to encourage them to be here. Other than that, I would say it’s straightforward execution. I’d recommend against centralized office space because there would be a temptation to put it in the Loop but that’s probably the wrong place. Maybe Lakeview of Ravenswood.

Who would run it? My obvious choice would be Jason Fried. He’s the most vocal and prominent proponent of bootstrapped startups, not just in Chicago but probably the world. He has the money, the clout, the media presence, the influence, and the experience to drive it. I don’t know if he would take time away from 37signals to run it, but I’m sure that much of the activity would coincide with his usual speaking engagements, and his connections and popularity mean that he could probably make the arrangements with less work than someone less prominent. I don’t know who else would be a good fit but that doesn’t mean that person’s not out there. So Jason, if you’re listening, or anyone else who thinks they could do the job, email me at peter at pchristensen dot com and let’s talk. There’s an opportunity here to vastly increase the visibility and success of the bootstrapping/lean startups message by letting prospective entrepreneurs prove your point.

Recap of My Experience at TechCrunch50

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I was fortunate this year to attend the TechCrunch50 conference in San Francisco. It was a little bit of an odd fit for me because GeekStack isn’t ready to demo, so we weren’t presenting, and in current investment circles, you need not only a proof of concept project but also some market traction in order to get serious interest from investors, so I didn’t pitch much either. I just used the conference as an opportunity to meet people, network, have fun, and see some new tech companies. The whole conference was kind of up and down for me, so I’ll put the highlights in a non-chronological, roller coaster format.

GOOD: My GeekStack t-shirt was ready and shipped in time and it looked great!

BAD: My sample card/business cards did not get shipped to my house in time for me to bring them with.

GOOD: Debbie at the 24 hour FedEx Office location on Blossom Hill Rd in San Jose helped me print some improvised cards on glossy cardstock and cut them to size. They didn’t look as sharp as I hoped (the sides weren’t aligned right so I got some funky borders) but they were in my hand and not so expensive and they were a hit with the people I gave them to.

BAD: The Japanese guy who parked next to me couldn’t figure out how to get his demo materials out of the trunk (he had a valet key)

GOOD: I showed him how to fold down the back seats and his morning was saved.

BAD: There was little to no AC in the convention hall and 500 people + 499 laptops quickly made the room uncomfortable and thus began 2 straight days of wiping sweat from my face every 5 minutes.

GOOD: Some of the companies were really awesome!

BAD: My eyes glazed over every time someone started talking about advertising or social media (that was a lot).

GOOD: Lots of people think adding game-like features (leaderboards, levelups, scoring, etc) is a good way to motivate people to use their apps.

BAD: This will get overused and people will get sick of it. Do I hear “Web64” coming?

GOOD: The judges on day 1 were awesome! Yossi Vardi kept the audience laughing and kept his fellow panelists from being too stuffy in the morning, and Paul Graham asked on or two oddball questions that kept all the startups on their toes. The day 1 afternoon panel of Marissa Mayer, Roelef Botha, Marc Andreesen, Paul Graham, and Tony Hsieh was flat out impressive.

BAD: I didn’t really care for any of the day 2 judges. Partly they were boring, partly I was tired, and partly the heat sapped the enthusiasm out of everyone.

GOOD: RedBeacon did a very impressive demonstration of their product that included delivering 500 cupcakes to the audience (delicious, sweet delicious cupcakes at that).

BAD: Judges kind of skewered them because while they did an effective demonstration, they didn’t answer the key “chicken and egg” problem they faced. pg coined an useful rule: “If you have a chicken and egg problem, you should spend the bulk of your presentation explaining how you will deal with the chicken and egg problem.”

GOOD: The RedBeacon guys are super sharp, did have answers to the concerns the judges expressed, and ended up winning the whole kit-and-kaboodle of the TechCrunch50 prize, the $50K, and $1.3M in advertising, a ton of pub, plus the last sumtuous laugh.

BAD: iMo came out with a high energy demo, dressed in a racing suit and helmet with “Eye of the Tiger” blasting . . . and he had a tech glitch so his demo didn’t work. Despite vigorous applause and encouragement from the crowd, led by Yossi Vardi, he couldn’t get it working in time and they had to move on. Keep in mind that this is a 20 year old kid who came from India by himself. It was the most heartbreaking thing I’ve seen in a long time – it was like watching a basketfull of kittens get fired from their kitty jobs and evicted from their basket.

GOOD: iMo returned in the afternoon to thunderous applause and demoed his iPhone app that lets you use the iPhone as a controller for PC games. He used it as a steering wheel for a racing game (in red racing suit and helmet to “Eye of the Tiger”, a joystick to control a flight sim (in a flight suit to “Danger Zone”, and to control a thug shooting up a house and throwing a grenade (in baggy jeans, a tank top, and swinging a baseball bat at a Sequoia VC to the tune of “In Da Club”). He brought the house down, and even though the judges didn’t think there was much of a business, they were all intrigued because he was so gutsy to fail, come back on, light up the crowd, and electrify the whole audience. He ended up winning the Best Presentation award.

BAD: Did I mention it was hot? I tried really hard to care about what was going on the second day but I couldn’t sit in the main hall for more than 30 min at a time.

GOOD: I got to meet people in the exhibition space, played with a MSFT Surface table, played Beatles Rock Band (but the yellow drum pad didn’t work so I kept losing) and found some more of RedBeacon’s cupcakes.

BAD: I didn’t win the free iPod that SalesVu was raffling off, but I did get to see the SalesVu demo – Point of Sale Software as a Service. I probably didn’t get all of the finer details, but it’s a point of sale terminal and app for restaurants for $1K instead of $10K it usually costs.

GOOD: Lots of people gave encouraging words about GeekStack and a couple of people wanted me to get back in touch with them when we have a demo.

BAD: I found out about Challenge Games, a Sequoia-funded company with $15 million and a team of cagy internet gaming veterans. Their CEO wrote the first book on online gaming communities. He wrote the freaking book. This knowledge put me into a little bit of a tailspin because my whole “no one else is doing trading card games online” myth went up in a FAT pile of smoke. Challenge looks awesome and I felt like the fat kid with no date to prom after looking at their site.

GOOD: I had a nice alcohol-fueled chat with some cool guys from Spawn Labs during the cocktail party who thought GeekStack was AWESOME and that I should be glad that Sequoia funded someone, because Sequoia investments tend to precede huge success. What better kind of validation could you ask for? This especially meant a lot because they had an awesome demo themselves.

BAD: I had to leave early to walk to catch BART to SFO.

GOOD: I found a group of guys driving to the airport, and one of them lived in the dorms with me in my freshment year of college. Hadn’t seen each other in 12 years and we met in the TechCrunch parking lot.

BAD: The fast ride to the airport meant that I had over two hours to wait for my red-eye flight.

GOOD: I had time to write this report of a great trip! Thanks to everyone at TechCrunch50!!

Summary of thoughts on the startups:

Ones I’m most excited about as a consumer: AnyClip (find any clip from any movie), Clicker (the ultimate guide to TV on the internet), Spawn Labs (play console games one any PC over broadband), iTwin (plug and play folder sharing over the internet – like DropBox but with a dongle instead of a download) and StorySomething (personalized bedtime stories delivered daily to iPhone).

Interested in as a business customer: Yext (pay-per-useful-call), CrowdFlower (Like the RightScale of Mechanical Turk).

Most likely to be an enormous, economy-changing company: RedBeacon. The judges nailed it with this pick. There’s a lot of work ahead and the usual ways to stumble and fail, but they could be as big as the Yellow Pages mixed with eBay. And as I mentioned, the guys couldn’t be nicer or sharper. In 10 years I’ll be saying I knew them when they were just starting out.

Why You Should Watch TWiST (and what’s so special about episode 13)

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[FULL DISCLOSURE: I’ve called into TWiST and received great benefit from it and will be a fan forever because of it. Also, although I’ve wanted to write about TWiST saying many of these things for a while, he is offering an iPhone for the best review, and that offer kicked me into gear.]

If you’re like me (and let’s face it, since you’re reading my blog, odds are you’re like me), you’re probably what I’d call a Hacker News Entrepreneur. By that I mean someone who probably grew up with computers, love them, have been programming for ages, maybe studied CS, and have an interest in starting a tech company. Hacker News, a community news website run by Paul Graham and YCombinator, is a fantastic place for people like us. There’s a mix of tech and startup related articles with some of the smartest and most civil discussion you’ll find anywhere on the internet.

If you read Hacker News a lot, you can’t help but have some of pg’s startup philosophy rub off on you. Some aspects of this include quick iteration, incorporating user feedback, making things simple to buy and use, and taking something valuable but difficult and democratizing it. The cornerstone principle and motto of YC is “Make Something People Want”. A side effect (or maybe driving principle?) of this is that there’s a tendency towards having many small customers who require little support or interaction to get value from your product. This does NOT mean pg discourages customer service – it just means you should make your offering so simple, intuitive, and well explained that most of your target market can figure out how to buy and use it without your help. Indeed, not only do YC companies have wonderful products, they provide the fastest, friendliest service I’ve encountered on the Internet.

This mindset and strategy is extremely alluring to computer nerds like us because we have a stereotypical (and let’s face it, well deserved) reputation for social awkwardness. For us, networking involves IP packets, not business cards. The media is something you burn isos on, not court for attention. Speak softly and let your code do the talking, etc. For people like me, Jason Calacanis comes off as a braggart, a schmoozer, a suit, a talking head, etc (I’ve heard worse but I’ll leave it at that). It seems to my kind that he cares more about the press than the product, more about promoting himself than creating value, that he’s got more hot air than great ideas. I know that before I started watching his new show This Week In Startups, this is the impression I had of him.

What changed? Lots of time watching listening to him talk and work. (And I do mean lots. Through episode 13, I’ve probably watched 25-30 hours of Calacanis TV.) The impression I described before is a caricature created by people who don’t know or don’t like him. Anyone can be caricatured – let’s do one of pg for fairness sake. This is a guy who sneaks around college campuses, encouraging people to quit their education and give him the fruit of their labor in exchange for the coins he has in his pocket. He’s telling the children (the children! Think of the children!!) that sleeping on couches and eating Ramen is the key to success. Ridiculous, but with a grain of truth, just like all caricatures. Given the chance to see anyone for who he is and getting to know what they actually do lets you form your own image of them. And I saw that he’s an enthusiastic, generous, hard working, just plain cool guy.

The grain of truth behind Jason is that he is a hustler, in the very best sense of the word. He makes things happen. His gift is in always making something happen. The contrast is striking on TWiST between the tentative callers unsure of how to express themselves and Jason’s fast talking, confident snap decisions. There were a couple times when a nervous entrepreneur described their project to him and he offered to invest in them on the spot. He’s often trying to move the conversation along when someone is belaboring a point that has already been made. He’s a talker, a communicator, a catalyst. He makes things happen in the real world.

That’s the key reason why all Hacker News Entrepreneurs should watch TWiST: For people most comfortable talking to a compiler, TWiST is your admission letter to Sales, Marketing, and Media University. You’ll pick up a ton just from the stories he tells, the way he interacts with people, how he manipulates the media, and the advice he gives. For instance, he demonstrated how to push peoples’ button to get attention when he made a PSA against Apple Fanboys that got a ton of attention. It’s hard to describe, but you’ll know it when you see it. It might not be your style (it’s certainly not mine) but it is eye opening and even if you don’t do everything he does, you’ll be a better entrepreneur if you’re aware of all the tools he showcases.

In Episode 13 (from August 28) he used several of these tools. Every week he dhows how to advertise by example but this time he was more explicit about what he was doing. Several times throughout the show he has a sponsor break where he has everyone on Twitter thank the show’s sponsors. This starts with the couple hundred of people that watch the show live and then there’s a long tail over the next couple weeks as people download and watch the show on their time. This gets a ton of tweets for the sponsors and cements them in the viewers’ minds since he gets them to take action in response to the ad rather than listen passively. (BTW, thank you to DNAmail, Ustream, WebSpy, and Audible!)

Another lesson (it really was a lesson, he prefaced it and everything by saying “I’m going to teach you marketing”) was about intelligently using money for marketing. He had three contests for three different purposes. First, he offered a $500 Apple gift card to the person who wrote the best review of the current episode. This is straightforward marketing (using money from one product to market the same product) but amplified by the contest. Next, he used one platform to promote two others. He offered a Mahalo prize pack, a schwag bag with a Mahalo hat, beach towel, mug, iPhone case, etc to the first 100 viewers to see the movie We Live In Public that a friend of his made. Finally, at the end of the show, he gave the promotional ad for audible (50% off first 3 months) and then chipped in $1000 of his own money to cover the other 50% for the first 50 viewers. This was adding money to increase the value to the sponsor (people signed up faster – 7 signed up before the end of the show), increase the value to the viewers (by $1K) and increase the value to his show (because more people are participating in it and will talk about it). So in a couple hours he showed three different ways to amplify marketing dollars and get the most attention and action for your buck.

There’s no way this next trick would work, not on savvy readers like you. You’d never fall for an inflammatory statement that manipulated you into action would you? Twice Jason use that trick. First, when announcing the episode review contest, he said “I don’t know if this will work. Probably only 5 people will do it.” I wrote in my notes right then “Fat Chance”. I suspect Jason knew exactly how that statement would motivate people and I just want to know how close his estimate was to the final number of reviews. Second, when talking about We Live In Public, he called out anyone that considers themself a social media guru and said if they don’t see this movie, they don’t know anything about social media. I’m sure this caused a lot of people to bristle and say “I’ll show you Calacanis, I AM a social media guru. I’ll see your little movie.” And they will. And the beauty of it is, Jason got them to do what he wanted, and he doesn’t even know who they are! Watch and learn.

Enough about Jason, what else can you learn from the show? Every week Jason and his guests answer questions from listeners who call into the show. It’s a great opportunity for rookie entrepreneurs to get advice from two or more veterans, and the questions have covered a wide range of topics. They spend 10-20 minutes with each caller so there’s a lot of quality discussion. For instance, this week someone called asking about doing a consumer electronics startup, and another person asked about tips and pitfalls when consulting for a big company. Previous calls have been about what to do if you’re have a family but want to do a startup, what to do with a stagnant product that’s no longer competitive, and many more. All of them have been interesting, and if your topic comes up, it’s pure gold.

Something that debuted this week was Jason’s Shark Tank, where people call in with a two minute pitch. After the pitch, they receive a critique of their product and their delivery. Jason is even looking to angel invest in pitches he likes. I don’t think they’ll ever settle an investment on the air but I wouldn’t be surprised if he does invest in some of the people that call in. The first two were about a Digg for emotions, and a LinkedIn for teens (they both sounded better than the 3 words I gave them).

The biggest single part of each show is the interview. Because of his media background and the fact that he’s in Los Angeles instead of Silicon Valley means that he gets a different set of guests than the usual Silicon Valley faces. This week was Matt Mickiewicz, founder of SitePoint, 99designs, and Flippa. Like most of the interviews, he talked about his life and entrepreneurial background, current projects, future plans, and tips for aspiring entrepreneurs. I hadn’t heard of any of the guests before they came on the show so it’s refreshing to meet a whole new set of faces.

returnkingSo after 1,700 words mostly praise (with the occasional backhanded compliment), is there anything I don’t like about TWiST? The biggest drawback (which is also a strength) is the length of the show. Most shows are about 2 hours, with some crossing the 2.5 hour mark. I dread the day when there’s a Return of the King length episode what makes my iPod catch on fire. On the other hand, the content is all entertaining and valuable, so I consider it an investment. You really have to care about startups or the show just won’t be worth the time. But if you do care about startups, consider it a free survey course from the University of Mahalo School of Business.

Bootstrapping: Weapons of Mass Reconstruction

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I’m a Hacker News-style entrepreneur with a family situation that precludes seeking investment or working full time. This has caused me to seek out a wide variety of resources as I learn about entrepreneurship. One of the writers I regularly read Sramana Mitra. The writing in her regular column is usually not that applicable to me; it’s more aimed at macroeconomic-scale Big Entrepreneurship. I read it anyway because it’s inspiring, hopeful writing and although it’s not applicable to my situation now, who knows where I’ll be in 5 or 10 or 20 years.

Having said that, I was very excited to hear about her new book “Bootstrapping: Weapons of Mass Reconstruction”. It’s a book full of interviews with entrepreneurs who have successfully bootstrapped their companies from a kitchen table to millions of dollars of revenue or an acquisition. I like this kind of book because it goes into more detail than a typical blog post or article, and the interview style is more human than the usual business book third-person style. So I went into the book with high hopes, and those high hopes were met (with a caveat).

My favorite interview of the whole book was the first one, was with Greg Gianforte. I’d read Greg’s bootstrapping book Bootstrapping Your Business: Start And Grow a Successful Company With Almost No Money before and heard him talk – he’s an engaging, funny speaker and writer and I’d recommend him to anyone. I also felt a stronger connection to his story because he was more of a software entrepreneur like me (well, like I’d like to be).

The interviews in the rest of the book were every bit as lively and entertaining, but most of the founders were in media, advertising, or content, not specifically software. For someone who was interested in one of these areas, this book is a gold mine of experience and insight. I ended up reading them because the writing and the characters were interesting, but the stories didn’t seem as personally relevant to me.

One more thing, despite the word “Bootstrapping” in the title, most of the companies either self funded or bootstrapped a prototype together enough to get angel or VC investment. So it’s bootstrapping in the sense of product before investment, not strict bootstrapping in the sense of avoiding all investment. Not a problem, just a clarification.

All in all, this book is every bit as good as Founders at Work, albeit with less well known companies and a media/content/advertising focus. It’s a good read for anyone interested in entrepreneurship and would be a priceless reference to anyone in those fields.

Internet Business Mastery QuickTip Index

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I just finished listening to all the back episodes of the podcast Internet Business Mastery. Since it’s an old show (started in October 2005) it has been fun to watch the hosts Sterling and Jay evolve in fast-forward. They started out with a lot of enthusiasm but didn’t seem quite sure what they wanted the podcast to be. Over time, they gained more polish, experience, and confidence and narrowed their focus. The production value of their show improved and they really started to implement their ideas in their own businesses and lives.

It actually a great sales pitch to compare the early episodes where they say “This is what we want to do” to the most recent episodes where they say “This is what we did and how it worked.” Anyone can say “Start and Internet business and you can travel the world,” but it’s a lot more credible to hear “We’re moving to Buenos Aires for 6 months just because we can.”

The podcast is pretty inspiring and somewhat informational. The free stuff is mainly good for little tips and inspiration. I haven’t bought their seminar, coaching course, or membership site access but I’m sure it’s much more helpful and thorough inside the pay-wall. For someone interested in meatier content about information marketing, I’d definitely recommend them.

One word of warning. If you’re reading my blog, you’re probably from the build-a-startup-and-make-it-so-good-that-it-becomes-popular-by-word-of-mouth school. If that’s the case, the focus mostly on marketing can sound a little slimy, a litte pushy, a little marketerese. While I certainly don’t advocate marketing at the expense of product quality, most developers are so terrible at and distrustful of it that any little bits they pick up will help. Things like using an email list, developing a sale over multiple contacts, etc. It’s okay to add value to your offering by marketing it. Wiser people than me have made this point. Sterling and Jay are a pleasant, non-threatening introduction to a lot of marketing concepts and I recommend them.

Two (very small) beefs. First, because they do a lot of affiliate marketing, they want you to click through their site and so they don’t tell you the name of the company or product they’re pluggig. You HAVE to go to their website to click. Second, their website isn’t very organized (it’s just a big pile of WordPress entries), so it’s not easy to find the link you’re looking for. Plus some of their links are wrong and most of the older ones are broken. So rather than complain, I compiled this list of all the shows, recommendations, and links for every episode. I did prune out broken links and time-sensitive things as well. You’re welcome!

[NOTE: Episodes 1-31 are no longer available for download. They will be sold later on CD with transcripts.]

[Read more…]

Announcing My Startup: GeekStack

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Are you in the mood for vaporware? An exciting idea? More of me talking? Then head over to my new startup GeekStack!

There’s a lot more info there (really, the home page is a wall of words) but the pitch is: “Collectible trading cards with the people, events, and achievements that our world is built on.” I have a first blog post up, called “Why Would A Software Geek Make A Physical Product?” which gives some more background and a sample of the writing style I’ll use (although if you’re reading this, you probably know how I write).

I have a lot of the ideas about how it will work but there are questions that still need to be answered. Check it out and take the chance to give me some feedback and help shape the development of the GeekStack.

Freemium Isn’t A Business Model, It’s A Marketing And Trust Strategy

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I’ve chimed in once or twice on the free vs. paid debate, and I’m firmly in the camp that you should charge customers money. You get money, they show some commitment, the expectation that comes with their money means you have an incentive to produce higher quality, and it gives you the funds and resources to sustain your business. Better yet, if they pay you repeatedly, you have predictable revenue and a baseline to measure the effectiveness of business-growing activities like marketing and advertising. So there’s the full disclosure of my preferences.Grain of Salt

Now you should definitely take my opinion with a grain of salt. I’ve neither succeeded at a paid business nor failed with a freemium business. I have never actually started or run a business. But I am good at listening to lots of people and figuring out who’s telling the truth, who has an agenda, and what assumptions lie behind what people are saying. And now I’ll apply that skill to Mark Evans’ latest post Freemium is Not a Business Model.

[For those who don’t know, “freemium” is where you have a trial or limited version of your product that still does enough to provide some value, and a premium version with more features or capacity or X that some fraction of people will pay for. The hope is that you make enough money off the premium customers to support the many free ones.]

Mark’s point is that many Web2.0 companies are using freemium as an excuse not to make something valuable. It’s not a long article, and this quote sums it up pretty well:

For consumer-focused companies, however, freemium is fool\’s gold…and, most important, it\’s not a business model to create a viable and vibrant company.

Your business model might be to make something good enough that people will use it for free, get a big audience, then sell your company. But then you’re not really creating a product customers, you’re creating a product on spec to sell to another business. If you know beforehand that that’s what you’re doing (Paul Graham recommends this approach), it’s fine; just don’t fool yourself into thinking that your users are actually your customers.

I don’t think that giving things away is inherently bad, but it has to be put in context. The point of giving your product away is to make impressions on potential customers. There’s another name for this: marketing. If someone is ever going to buy your product, they have to a) know about it, and b) trust it.

People who don’t know something exists will never buy or use it. Period. It’s exactly the same as how people never buy things that don’t exist. If a potential customer doesn’t know about your product, then to them it doesn’t exist. Giving the product away lets people use it, and others can see people using it, users tell other people about it, etc. Those impressions are the same or better than the ones you have to pay for in advertising, hence the appeal of the free sample.

When people use your product, they can tell if they like it and want more. For instance, there are a million different calorie tracker websites and programs out there. It’s not a hard programming problem, it’s a data (why isn’t the food I just ate in here?) and interface (this takes too long, forget about it) problem. Those are things you can’t determine from a sales website, and definitely not from the claims the seller makes. So I went for a couple years before I found a situation where I trusted one enough to try it. I got a recommendation for Gyminee from someone I respected, and since it was free, I gave it a try. I found it easy enough to use, with a combination of fairly good food database and extremely easy to use interface, so I’ve stuck with it and recommended it to a few people. There is a Pro version that offers things like meal and workout planning that I’m not currently interested in. But if I do get more serious about my fitness and nutrition, there’s about a 99% chance that I’ll keep using Gyminee and about a 1% chance I’ll switch. Letting me use the free features turned a single impression into a potential customer. (plus it made me happy enough to plug it to everyone here)

Is it worth it to Gyminee to have me? Is this a success (because I use and recommend it) or a failure (because I haven’t paid them anything) of freemium? We can’t tell! Without knowing their expenses and conversion rates, we can’t say whether this is good or not. Let’s play with some numbers and see.

Here are some wild guesses about their business:

  • Monthly hosting: $70 for a month for a 1GB slice from Slicehost
  • Startup living for 3 people in Hunstville, AL: $3,600/mo
  • Office, internet, etc: $1,300

This would give them roughly $5,000/month expenses. Gyminee Pro costs $5/mo, payable in 3 month chunks. So they would need 1,000 Pro customers to break even. If they convert 2% of signups into Pro accounts, they would need 50,000 registered users. If they have $50,000 in funding/savings/etc, then they have 10 months to get to that point.

What does this mean? Nothing! Even in this simplified model of their business, it’s a complex multivariate relationship. If they’re not where they want to be, they can do lots of things to improve it:

  • raise more money
  • reduce their expenses
  • raise prices for Pro accounts
  • create another set of features for a more expensive “Arnold”-level account
  • sell either the meal OR workout planning as a sub-Pro account
  • create more leads and registered users
  • improve their sales process so they improve the percentages in their customer pipeline

You know what’s even better? They can do ALL of these things, within the limits of their time and resource constraints. For instance, since it seems like a young product, most of their costs have been related to designing and building the site. That is a fairly fixed cost that is already spent, so their best bet now is probably to get more and more customers to reduce the per-user cost of that upfront design work. Once your product is mature enough to be competitive, sales becomes more important. This is not some inherent quality of sales – when engineering makes the product better, sales becomes a relative weakness. When your sales grow fast and you enter new markets and people become used to your product, engineering becomes a relative weakness and that’s a good time to improve your product. You can improve your overall position by improving whatever is weakest in your business.

So if freemium isn’t when you should use freemium or not. These are the questions to ask:

  1. Are there enough people willing to pay for my product to support my business goals?
  2. Is there a subset of features of this product that’s enticing enough to stand on its own?
  3. What percentage of my paying market will be satisfied with that subset and decide not to pay?
  4. Based on my customer pipeline, what is my customer acquisition cost?
  5. What is my cost to support each free user?

So if (revenue lost in #3 + (#5 * # of users)) < (#4 * # of paying customers), then you should consider freemium.

Done? NO! This is not a one time calculation! You have to periodically reevaluate each of those to determine if that relationship still holds. So any changes you make should be temporary, so you can test the effects and decide if it is worth it to continue that change. It’s up to you to decide whether it’s fool’s gold or real gold.

Fool\'s or Real Gold?

Fortunately, there is a good place where we can see this in action – the iPhone App Store. It’s the one redeeming quality of all the mercilessly annoying whining about price changes in the comments: you get a record of different prices at different times. I’ve seen lots of examples where a company has lowered the price, made a lot of sales, shown up on the “What’s Hot” list, become popular, and then raised the price again. Sometimes, like for AirSharing and MotoChaser, where they have a free or low introductory price, then raise it. This serves two purposes: getting a feel for demand at different prices, and getting some free publicity.

Follow any discussion board for entrepreneurs, and there will be articles and conversations about pricing strategy every week. The reason people say it’s an art, not a science, is because the optimal pricing strategy is different for every business, and it changes as the business changes as well. Consider options, make informed guesses, and experiment until you find what works for you.

Or you could do like me, and work on creating free content that you have to pay to use. It’ll make sense soon – subscribe to stay tuned!

UPDATE: Dries Buytaert at Acquia and Mollom wrote a similar article about he uses a combination of freemium and open source to not only drive business but get valuable development contributions. Thanks Dries!

Chrome, the Google Docs-mobile

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A few weeks ago, Google Chrome was released with much fanfare, press, celebration, comic books, and praise (with the usual skepticism and contrarian views thrown in for good measure). People wondered if Google was getting into a browser war, an OS war, a land war in Asia, whatever. I kept waiting, kept waiting, kept waiting until finally … oops, no finally, just more waiting. No one pointed out the biggest strategic benefit of Google Chrome.

First, some background. Google makes a lot of money. Like, they didn’t have enough bathtubs in the Googleplex to put all the money in. They were going to build swimming pools to put their cash in but all of the pool contractors in the Bay Area were already committed, so they’re working on damming and draining part of the San Francisco Bay to make a pit big enough to put all of the coins, bills, doubloons, and gems that those little blue text ads deliver to Mountain View. Meanwhile, Larry and Sergey are impatiently waiting to fulfill their dream of swimming through it like Scrooge McDuck.

So Google = Money = Good. But they make ALL (like 99+%) of it from advertising, about 2/3 from search ads and 1/3 from contextual ads on other websites. So although they completely own this market, making more money than all of their competitors combined and more than anyone imagined was possible, this single-source-of-revenue thing scares the crap out of a lot of people (just ask anyone who has lost a job). That’s the only criticism of Google as a business that has any real substance.

What are the biggest, juiciest targets for a behemoth that needs another revenue source? Let’s look at the cash cows in the computer industry and how attractive they would be to Google:

  • Hardware: a total non-starter. While Google might run the best data centers in the world, it is also one of their major competitive advantages, both in cost and performance. Selling or sharing it is out of the question. Other fields like PCs or servers are too low margin compared to their current business. Besides, hardware involves atoms, and Google has no experience with atoms.
  • Operating Systems: Sure, Apple and Microsoft make a ton of money and high margins off of their OS products, but they also have decades of accumulated advantage, installed base, and brand equity. And they got to build those things back when people PAID for new operating systems.
  • Office Software: Someone at Google is at least as smart as me because they went through the same process of elimination and ended up here. So they’ve built and bought their way into Google Docs, which does enough of what people expect in an office suite that it is considered a plausible alternative to MS Office.

They built it, some businesses have adopted it, but they’re not making billions of dollars off of it. Why not? Let’s ask Joel. His Strategy Letter III is probably the most important business lesson that people don’t get.

The only strategy in getting people to switch to your product is to eliminate barriers…Think of these barriers as an obstacle course that people have to run before you can count them as your customers. If you start out with a field of 1000 runners, about half of them will trip on the tires; half of the survivors won’t be strong enough to jump the wall; half of those survivors will fall off the rope ladder into the mud, and so on, until only 1 or 2 people actually overcome all the hurdles. With 8 or 9 barriers, everybody will have one non-negotiable deal killer. This calculus means that eliminating barriers to switching is the most important thing you have to do if you want to take over an existing market, because eliminating just one barrier will likely double your sales. Eliminate two barriers, and you’ll double your sales again.

(Incidentally, he used Excel as his example, pointing to the last time a smart aggressive software company with one revenue stream was looking to diversify. Maybe office software is just more usurpable than operating systems.)

Google is facing a whole different set of barriers to adoption than Microsoft faced when attacking Lotus 123. What are some of the barriers to adoption facing Google Docs?

  1. Storage space is limited.
  2. MS Office has office has more features.
  3. It’s slower than installed apps.
  4. It can only be used when online.
  5. People are used to opening programs, not websites to work on documents.
  6. IT Departments won’t upgrade their browsers beyond IE negative three.
  7. [UPDATED] Some companies will NOT store their docs online – they only want them on their own machines/network (government, confidential, corporate secrets, etc)

Pre-Chrome, it looked like only #1 and sort-of #2 could be solved. Google, home of the original 1GB email account, isn’t afraid to offer more space when their products are mature. They have great developer resources to add whatever features are necessary, but the JavaScript foundation put a cap on the kinds of features that could be delivered with acceptable performance. The rest just seemed out of reach.

How does Chrome change this?

  • The V8 JavaScript engine greatly improves the performance, basically solving #2 and #3. Coupled with the size and bloat of MS Office, Google Docs on Chrome is pretty comparable for speed. Also, now Google can control the entire stack between the OS and the office apps (browser, renderer, JS engine, software, etc) so they can optimize in ways that they couldn’t do on other browsers. Both Google Docs in Chrome and MS Excel take 1-2 seconds to open on my computer, while Firefox 3 took about 4 seconds and went through several ugly partial rendering states.
  • Google Gears is pre-installed, which should speed up adoption of Gears and solve #4.
  • The “Create Application Shortcuts” feature means that you get a nice desktop link that gives you an applicationesque window with either the list of all your docs or a specific doc, which can also be easily synced for offline access. Take a look:
  • Google Docs vs MS Excel iconsBye bye, #5.
  • And last but not least, the $50 billion question, what about #6? Imagine a version of Chrome with a different installer that a) included an IT controlled whitelist, b) automatically ran the offline setup after installing, and c) created appropriate shortcuts. This means it can be centrally installed, restricted from general browsing, and treated like an installed app. IE6 or 7’s role isn’t changed. That would get the seal of approval of many more IT departments because of the greater control they would have over it vs a standard browser app.
  • [UPDATED] If there was an option to store documents offline only, that would solve #7. This would negate one of Google Docs’ biggest strengths (collaboration) but giving companies that option just might be worth $50B.

So in one move, Google addressed all but one of the strongest obstacles to Google Docs, paving the way for a much bigger, more profitable expansion and the coveted second revenue source. Can you think of any other obstacles to the wider adoption of Google Docs that Google needs to address?

[UPDATES: Thanks for the suggestion Evan!]