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.

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.

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.]

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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.

I had great fun writing my last article “What Kind of Software Would People Actually Pay For?” because it helped me flesh out a lot of the ideas that had been swimming around in my head recently (actually for the last few years). And it actually made my Masters Degree in Urban Planning useful!

[Hold on kids, Uncle Pete is reminiscing]

Urban history is just economic history viewed from a different angle. Farming and agriculture was the dominant form of life for thousands of years because it was the best economic option – access to soil and water was more important than access to other people. Even if you couldn’t sell the food you grew, at least you could eat it and not starve.

With the economies of scale gained during the Industrial Revolution, congregating in cities became a better economic option for many (and eventually most) people. [Warning: US-centric view of history ahead] Despite the horror stories of Victorian London of the Chicago stockyards, life in cities was a better choice, especially for people who didn’t own their own land. The technological developments of the era (steel mills, railroads, electricity, heavy manufacturing, etc) made those who developed and invested in them rich, and the cities that accommodated them prospered. Cleveland in 1900 had all the optimism and glitter that cities like Seattle do now. Starting around the 1970s, the US economy shifted from primarily manufacturing to services like finance, insurance, accounting, advertising, marketing, law, high tech, research, software, etc. This if referred to the “white collar” or “service economy” and is what we have now.

Some people claim there is another economic shift underway, from providing services to providing experiences. This idea was first developed in the book “The Experience Economy” by B. Joseph Pine and James Gilmore. Examples of this are how a regular amusement park may offer fun rides, but Disney provides a complete immersion in their (surreal, creepily clean) world. Dunkin Donuts sells you coffee, but Starbucks provides a cozy place with hip music. Nike doesn’t sell shoes, it sells athleticism. You get the point.

[Reader interrupts]

Reader: Peter, why are you giving me a history lesson? That’s not why I read your stuff!

[Peter shakes the glimmer out of his eyes and gets back on track]

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[UPDATE: See two update posts: “The Value in in the Experience” and “Music Operates Directly on Your Abstract Syntax Tree“]

The “Free” Firestorm

Hank Williams, my recent blogging buddy, lit the internet on fire recently with a series of posts where he accuses venture capitalists of collapsing the market for software entrepreneurship by funding so many companies that give products away for free. He says:

In today\’s “free” world, in most online business categories, it is inherently impossible to start a small self-sustaining business and to grow it. This is because in the digital world, advertising, the only real revenue stream, cannot support a small digital business. If businesses were based on the idea that people paid for services then small companies could succeed at a small scale and grow. But it is very hard to charge when your competition is free.

…Venture capital has totally distorted the market. VCs are investing billions of dollars in companies with instructions to get big fast and to worry about advertising revenue later. As a result the competition is for users and not paying customers.

Then at Startup School 2008, DHH took Hank’s fire and poured a 500,000 DWT oil tanker on it with his talk “The Secret to Making Money Online“. And what was the secret? Charge people for your product! Breathtaking, isn’t it? We’re living a world where feathers get seriously ruffled when you insinuate that people should have to pay money for stuff.

This recent “free” debate needed to happen, and some good points were raised. Anything that can be digitized can be copied and distributed for (essentially) free on the Internet, so anyone whose business is digital or digitizable needs to understand free. It can either be an advantage (if you’re starting from nothing and building up) or a disadvantage (if you used to rely on high copying costs to protect your profits – I’m looking at you, music and movie industries).

Breaking Free From Free

What does this mean for software entrepreneurs? Right now the market for people wanting to make money off the Internet (supply of entrepreneurs) is growing, the demand for free software is growing, but what about the demand for non-free software?. Reg Braithwaite aka Raganwald asked a great question:

What does this mean for startups and business models? Is this effect stronger in some niches (programmer tools, for example) but weaker in others (enterprise integration applications)? Does SAAS change the game? Does pricing a product so that it is credit-card-ware change things?

Rather than answer those specific questions (which I don’t have any particular insight or experience into), let’s look at some guidelines for anyone trying to grow a profitable, Ben and Jerry-style software company. Hank gave his advice on the subject in “Seven Dos and Three Dont’s for Creating New Web Products” post (definitely go read the whole post for details and examples). Here’s my list of 5 principles to evaluate an idea to see if people will pay for a product that:

1. Supports serious, expensive hobbies
2. Is so outstanding it redefines its category
3. Helps businesses spend less money
4. Helps businesses make more money
5. Can be bought easily and instinctively

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I’m a cheap guy who doesn’t like to spend money on software. I’m not totally against it, but I have awesomer stuff to spend my money on like diapers, mortgage payments, and $4 gas. I enjoy using free tools or trials offered by the software entrepreneurs I know, but no matter how much I like them, I could live without most of them.

Not DropBox.

DropBox solves a pain I’ve had for years, a pain that never relented or could be relinquished – keeping data consistent across multiple computers. I usually have 2 computers at work (a desktop and a laptop), plus my laptop at home and 2 more desktops. I tried to keep a folder that would sync across all of those machines but I never found a process or product that could do it for me, so I just decided to live without access the files I wanted. I’m not even talking about a 100 gigabyte media library, just things like notes, drafts, some pictures, etc.

I’ve been using DropBox since it came out in beta, and it solved my problem so completely that I had to consciously think to remember what life was like without it (kind of like trying to remember what it was like to install a device driver on Win 3.1). There’s a client app you install that watches your DropBox directory. It then syncs all the files in that directory tree with a copy on their server, and pushes the changes out to other machines where you’ve installed the client app. So far, It’s fast and flawless.

But wait, there’s more! Since it syncs by sending changes to your file instead of the entire file, it also keeps a backup and revision history so you can restore older versions (again, across all machines), like source control for dummies. They also encrypt the files, both in transit and on their servers, so your stuff is safe.

Still not sold? Since copies of all your files are on their servers, you can access them (including revisions) over the web! So if you’re on a computer that doesn’t have the client installed and you just want a couple files, you can just grab them off the web.

It’s sort of funny, but despite absolutely loving the product, I hadn’t written about it yet because I didn’t know what to write. It worked so well that I didn’t even notice it 99% of the time. Have you heard of the book Don’t Make Me Think, one of the great books on designing for usability? (If not, GO READ IT!) If you need to see an example of those principles in practice, try DropBox. I didn’t have anything to write because I hadn’t really used the program – it just quietly served me like a good butler.

They’re still in beta. Once beta is over, there will be small free accounts and paid accounts with more storage. Beta testers will retain a free account that’s bigger than the standard free. I have some beta invites left, so if you’d like to try DropBox (and if you don’t, why the heck are you still reading?), email me and I’ll send you one.

I’ve been beta testing a new project management software tool called StreamFocus, and unlike most other betas that are either nice or just plain lame and it’s easy to dismiss them. Also, the other products are consumer apps and therefore a) simple and b) extremely streamlined for easy, intuitive use. StreamFocus, unfortunately, is neither of those. So why am I sitting here still writing about it? Because it looks like it will make lots of money for very wealthy customers.

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