Agents, Ninjas, Honchos: Three Types of Advisors

Written by:   |     |   |     |  

Small and fat little ninja

Startups at all stages benefit from the wisdom of advisors. These people typically complement the management team in some meaningful way. They are not on the board, so their advice is merely guidance. Still, if a founder picks the right advisors, she will receive a wealth of benefits.

Advisors can serve as:

  • A sounding board to discuss product roadmap, partnerships and channel arrangements, personnel issues, and strategies for various departments.
  • Qualified eyes to vet opportunities before they go to the board.
  • Connectors to talent when it’s time to hire.
  • Big names that offer credibility during fundraising.
  • Future board members. Time spent advising is a great opportunity for the founder and advisor to audition each other as potential partners.

There are several advisors out there who provide little value. Everyone wants to be a part of — or find — the next big thing. A founder with a good idea and solid strategy will have her pick of potential advisors in exchange for equity. So, how do you decide?

There are three basic types of advisors, each with their own strengths. A good management team will select advisors from all three types and focus on what the startup needs most.

Honchos – The Industry Veterans

Like the name suggests, these are the big dogs. Honchos are the veterans of your industry. They know the ins and outs of your business, and they typically know where you’re headed before you do. They bring credibility to a venture that may be trying to gain momentum, and that credibility could be just what a founder needs to rise above the noise. For this reason, honchos are particularly beneficial pre-funding.

Honchos are found by looking vertically. Who is the best in your industry? Everyone probably knows their names. Ask around and gauge people’s impressions. If having a particular person associated with your company impresses everyone, chase that person down and make it happen.

Unfortunately, honchos are typically the most expensive advisors and will devote the least amount of time to you and your company. Honchos typically require meaningful equity compensation. Plus, it’s possible they may be working with your competition. Remember: When you bring on a honcho, you are paying for her name more than her time.

Ninjas – The Functional Experts

These people are the functional experts who can swoop in and help with particular business challenges. They have the largest variation in compensation, and they may advise long-term or for a set period of time until one particular problem is solved.

Ninjas can help you optimize an aspect of your business that you are struggling with.
Founders can find good ninjas by searching for leaders in particular functions. Who has experience finding operational bottlenecks? Who is the best at marketing, finance, or whatever happens to be the most pressing issue? Ninjas can be helpful at all stages of a company. Ask for their advice and offer them equity when their eyes light up with enthusiasm.

Ninjas can add tremendous value to your company, but don’t become too reliant on them. They are still just advisors; they aren’t running the company. Beware of know-it-all ninjas who don’t know when to get on board or how to step out of the way. Ninjas may prefer equity or cash depending on the stage of the company and the length of the engagement.

Agents – The Connectors

The agents are the connectors. They probably don’t know — or care — much about your business model or technology, but they know a lot of people. Because they have a good idea of who will click, they are great for finding a tricky management hire or top-notch developer.

Agents are often investors, journalists, consultants, recruiters, and other cross-company professionals. They could either have big, public reputations or operate under the radar. Some of the best agents don’t maintain LinkedIn profiles. Either way, they probably know some important people you won’t be able to find any other way.

Typically, agents are more beneficial when companies are slightly bigger. They are the ones to help you fill out your employee roster or land key partnerships, so it’s usually good to have financial backing already. You can find them by asking around (and sometimes they find you first). Agents tend to have a big network across industries. They sometimes take equity but may prefer cash compensation.

Every startup should have a variety of advisors. They will point out solutions the founder can’t see, offer credibility, and make connections that couldn’t be made otherwise. Be wise about how much equity you offer; pay an advisor only as much as you believe justifies the value added to your company. Look far and wide for a healthy selection of the three types so you aren’t building the company by yourself.

This article originally appeared in “Up and Running Blog” and a link to the published post is available at: http://upandrunning.bplans.com/2013/04/30/agents-ninjas-honchos-which-advisor-is-best-for-you/.

Leave a Comment   |   |     |  

Poor Pricing Kills Startups

Written by:   |     |   |     |  

Withered corn in clouds

Founders don’t spend enough time examining pricing. They’re too busy working on more important issues such as releasing version 2.0 and raising enough capital to keep the doors open. Brilliant entrepreneurs who build useful products generate substantial value, but in order to capture this value, they must implement rational pricing strategies. If you’re one of these entrepreneurs, here’s a quick guide on how to get started on pricing and avoid the most common traps:

First, study your competitors. Don’t reinvent the wheel. Even if you’re stronger, faster or prettier, it’s safe to say your competitors have done some homework already. Research competitive products’ websites and go through their purchase processes. Ask some of your prospects or beta users how they evaluate products or services in your space and what their decision flow is like. Is the customer accustomed to modular or all-in-one pricing? Are there price tiers? How steep are volume discounts? Note surprises and nuances that apply to your business model.

Next, launch softly with a high “introductory” price. The concept of an “introductory” price is powerful because it grants leeway for adjustment, yet also creates a sense of urgency that drives business through the door. Circulate this price freely among beta users, email subscribers and other ready-to-buy prospects.

Your introductory price should be enough to cover costs, but there’s no need to stop there. Consider pricing your product at the high end of your comfort zone. Although it’s hard to increase your prices once they’re in circulation, you can readily reduce them. Furthermore, a high introductory price sends a signal to the market that you have a quality product.

At LogMeIn, a company I used to work for as vice president of online marketing and operations, we priced an iPhone app at $39.99 back when most apps were less than $2. Despite some initial complaints, enough customers accepted our price point that the software became a Top 20 grossing app.

Over time, test a cross-section of lower price points. Once you’re comfortable that prospects understand your pricing model and your price point is in the right ballpark, you can periodically lower your prices through one-time discounts and product bundles. It becomes easier to fine-tune your pricing as volume increases.

One handy way to price test is to divide your prospect email addresses into random buckets, issue coupons and measure total revenue generated. We once tested four coupons for LogMeIn Pro: $59.95, 69.95, 79.95 and 89.95. Customers reimbursed the highest proportion of $59.95 coupons, but the $69.95 coupons generated the most revenue, so we lowered our price accordingly. If lacking a big prospect database, you might perform a similar test by striking through old prices on your purchase page, offering new prices each week for four consecutive weeks, measuring the revenue generated, and tweaking appropriately.

Finally, examine pricing attributes in the context of your overall business:

- Published pricing is a blessing and a curse. This applies primarily to B2B companies. Price awareness lowers the friction for silent prospects who are close to purchasing, but it also diminishes your flexibility. If you choose to publish pricing, you can avoid boxing yourself in by requiring expensive price tiers and high-volume customers to contact you for information.

- Free and freemium models drive growth at the expense of short-term profitability. If you can afford it, consider giving away parts of your product or service for free. Explore capacity based freemium models, which require customers to pay beyond a usage threshold, as well as feature-based freemium models, which provide free basic features yet charge for premium features.

- A little grace goes a long way. You don’t need to immediately penalize customers for exceeding price tiers or breaching license agreements. To your customer, there’s nothing worse than logging in to find a big red X or coming back from vacation to realize service has been discontinued. Utilize grace periods and friendly messaging to keep customers happy so they become evangelists and refer more customers.

This article originally appeared in “The Accelerators” blog of the Wall Street Journal.  A link to the published post is available at: http://blogs.wsj.com/accelerators/2013/04/12/poor-pricing-kills-startups/.

Leave a Comment   |   |     |  

Three flavors of freemium

Written by:   |     |   |     |  

Vanilla ice cream

You wouldn’t think there’d be much of a difference between natural vanilla and vanilla bean ice cream, but for some reason, parties are more exciting when the host rips out the Haagen-Dazs with the little black specks.  Freemium models are like vanilla ice cream, most of the time we lump them together and consider them equal, but a further exploration reveals subtle differences that make some types more appealing than others.

First, there’s the “capacity-based freemium” model.  This is the strongest known freemium model.  If you offer capacity-based freemium, your customer can immediately get her foot in the door and start using your fully-featured product or service for free.  Your customer only incurs costs when her need scales beyond a quantitative threshold for capacity, usage, or number of users.  Simple examples include Dropbox (at least 2 GB) and HipChat (first 5 users).

Alternatively, there’s the “feature-based freemium” model.  Even though it’s weaker than capacity-based freemium, it’s easier to build into products and more widespread.  With this model, your customer can immediately use some version of your product or service completely free.  However, he or she must pay to use additional features or functionality.  Classic examples include LogMeIn (free remote access, pay for file transfer capability) and Skype (free VOIP calling, pay to dial out).

With both of these models, upgrade price tiers are often (but not always) correlated with cost.  Large deployments in the “capacity-based freemium” may be more costly to the provider.  Similarly, premium features may require additional infrastructure and incur higher OpEx.  However, your customer is oblivious to nearly all of this.  Here are three reasons “capacity-based freemium” is superior as far as your customer is concerned:

  • With “capacity-based freemium” you only need to solve ONE customer pain point, but with “feature-based freemium” you must solve at least TWO customer pain points – one drives free adoption and the other upgrades.  Oftentimes the customer doesn’t fully understand or recognize the second pain point until later.  (If the second pain point isn’t acute, the company suffers from low upgrade rates.)
  • With “capacity-based freemium” it’s easy to alter the pricing model.  The threshold is typically defined by a number (e.g. 5 users, 50 GB, 10 groups) that can slide up or down with minimal coding and messaging.  The impact of this sliding scale is easy to model out based on data previously collected.  On the other hand, “feature-based freemium” requires flipping a switch on or off.  Suddenly choosing to start or stop charging for a particular feature may result in drastic economic consequences.
  • With “capacity-based freemium” it’s more natural to incentivize referrals.  If customers Boring Barry and Average Anne realize they can get “more of the same” without whipping out a credit card, then why not nudge a friend or two?  They anticipate using more capacity and appreciate it.  However, they might care less about new features that they don’t understand.

Observe that these freemium models aren’t mutually exclusive.  Some companies may slap a “capacity-based freemium” model on the primary use case and “feature-based freemium” models across an array of features that appeal to a subset of the core audience.  Some premium features are popular, inexpensive, and have high conversion rates.  Others are elite and priced to a high-end, yet dedicated customer segment (with a low conversion rate).  Unfortunately, it’s the low-price and low-conversion features that exhaust resources and kill companies.

At last, the French vanilla of the freemium world is the “use case freemium.”  This overlooked and underused freemium model refers to products or services which are either free or paid based upon how the product is used.  The product functionality may be identical across use cases.  Examples include:

  • free for non-commercial use (often with a label indicating “this is licensed for non-commercial use” so as to embarrass out-of-compliance companies)
  • free for schools (perhaps a dot edu email is required)
  • free for certain distribution channels, and
  • free for non-profits.

Fortunately, these models are straightforward to test and implement.  On the other hand, customers can cheat these systems fairly easily.  Cheating is only a problem if your product or service is expensive to deliver; after all, cheaters may be evangelists and future customers.

8 comments   |   Leave a Comment   |   |     |  

Crowdfunding 101: pros and cons

Written by:   |     |   |     |  

Sheep off State Highway 7, New Zealand (copyright Steven Dupree, April 2010)

Private equity, the domain of Vanderbilts and Warburgs, brought a new form of financing to the 1940s.  With all its large minority positions and lucrative fees, venture capital hit its stride in the 1970s.   The turn of the century popularized the image of the brilliant, yet narcissistic independent angel investor.  Now, with the recent JOBS Act and a nudge from Capital Hill, will 2013 will be the year of crowdfunding?

As startup costs decrease and information flows more freely, each generation brings a suitable new form of fundraising.  Crowdfunding is the latest in the pantheon of inevitable funding innovations.  Outside funding from non-accredited investors is not quite legal in the US (sites such as Kickstarter and GoFundMe attract funding for projects with no promised equity) but this will soon change.  With the advent of crowdfunding, more entrepreneurs will get funded and more investors will share in wealth creation, so what’s the downside?  It’s tough to tell at first…

The best starting point is to understand how the industry is likely to evolve once crowdfunding hits the mainstream.  (For now, scholars, legislators, investors, and entrepreneurs will beat themselves senseless over the relative weightings of the associated pros and cons.)  In a world with crowdfunding, here are three new realities:

1. Entrepreneurs come up with less initial capital from themselves, friends, family, and angel investors.

  • PRO – Crowdfunding minimizes the tedious fundraising process (and its associated time and cost) so entrepreneurs spend more time where it counts, on the business.  Scrappy entrepreneurs from humble means are no longer disadvantaged when trying to launch companies from scratch.
  • CON – By putting less of their own skin in the game and no longer facing investors one-on-one, entrepreneurs lose out on the truly valuable step of convincing others.  Entrepreneurs collect less pointed feedback from critics so their early business models aren’t honed as well.

2. Significantly more investors participate in early financings with smaller stakes apiece.

  • PRO – Anyone who is interested and has a little capital to spare can participate in financings.  Ultimately, the industry shifts from “rich gets richer” to “smart gets richer.”  Diversification of the investor base is good for management, who receives a wealth of points-of-view but is no longer beholden to a small number of parties.
  • CON – Crowdfunding information is highly asymmetric with respect to what VCs and (to a lesser extent) angels obtain in diligence.  Investors are susceptible to fraud or just plain incompetence.  Since they’re further removed, investors find it difficult to obtain the necessary data to make smart decisions.  Some investors won’t understand many of the risks associated with crowdfunding.

3. Many more ideas get funded.

  • PRO – Complex, difficult, and niche ideas get funded.  Entrepreneurs not constrained to 5-7 year payback windows can pursue models with high creativity, democratized invention, and positive externalities in society.  Unusual companies (such as Copenhagen Suborbitals, a Dutch space company sending humans into orbit) have the opportunity to form, recruit sharp minds and push boundaries.
  • CON – Crazy ideas get funded.  More ideas get funded today than can possibly return capital, but with crowdfunding the percentage of successes markedly decreases.  A lion’s share of crowdfunded investments will never make money and investors will be out-of-luck.  While small, fragmented investments limit the catastrophic risk to any single investor, too many failures will give crowdfunding a bad rap and prompt regulatory tightening.

Crowdfunding in some form or fashion will inevitably increase over the next few years.  Companies requiring stealth or huge amounts of startup capital may continue to be funded in more traditional ways.  Venture capitalists will still plug the funding gap for growth- and later-stage companies.  However, in the immediate term, crowdfunding is poised to alter the entrepreneurial ecosystem significantly – just like angel investing, venture capital, and private equity before it.

This article was originally commissioned by the Stanford Center for Entrepreneurial Studies.  A permalink to the published article can be found at http://www.gsb.stanford.edu/ces/crowdfunding-101.

2 comments   |   Leave a Comment   |   |     |  

Midfunnel metrics matter

Written by:   |     |   |     |  

The state between Rhode Island and New York

Connecticut is famous for a long stretch of congested highway that’s perpetually under construction.  Anyone from Rhode Island who takes a holiday weekend in New York drives through Connecticut unless he or she is seeking the fall foliage of western Massachusetts – or is otherwise directionally challenged.

So how many Rhode Islanders visit New York each weekend?  Not many (most of us stay put).  You might find out by counting all the Rhode Island license plates you find across New York State.  But if you’re pressed for time, simply count the cars entering Connecticut from the eastern edge.  If you subtract the cars that exit the highway just beyond the border for Foxwoods Casino, there aren’t many other reasons to enter Connecticut.  You’ve discovered a reasonably precise proxy variable – but do you trust this number?

Most companies initially focus on optimizing the “top of the funnel” because it’s easy to observe and measure.  (Possibilities include page views, registrations, signups, downloads, and new subscribers.)  These metrics provide the largest sample sizes; however, they suffer the accuracy problem.  They don’t necessarily indicate actual value.  Have you ever turned on a campaign that generated a flood of leads with zero purchases?  This happens frequently with push marketing, co-registration, and broad campaigns.

On the other hand, some companies shift to the “bottom of the funnel” and endure a different problem.  (Sample metrics include transactions, customers, revenue, and bookings.)  While these are the ultimate objectives of your customer acquisition campaigns, they typically suffer the precision problem.  You may notice blocky or clustered data.  For example, suppose your hardware site purchases an AdWords phrase: “Phillips screwdriver for real cheap.” Your 20 monthly clicks may result in 0 purchases, but does that mean you should bid $0.00/click?  And when Boring Barry or Average Ann purchase 500 screwdrivers off this link tomorrow, should you suddenly bid a thousand dollars per click?  “Long-tail campaigns” with limited data are particularly susceptible to clustering.  Furthermore, many bottom-of-funnel metrics suffer time lag – marketers must wait through sales cycles to observe enough data to make optimization decisions.  Especially for B2B companies, these sales cycles can last several months.

So what’s the solution to this tradeoff between accuracy and precision?  You must identify midfunnel metrics.  These are metrics that yield large sample sizes and are quick to be observed, yet are reasonable indicators of actual value or future purchase intent.  At LogMeIn, we created a “quality trial” metric to describe someone who downloaded the free service and subsequently performed one remote session.  15Five studies trial users who file that first report.  A hardware manufacturer may measure campaign allocations against resulting “purchase page” views.  A nonprofit may examine the impact of programs on volunteer rosters.  What are some other examples of midfunnel metrics?

In our weekend escape example, you don’t need to count every Rhode Island license plate in New York State, but perhaps you can do better than staking out Connecticut’s eastern edge.  For a suitable midfunnel metric, I propose you count the Rhode Island license plates crossing the George Washington and Tappan Zee Bridges (just past the entrance to New York State).

If you’re from northern California, you may find it easier to place African countries than New England states on a map.  I’ve got you covered: substitute Lake Tahoe for New York and Sacramento for Connecticut.  Count license plates entering the El Dorado and Tahoe National Forests.  Everything else follows.

Leave a Comment   |   |     |