Oct 7 -- Before The Startup, Consumer Obscurity, Burn Rates and Product Roadmap. On startups burn rates • Board Observers. Bill Gurley gave an interview a few weeks ago in the WSJ where he sounded alarm on the very high cash burn rates of big startups these days. It triggered an immense debate as he was immediately echoed by Fred Wilson, this “Winter is coming” post from Techcrunch post along with deeper commentary from Mark Suster or Danielle Morill.
The trade-offs between profitability and growth is one of the most fundamental and (generally) misunderstood business topic in the startup ecosystem. Here I’ll explain why there is no “right” amount of burn for a company, and I’ll try to give you some frameworks you can use for thinking about this problem. Frameworks The first item is to remember that you should take all advice as directionally good guidance, but every business is different. What are the frameworks you can use to determine the optimal burn rate for your company? The milestone play The “milestone play” consists in getting your company to a point at which you can raise money at a higher valuation. Before the Startup. October 2014 (This essay is derived from a guest lecture in Sam Altman's startup class at Stanford.
It's intended for college students, but much of it is applicable to potential founders at other ages.) One of the advantages of having kids is that when you have to give advice, you can ask yourself "what would I tell my own kids? " My kids are little, but I can imagine what I'd tell them about startups if they were in college, and that's what I'm going to tell you. Startups are very counterintuitive. It's like skiing in that way. Startups are as unnatural as skiing, so there's a similar list for startups. Counterintuitive The first item on it is the fact I already mentioned: that startups are so weird that if you trust your instincts, you'll make a lot of mistakes. When I was running Y Combinator I used to joke that our function was to tell founders things they would ignore.
Why do the founders ignore the partners' advice? You can, however, trust your instincts about people. Expertise Game Try. Travel planning software: The most common bad startup idea. At CMU yesterday, I heard a story about how Yahoo Trip Planner has pretty much zero adoption. It has never taken off, though it remains online even today. Yahoo keeps it around because it's fantastic for recruiting.
People love to work on this idea! Yahoo recruiters lure talented engineers, designers and PMs to work on this project, then gradually shift them off to real value-creating projects once they're hired. Travel planning software (the kind that you would use with friends and family to plan vacations) is one of the most common ideas pitched. It has been attempted, and attempted, and attempted again. It doesn't surprise me that people go after this, though. Yet so far, this particular idea doesn't lead to massive success and incredible amounts of value creation.
This points to the deeper problem that underlies every product or service: obscurity. Which leads us back to trip planning. I used to think nobody needs this. Five ways to build a $100 million business. To build a Web company with $100 million in annual revenues*, you essentially need: Salespeople sometimes refer to "elephants", "deers" and "rabbits" when they talk about the first three categories of customers.
To extend the metaphor to the 4th and 5th type of customer, let's call them "mice" and "flies". So how can you hunt 1,000 elephants, 10,000 deers, 100,000 rabbits, 1,000,000 mice or 10,000,000 flies? Let's take a look at it in reverse order. Hunting flies In order to get to 10 million active users you need roughly 100 million people who download your app or use your website. Hunting mice To acquire one million consumers or prosumers who pay you roughly $100 per year, you need to get at least 10-20 million people to try your application. Hunting rabbits Most SaaS companies that target small businesses charge something around $50-100 per month, so their ARPA per year is around $1k. So how can you get one million signups for less than $70 each? Hunting deers Hunting elephants.
Before You Plan Your Product Roadmap - Inside Intercom. Are all your users using all the features in your product? Of course they’re not. Let’s talk about that. When planning your roadmap, and where the team spend their time, it’s useful to ask “how many people are actually using each of our product’s features? “. The core of your product is buried in the top right, because that’s what people are actually using your product for. If you have features in the top left it’s either a sign of a badly adopted feature or they are your enterprise plan features, in which case you’ve thought about this and it’s ok. An even simpler way to think about it is this: What percentage of your customers or users have adopted each feature? As every product manager knows, the messy reality of a product looks a lot more like this. How do you get here? But success can be a lousy teacher. So you added a chat room, but it didn’t go so well, you kinda botched the launch of it.
A side note on disruption In these cases you are vulnerable to disruption. Takeaway. How to Retain Your Startup's Best Employees. One of the most important changes is the workplace in the last 20 years is the notion that most employees are free agents. We are hired and fired and resign at will. It’s a markedly different era than the career salarymen of IBM’s heyday who remained with the company for decades from college graduation through retirement. In this highly-competitive talent market, where every employee is a free agent, hiring and retaining talent has become a key strategic advantage. So, which are the best tools to create a vibrant and attractive working environment? A Tour of Duty has a defined mission, clear objectives, and a bounded time frame. Rotational Tours: rotational tours cycle an employee through a few different departments over the course of several years.
Achieving success in a of Tours of Duty demands a similar process to most well designed projects. I wasn’t familiar with it before reading The Alliance, but I really like the idea of a Tour of Duty. Most Startups Should be Deer Hunters. This post is part of my series “Startup Lessons“ Elephants, Deer and Rabbits – Some thoughts on start-up segmentation Nearly all of the mistakes I made at my first company I fixed by the time of my second company. This is the only mistake I repeated twice and it is a mistake that I see many, many companies make. I know that this advice won’t apply to every possible startup – but I think it applies to many. When you start your company the very first question you need to ask yourself is which kind of customers do you want to serve. Many start-ups (and even growth firms) lack this discipline and they therefore serve customers off all sizes.
Make sure you know what the size of customer you want to serve is, what the people in a company of that size do, the problems they have, the features that will resonate and the channels you’ll need to sell into and service that customer. I’ve stated my animal bias in the title – but each can work for different business types. Elephants: Rabbits: Deer: