Are We In Another Startup Bubble?

Have you noticed how many online startups there are again recently? While it’s great for overall innovation, it can create a challenging ecosystem for budding entrepreneurs. I’ve spent more time than I care to remember, evaluating various businesses, looking at models, and seeking opportunities where I could compete. Invariably no matter what idea I find and no matter how niche or arcane it is, it’s likely there are already more than a handful of competitors already in the space.

Just a few years ago, may of the simplest online opportunities were still viable for new entrants with relatively little capital. Today, I see excessive competition everywhere I look, and nearly every niche seems to have at least 1 or 2 well-funded competitors. The other day I was joking with my wife about the issue, and we came up with a business idea (as a joke) that we thought would be a good litmus test — a dating CRM. Afterall, a busy dating pro needs to keep track of all their dates right?. So we looked online, and to our horror, there were several, one of which appeared to be a serious product.

This kind of crowding isn’t what you want to see if you’re about to take a major career gamble.

So why has the market become so congested? Consider what has happened with venture capital investments in Internet startups. Only a decade ago, the expense of getting a startup off the ground was very high. With the cost of servers, and having to write all the low-level code from scratch, it was entirely likely to require millions of dollars to get a company off the ground. As hardware commoditized and foundational software became open source, the cost and time to get off the ground has reduced substantially. Investor Mark Suster wrote an interesting piece on this topic, suggesting that the capital cost of launching a new startup has gone from a million dollars to only $50,000.

I’ve heard it said anecdotally that only 1 in 1,000 Silicon Valley startups would be considered a “success” five years later. A little more promising, I also heard Founder Institute CEO Adeo Ressi indicate that startup success was closer to 3%. I don’t know what the actual number is, but this serves to illustrate just how high the risk is and why the lower cost of investment for VCs is such a good thing. Rather than spending a million dollars on a single business, you can spread that same million dollars across many young startups and significantly increase your odds of reaching positive ROI. That’s why we saw Y-Combinator launch a few years ago to provide early-stage mentorship and $20,000 of investment for college students who want to take a chance on a startup.

The Y­‐Combinator model has proven so successful that it has attracted much more money into the ecosystem and there has been an absolute explosion of startup accelerators across the country, all proliferating the same mentorship + seed capital model. The net result is that you have often multiple tech entrepreneurship factories churning 20-50 out cohorts of new startups every quarter.

With geek now being chic and success stories such as Facebook and Google inspiring movies and careers around the world, the allure of becoming a startup millionaire is today’s equivalent of becoming a rock star. And the Internet has torn down many physical barriers that once precluded other nations from competing. Now you see merchants selling directly from China on eBay, and SaaS companies providing compelling online software solutions directly from India and Eastern Europe. No wonder it feels so crowded!

But let’s focus back on the maturing of capital markets and their contribution to this phenomenon. In the traditional investing cycle, initially, a few investors would reluctantly invest a little money in a company that already had a proven model and track record. With a nearly guaranteed return on investment, they saw healthy returns and confidence built. In the next cycle, more investors observed this success and tried to step ahead of the conservative late-stage investors to get in on the easy money. They accepted more risk and lower returns. This process continued until we had a very mature market in which too much money was chasing too few ideas, all trying to step ahead of one another. And eventually we got to where we are today — money being thrown at every college kid with an idea and no track record. Now imagine what happens with the newly passed JOBS Act, that will make it easier for small businesses to attract angel funding from non-accredited investors, particularly through crowd-funding.

But everything goes in cycles, and I can’t help but wonder if this wave is already cresting. While there’s been opportunity for venture capital firms to spread their risk across numerous startups and increase their odds, doesn’t the proliferation of incubated startups actually challenge the success potential of each one of them? And how long does it take for the aggregate return-on-investment to once again find its historic equilibrium?

It was less than a decade ago that Wall Street was touting financial innovation and Congress was touting easy lending that would make it possible for more Americans to become homebuyers. This, of course, opened up capital to home buyers and investors that created the housing boom and eventual bust. But all it really did was bring more people into the market place and temporarily distort opportunities; a distortion resolved a few years later.

So how long will it take for this bubble to correct? As aggregate returns begin to marginalize and the over-supply of startups begin to cannibalize one another, other investment opportunities such as real estate may become more attractive again and provide healthier alternatives for the early ‘smart money’. The ultimate consequence is going to be a downward leg for a number of years for startups. It won’t be the end of the world, but it will mark the end of an easy-money cycle and a period of exaggerated perceived opportunity.

For would-be entrepreneurs looking to invest in a startup today, it may be worth taking a hard look at whether this is the best time to take the plunge. Isn’t it after all the height of a market cycle when the opportunity looks the best and when everyone is convinced that ‘things are different this time’?

Originally published at  VentureBeat.com:

Are We In a Startup Bubble?

The Need for Development Process

Many smaller and non-technical businesses are not familiar with web development process and thus may not fully appreciate the need for it.  Many times, the development team is pushed to override process either because it appears wasteful, interferes with a more organic process, or because there are looming deadlines that conflict.  While this may facilitate short-term goals, it is rarely beneficial in the long term.  The goal of this article is to describe the challenges that face the development team without process, the longer-term consequences, and ultimately to provide a road map to a lightweight process that may work well for a small business or non-technical business.

The Challenges:

Organization – Without process in place, most small and non-technical businesses will act as a pitcher and expect the developer to be the catcher.  Meaning ideas are thrown at the developer for implementation, and the developer must pick up these changes and respond to them. Sometimes these emails are coming from different people within the organization, some of whom aren’t even authorized to request changes.  Often, most one of these requests are the top priority and all need to be completed today, regardless of what’s involved to complete the task. This leaves the development team with no ability to manage their schedule, no opportunity to set expectations for how long a request should take, and no ability to truly manage priority for the tasks. You can see how this can get complicated really fast.  It becomes very easy in an environment like this to miss incoming tasks, not prioritize effectively, and ultimately not manage productive time well.

Team Impact – Aside from the organizational impacts mentioned above, consider what happens to the focus and emotional state of a developer responding to this environment.  They begin to get confused, stressed, and may begin to feel pressure to get things done.  In a more prideful developer, this will lead to ‘grumpy’ interactions with others on the team, as they are going into lockdown mode, trying to get things done the ‘right way’, and ‘despite the team’. On the other hand are developers who respond to the pressures to get everything done quickly, start to stress out, speed up and take short cuts, which increase the risks of making mistakes and risk of secondary ‘regression’ bugs popping up in existing code.  Ultimately management and/or the team around the developer will get frustrated regardless which of these two paths is chosen.  Who is happy here?

Quality Impact – At a very fundamental level, developers are creating a system. They take the business rules defined by the business, translate these into logical statements and create order out of the collection of requirements.  That is how things *should* be working anyway.  Consider what happens when a series of unrelated business requirements becomes a barrage of piecemeal emails, all of which have urgency attached to them.  The path of least resistance for the developer at that point is simply to comply with each request as asked but unfortunately that means any attention to maintaining architecture and system design is lost.  Rather than writing (and documenting) meaningful modules that interoperate with the system in a reasonable and predictable way, the features are just being added in the quickest way possible and with no documentation to explain the ad hoc logic that is no longer consistent with the underlying system to which it was applied.

The result is code that is increasingly difficult to maintain, understand, and develop against without risk of causing new errors.  So even if the developer succeeds in responding to the ad hoc requests, in the long term he will be blamed either when a new developer one day arrives and talks about how bad the system is coded, or when the team and management grow tired of all of the bugs later in the incoherent system that walked away from or didn’t implement a reasonable system design.  Its a slippery slope that only the more ‘grumpy’ developers can avoid but then these developers are scorned in the short-term for being difficult to work with, and unresponsive to the business priorities.  Who wins in this environment?

The Solution:

The only reasonable solution to this problem, is to take a rational approach to development – process! For businesses who are resistant to process, iterative methodology provides a much more lightweight approach and allow developers to be more responsive and agile (pun intended) to the business than more traditional waterfall methodology.  Using an iterative method, the team will begin to work within a structured iterative schedule, typically 1-4 weeks in length.  For example, assuming the iteration is one week in length, a design session happens on Monday, development occurs Tuesday through Thursday, user testing occurs on Friday, and development occurs Friday evening, during low traffic hours; the same process is repeated every week.

During the prior week, the business stakeholders have been compiling a prioritized wish list of features and bug fixes they want to complete the following week.  Then, at following Monday’s design session, the team meets with the developer(s) to discuss the features to include for the week.  The developer(s) help determine which of these priority items will fit into the week’s time box. The developer also works with the team and the growing task list, to identify functionally themed items that should be grouped together either as an iteration or a special project.  This effort gives the developer an opportunity to ensure he has enough time to develop things properly, and to develop features with awareness of other coming items that may influence his design for the new modules.  Finally, the list is decided and the business stakeholders compile a final iteration document, that outlines the requirements decide upon for that iteration.  The developer would take this document and work on the new features Tuesday through Thursday of that week.

On Friday, it is time for the team to begin testing. The developer will have completed “unit testing” and will have checked the critical workflows of the new features, but ultimately the developer is too busy and lacks the objectivity to be accountable for validating his own work.  Thus, it is up to the business stakeholders to perform “user acceptance testing” (UAT).  During UAT, the stakeholders will validate functionality, using the same iteration document that the developer coded against.  This provides a natural checklist to ensure all was accounted for.  Additionally, stakeholders should have a “regression checklist” that accounts for all critical workflows in the website or software application, to ensure nothing critical is broken by the new features.  Any errors discovered are returned to the development team for repair, and a mini iterative loop occurs for the rest of the day, either until a satisfactory new version of the software is ready for deployment, or until the deployment is called off for that week, due to too many complications, in which case the iteration extends to the following week.

If the “build” receives the greenlight for deployment, this needs to occur at the same scheduled time each week, preferably at off hours.  This ensures that any deployment errors that occur, happen at convenient times when traffic is low, and the consistent scheduling helps the developer to follow proper process such as backing up prior to deployment, identifying files to deploy and creating a checklist if needed, which helps reduce errors and increase response time for roll back if something goes wrong. Again, much better than frantically deploying numerous times during a week, in response to the latest “need it today” request. With each additional deployment, risk of a poor deployment multiples and the lack of planning for ad hoc updates adds an exponent onto of that.

By following these proper steps, the developer(s) *and* the organization are setup for success rather than failure.  This will not only make the developer happy in the short term, it will result in the entire team having greater satisfaction with outcomes and their relationship with the developer(s) in there long term.  Yes it requires a little bit of discipline and advanced planning, but it should actually reduce overall time and cost of achieving the same results; its a classic case of how planning ahead saves time, money, and stress!

 

Test Your Ideas Early & Often!

One of the core principles of the Lean methodology is to validate “product/market fit” as early in the process as possible.  Historically, a business would define a budget, create a product, and put it on the market and hope for the best.  Typically this worked fine since we were living in a supply-driven economy wherein there were more consumers (demand) than providers (supply).  Today however, the cost of competing to supply a product has fallen dramatically, and suppliers are increasing by the day.  And so too, the risk of failure has risen.  So it is more important than ever to make sure you are building a product people truly want, with better product/market fit than your competitors.

If you are a startup, you likely have limited time and money, and thus a limited runway with which to work, to make sure your product “hits”. If it doesn’t, it is often game over.  So what can you do to make sure you don’t waste your entire budget or timeline creating something that no one wants?  Here are a few ideas:

1. Smoke Test – Create a website that promotes your product, market it as if the product exists, and then track your results.  Another term for this might be “vaporware”.  You can see hypothetically how sales conversions would be, if you were to build the product, before you invest a dime!  I’ve used PPC ads for limited amounts of time, and when a user submits their data, I simply display a thank you page and say someone will contact you shortly. This works best for consumer products and software products.

2. Affiliate Marketing – With affiliate marketing hubs such as CJ.com and Linkshare, its extremely easy to become an independent marketer for thousands of brands. By doing so, you can make a little money to cover your marketing costs but more importantly, you’ll have visibility deeper into the sales funnel than you would with simple smoke testing.  Many times your affiliate program will share details such as how long the customers stick around (lifetime customer value) and what has worked well for them in the past.  A word of caution however, if you’re entreating a market with plenty of affiliate programs, (a) the market is probably already a bit too saturated and (b) those affiliate marketers have already probably driven up and artificially inflated marketing costs in that vertical.

3. eBay – If you have a physical product you’d like to build an commerce store around, consider first trying to sell it on eBay. By a few test pieces, and run a campaign on CraigsList.  If you’re able to generate demand volume and reasonable profit margins, then you could justifiably move forward and build the store.

4. Prospect Interview – If you’re considering the development of a B2B product, the best thing would be to talk with the people for whom you might develop your solution.  Let’s say you’ve decided you will build a software solution for accountants. You need to speak with a few accountants to understand their “pain points”, and figure out how you could solve them.  Once you’ve found something, ask other accountants if they would realistically buy the product and how high of a value it is to them (1-10).

If you find a niche that seems compelling and you have validated a reasonable probability that you can hit product-market fit if you proceed, congratulations!  The next step is to build enlogica, meaning build in small installments, beginning with the smallest, most minimally viable version of the product you think someone would actually use.  Then, socialize it!   Begin to share it with a small group of prospects who can give you feedback and help you refine your vision.   Because they are your end-consumer, they should be your partner in the design process.  The will be able to tell you better than anyone, if this is exactly what they need and want, and help you to avoid making some pretty fundamentally bone-headed mistakes!

Test Your Ideas Early & Often! – revise

One of the core principles of the Lean methodology is to validate “product/market fit” as early in the process as possible.  Historically, a business would define a budget, create a product, and put it on the market and hope for the best.  Typically this worked fine since we were living in a supply-driven economy wherein there were more consumers (demand) than providers (supply).  Today however, the cost of competing to supply a product has fallen dramatically, and suppliers are increasing by the day.  And so too, the risk of failure has risen.  So it is more important than ever to make sure you are building a product people truly want, with better product/market fit than your competitors.

If you are a startup, you likely have limited time and money, and thus a limited runway with which to work, to make sure your product “hits”. If it doesn’t, it is often game over.  So what can you do to make sure you don’t waste your entire budget or timeline creating something that no one wants?  Here are a few ideas:

1. Smoke Test – Create a website that promotes your product, market it as if the product exists, and then track your results.  Another term for this might be “vaporware”.  You can see hypothetically how sales conversions would be, if you were to build the product, before you invest a dime!  I’ve used PPC ads for limited amounts of time, and when a user submits their data, I simply display a thank you page and say someone will contact you shortly. This works best for consumer products and software products.

2. Affiliate Marketing – With affiliate marketing hubs such as CJ.com and Linkshare, its extremely easy to become an independent marketer for thousands of brands. By doing so, you can make a little money to cover your marketing costs but more importantly, you’ll have visibility deeper into the sales funnel than you would with simple smoke testing.  Many times your affiliate program will share details such as how long the customers stick around (lifetime customer value) and what has worked well for them in the past.  A word of caution however, if you’re entreating a market with plenty of affiliate programs, (a) the market is probably already a bit too saturated and (b) those affiliate marketers have already probably driven up and artificially inflated marketing costs in that vertical.

3. eBay – If you have a physical product you’d like to build an commerce store around, consider first trying to sell it on eBay. By a few test pieces, and run a campaign on CraigsList.  If you’re able to generate demand volume and reasonable profit margins, then you could justifiably move forward and build the store.

4. Prospect Interview – If you’re considering the development of a B2B product, the best thing would be to talk with the people for whom you might develop your solution.  Let’s say you’ve decided you will build a software solution for accountants. You need to speak with a few accountants to understand their “pain points”, and figure out how you could solve them.  Once you’ve found something, ask other accountants if they would realistically buy the product and how high of a value it is to them (1-10).

If you find a niche that seems compelling and you have validated a reasonable probability that you can hit product-market fit if you proceed, congratulations!  The next step is to build enlogica, meaning build in small installments, beginning with the smallest, most minimally viable version of the product you think someone would actually use.  Then, socialize it!   Begin to share it with a small group of prospects who can give you feedback and help you refine your vision.   Because they are your end-consumer, they should be your partner in the design process.  The will be able to tell you better than anyone, if this is exactly what they need and want, and help you to avoid making some pretty fundamentally bone-headed mistakes!

Online Advertising Concepts 101

For anyone not familiar with all of the concepts and terms in internet advertising, I thought I’d create a quick little cheat sheet.  I’ve broken down the terms by topic (general, ad banners, paid search, etc).  There are really just a few core concepts and a lot of specific variants, just enough to make it confusing if you don’t speak this language every day.  So without further ado:

 

I. GENERAL

  • Ad Impressions – The number of times your advertisement is shown. It is not the same as page count since it might show multiple times on the same page. Its not the same as visitors, since the visitor may see it more than once.
  • Ad Units – An ad unit is a piece of page real estate that has been set aside for advertising.  Common ad units are the 7288×90 ad banner in the header, the 300×250 rectangle at the top of a side bar, or a 160×600 “tower” along the content.
  • CPA – This is the Cost Per Customer Acquisition.  Let’s say your ad was clicked 10 times at  $1 each, but only 2 of those people completed the goal you specified (user signup, purchase transaction, etc).  Thus your cost per customer acquisition is $5 (10/2).
  • KPI – The Key Performance Indicator is a marketing term that expresses performance of your efforts in an easy to understand number.  Most of these terms could be described as KPIs and will be referred to as such below.
  • Remnant Inventory – Remnant ads are the low-cost clicks that publishers use as backfill and will display when all of their premium advertising is exhausted. Some networks such as BlueLithium and ValueClick specialize in nothing but the low cost remnant  inventory.
  • Ad Server – Assuming you’re a sophisticated advertiser, you’re using an ad server to prioritize several accounts of advertising. Priority is assigned based upon the ad rates you can achieve with that given account. You’d make sure to utilize the higher paid CPM ads first, and then backfill with your secondary and then tertiary accounts, remnant inventory, etc.
  • ROAS – An acronym for Return on Ad Spend.  Similar to Return on Investment (ROI) but specific to the return on marketing dollars.  Calculated as the (return of investment –  cost of investment) – cost of investment.  In otherwords, if a $2 investment returned $5, the ROAS would be 60%.

II. AD BANNERS

  • CPM – This is Cost per 1000 Impressions.  The ‘M’ is the latin symbol for 1000.  If you are paying a $4 CPM, then you are effectively paying $0.004 cents each time your ad is displayed.
  • eCPM – The Effective Cost Per 1000 Impressions is used in mixed advertising models where you have some CPM, CPL, PPC, etc, you ultimately need to boil all of this down into a single KPI. Once you factor out all of these various cost models, what is the bottom line amount that you are paying (or earning) per 1000 impressions of an ad.
  • RPM – Revenue Per 1000 page Impressions (not per ad unit).  This is a rather confusing and relatively new term in the industry, but something Google switched to in 2011 to express performance of an overall *page*, rather than individual ad unit.  So, if you have 3 ad units on a page, this KPI now expresses the performance of the aggregate of all 3 units.  Why?  Because it looks better and its more difficult to compare to competitors.  Instead of showing that you have a $2 eCPM, they can now show you a $6 RPM.
  • In-Text Ads – If you’re ever see ads that pop up from within text when you roll over (or click) a word with a double underline, then you’ve see an in-text ad.  These are generally CPC based and work *very* well for some sites and poorly for others.  It can be a nice incremental add to your overall monetization model, if you run a content site or blog.  Beware of and test for ad cannibalization however.
  • Ad Cannibalization  – The tendency for some ads to take revenue away from others.  A simplistic logic would suggest that if you have 4 ad units on a page, you’ll make more than if you had 3, but its not necessarily true.  It all depends upon the type and placement of those ads.  Four units can in fact earn the same so slightly more, but degrade the overall user experience in the process, costing you more in the long-run.  The truths are different for each site and need to be monitored and tested.
  • Interstitials – A few popular financial publications online are known for interrupting you before you view a page in order to show you a full-page ad for 10-20 seconds.  These are called ‘interstitials’ and as annoying as they are, they pay *very* well. They’re not for every website and require high value content on the other side of the ad if you’re concerned about customer loyalty, but their CPM warrants exploration.
  • Re-Targeting – If you’ve ever noticed an ad for a company will begin showing up all over the Internet after you’ve been to their website, this is the magic of “retargeting”.  This is made possible because Google controls some 70% of the online advertising market now with their AdSense and DoubleClicks networks.  All they need to do is “drop a cookie” to track you when you visit any website displaying their ads or embedding retargeting beacons.  Then, if they see you’ve been visiting an advertiser, that advertiser can opt to show preferred ads to you after that qualification event occurred.  This is a significant new technology in the ad banner market because ad banners were generally considered to be unprofitable prior to this.  After this innovation, ad banners can be equally or even more profitable than their PPC counterparts.
  • Ad Flight – When an advertising deal is reached with a given publisher directly (instead of a network), that particular advertising agreement may be referred to as a “flight”.

III. PAID SEARCH ADS

  • PPC – Pay Per Click is a search advertising model that began with Overture.com over a decade ago and was popularized with Google. These are the ads you see above and to the right of the ‘organic’ search results.  Users of GOogle’s Adwords product will pay each time a user clicks on their ads.
  • CPC – The Cost Per Click (CPC) is the amount that you will pay each time a use clicks on your ad. Let’s say you’re spending $1 per click.  You add shows 100 times but is only clicked 10 times, you will owe $10.
  • CTR – This is a comparative number that expresses what ratio of ad impressions to ad clicks are achieved.  If you have 100 impressions and 10 clicks, your CTR would be 10%.

IV. PERFORMANCE ADS

  • PPL – The lead generation business wants to pay based upon a Pay Per Lead basis, which basically is the ‘bounty’ they will pay you per signup on a web form.  Lead generation can provide high payouts but the industry has become very sophisticated about the quality of leads.  A lead’s quality is determined by how much data is provided, how you got them to sign up (incentives?), and sometimes validation of the data.
  • CPL – The cost per lead is how the leaden company would refer to the cost of acquiring a *prospective* customer (aka a “lead”).
  • CPA – If CPL determines the cost of acquiring a prospect, the CPA is a different KPI that indicates how much an actually converted customer would cost.  Consider that of 100 ad impressions, 10 will fill out a form and 2 will convert.  You cost 10 prospects (CPL) and 2 customers (CPA).

V. AD OPTIMIZATION

  • Quality Score – In Google’s effort to maximize their own revenues, they have determined a number of quality criteria that will effect how often your ad is shown and how much you must pay for positioning.  This all comes down to how likely is a user to actually click on your ad.  They discourage ads that contain phone numbers since it would be free advertising but encourage ads that contain the key search terms since they perform well.
  • Landing Page Optimization – LPO is the art of designing a single web page to improve conversion rates. This is usually specific to PPC advertising campaigns, but can also be applied to other online advertising channels.  The basic goals are to (a) ensure your key terms are highly relevant to the terms you advertised for so the user feels they found what they’re looking for, (b) a brief synopsis of the value proposition, and (c ) a “big-ass button” (BAB) to drive the users toward your desired goal.  Use of A/B testing tools will help to drive the optimization of the landing page.
  • Conversion Optimization – CRO is a broader view of optimization that includes Landing Page Optimization.  Here you are looking at many, many metrics to find what works.  You may be using A/B/n testing tools to optimization on-page but you may be also looking at cross-pollinating effects too.  For example, how were customers acquired, can you use marketing automation to follow up with them in an intelligent way and eventually bring them back for purchase?  Can you speak differently to prop sects based upon where they signed up from and what their user behavior is?
  • A/B Testing – There are many tools available now to help with comparative testing – Google Optimizer is a free one, and Landing Page Optimizer and Optimizely are two popular paid products.  These products allow you to randomly display different versions of your landing page and then compare results.  Sophisticated online marketers are constantly testing and refining their landing page designs and messaging based upon A/B testing.