My VC Year

After ten years of running a slow-growth, bootstrapped software company that was profitable from day 1, I found myself running a fast-growth, VC-funded internet company that is actually trying to get unprofitable. I’ll reflect on some of the differences and some of what I’ve learned from going over to the dark side.

Bio – Joel Spolsky is a globally-recognized expert on the software development process.

His website Joel on Software is popular with software developers around the world and has been translated into over thirty languages. As the founder of Fog Creek Software in New York City, he created FogBugz, a popular project management system for software teams. He is the co-creator of Stack Overflow, a programmer Q&A site.

Joel has worked at Microsoft, where he designed VBA as a member of the Excel team, and at Juno Online Services, developing an Internet client used by millions. He has written four books: User Interface Design for Programmers (Apress, 2001), Joel on Software (Apress, 2004), More Joel on Software (Apress, 2008), and Smart and Gets Things Done: Joel Spolsky’s Concise Guide to Finding the Best Technical Talent (Apress, 2007). He also writes a monthly column for Inc Magazine. Joel holds a BS from Yale in Computer Science. Before college he served in the Israeli Defense Forces as a paratrooper, and he was one of the founders of Kibbutz Hanaton.

Joel Spolsky

The only speaker that doesn’t use the screen. He talks about the early days of StackOverflow, Fog Creek and his history but wants to spend the most time talking about his experiences with VCs. He was running a great business and got approached by a VC who wanted to invest. He got on really well with them and almsot decided to do a deal without talking to any others. He spoke to Jason Calacanis who suggested it wouldn’t hurt to talk to others – he was sure it wouldn’t take 6 months to raise the funds.

Joel went to the Valley and spent time with a bunch of interesting VCs who were generally incredibly smart and generally very ethical. Some of them were dicks. One guy had meetings and was on the Accel website as involved in the company and then told him afterwards that he wasn’t there anymore. Not many of them knew too much about the business. The partner at the  investor who put money in (Union square Ventures) didn’t actually know that StackOverflow had money after they had put money in…

Joel knew they were a hot deal when they started to get lots of interest and talk about term sheets. They were lucky to be in a position to get to choose the people they took money from. At this point as entrepreneurs, you look at the reputation of the VC and their entrepreneurial friendliness. The best VCs get in the best deals because they have sterling silver reputations for being honest. Fred Wilson (@avc) is the best in the business.

As they were about to do the deal, the original VC came back and told Joel they wouldn’t be investing. Joel didn’t care but the VC had to tell him why…

• Valuation too high.
• Thought that Joel being CEO would be idiocy.

Joel wasn’t too interested but the VC insisted on telling him why.

“The thing VCs hate more than anything is making an offer and having it turned down. It hurts their feelings.”

When the investment was made, lots of people had shares in the business. They had not done the paperwork on the shares etc and had not realised that just telling people they would be looked after to avoid paperwork would create big headaches. They ended up having to give the employees share options, not their shares in order to avoid taxes.

Just before the deal with Union Square, the original VC that tried to invest got hold of Joel’s co-founder, Jeff Attwood and tried to torpedo the deal by creating conflict. They worked out Jeff’s biggest fear would be Fog Creek taking over Stack Overflow. This was a little annoying. I hope he names the VC in the Q&A…

The investors ended up being and all star list. Not just Union Square Ventures, but Ron Conway, Chris Dixon and Caterina Fake. Story.

In common with almost everyone else that has spoken, the culture at Stack Overflow is incredibly distinctive – different.

Joel signed up to CEO coaching which he thought would be a lot of stuff about being better at reading spreadsheets. He was jarred when his coach asked him how he felt. It made him really think about things in a different way. His key take away was that he could not lead a company as CEO where he did not buy into the culture and ethos.

As leader, he had to provide leadership, not management.

All a CEO needs to:

• Get the right people on board
• Get the money
• Be the keeper of the vision

A CEO just has to ask his people on thing, “What do you need?”

As a founder, Joel’s philosophy is to leave the world in a better place.

• The queues for the restrooms are for the Gents.
• The Auditorium is full at the break as Dan Bricklin shows home movies.

Dan Bricklin shows home movies to Geeks

Profit Models

Explore many wildly different profit models from a bird’s eye view. Abstracted to memorable shapes, it’s simple and inspiring to apply them to your business.

Bio – Derek Sivers is best known as the founder of CD Baby. A professional musician (and circus clown) since 1987, Derek started CD Baby by accident in 1998 when he was selling his own CD on his website, and friends asked if he could sell theirs, too. CD Baby was the largest seller of independent music on the web, with over $100M in sales for over 150,000 musician clients. After he won the 2003 World Technology Award, Esquire Magazine’s annual “Best and Brightest“ cover story said, “Derek Sivers is changing the way music is bought and sold… one of the last music-business folk heroes.” In 2008, Derek sold CD Baby to focus on his new ventures to benefit musicians, including his new company MuckWork where teams of efficient assistants help musicians do their “uncreative dirty work”. His current projects and writings are all at sivers.org.

Derek Sivers offers a choice of two stories

Derek fell into selling CDs because he couldn’t get a distributor for his own stuff. Other people came to him and asked him to sell their stuff for them and the business grew throughout the Dotcom days when VCs would approach him to invest but he had absolutely no interest in doing anything other than selling CDs. He genuinely wanted to sell CDs until the last CD was sold on earth.

By 2007, he had got to a point when he had to redo the site when he rewrite all the code that had evolved over the years. Having spent a lot of time making the code elegant, he suddenly felt for the first time that he had done what he wanted to do. Anything else that he was going to do would require a lot of work for little emotional reward.

He spoke to Seth Godin, who said, “If you really care about it, sell”. What he meant was that if he cares about the customers, he should sell as if his heart isn’t in it, he ws doing his customers a disservice.

Then he thought about the four basic stages of a company lifecycle and thought, ‘Good time.’

Business Life Cycle

The once secret side of the story is that he sold because he fucked up on so many levels.

In 2002, the business had got to a point where Derek was dealing with every single issue in the business and that he wasn’t having any fun at all anymore. Hewas answering every edge case issue that any customer had himself. He almost ran away. He booked a flight and a hotel in Hawaii. He didn’t go. He let one customer service girl go who was asking most of the questions. He shared his thought process with everybody in the business about why he had reacted in the way he had. People learned the philosophy of the business and Derek bogged off and spent four years coding and being president of the business while he was absent from the business. After four years it all went wrong.

When he became less hands on in 2002, the business was 20 people. In 2006 it was 200 or so people. The company culture had changed massive and Derek had no idea what was happening.

July 10th 2007 was the worst day of his life so far. He missed the company meeting and then listened to the recording of it later. His room mate at college, whom Derek had hired, was leading a company revolution and the company whooped and cheered as he spoke.

Derek was a bit sad. He was really upset.

• Apache Control Halt

Was writing a, “This site is shut down note” and a letter to the company employees saying, “Fuck you”. Deep breath.

• Apache Control Start

He thought about putting five Golden Tickets into CDs and giving away the business a la Willy Wonka. A couple of days later, he did get a bit more real.

• Apache Control Sell

Suddenly people started coming to him and say that they were interested in buying the business. The business was making about $ 3,000,000 profit a year. Three organisations called in three days and asked him whether he would sell. He said no. Next week he called them all back and said maybe, and told Amazon the same.

Derek’s terms of sale:

My terms, by Derek Sivers

With multiple people interested, he was able to get all he wanted from the sale. He had to be prepared to walk away from the sale at any time. He was. And he had options.

He made about $20,000,000 from the sale but put the business into a charitable trust before the sale and the money will go to charity when he dies.

He recognises that that is a bit wierd but really doesn’t want the money.

He wants to continue to be happy. Something tells me that he will be.

What have I learned in 40 years of developing software products that people use?

Bio – Dan Bricklin is currently president of Software Garden, Inc., a small consulting firm and developer of software applications that he founded in 1985. He is best known for codeveloping VisiCalc, the first electronic spreadsheet, while he was a student at the Harvard Business School. VisiCalc is widely credited for fueling the rapid growth of the personal computer industry.

Until early 2004, Mr. Bricklin served as CTO of Interland, Inc., after it acquired his previous company, Trellix Corporation, in 2003. Prior to founding Trellix in 1995, he served as president of Software Garden, Inc., where he developed a variety of software programs, including Dan Bricklin’s Demo Program. Mr. Bricklin also cofounded Slate Corporation, a developer of application software for pen computers, as well as Software Arts, the developer of VisiCalc. Prior to forming Software Arts, he had been a market researcher for Prime Computer Inc., a senior systems programmer for FasFax Corporation, and a senior software engineer for Digital Equipment Corporation.

Mr. Bricklin is a founding trustee of the Massachusetts Software Council and has served on the boards of the Software Publishers Association and the Boston Computer Society. Mr. Bricklin has received many honors for his contributions to the computer industry from the ACM, IEEE, MIT, PC Magazine, the Western Society of Engineers, and numerous others. Mr. Bricklin holds a BS in Electrical Engineering/Computer Science from MIT and an MBA from the Harvard Graduate School of Business Administration. He received an Honorary Doctor of Humane Letters from Newbury College, and was elected to be a member of the National Academy of Engineering.

Dan Bricklin at Business of Software 2010

Dan Bricklin doesn’t need an introduction so doesn’t get one. The audience is quite literally in awe. Everyone seem to have an old book by Dan. Dan’s DNA is embedded in software across the world and across the decades.

What has Dan learned about software along the way? Think about the ‘job’ that people will hire the software to do. Software is being used as an alternative to employees.

The History of Visicalc is a good illustration:

In the 60s people did accounts on bits of paper.

Dan was one of a group of students who lived and breathed computers but they worked out calculations on bits of paper.

Dan Bricklin Halloween Calculating Machine

Computers were very hard to run. Dan was at Dec so there was an assumption that any software would come with its own hardware as it would need it – truly integrated solution.

“I went to Harvard Business School to learn the magic of business in 1977.”

Visicalc was a typical startup. Set up up in an attic though in those days, state of the art equipment involved acousitc couplers. Broadband, not so much…

First ad for Visicalc was in Byte Magazine May 1979. Teaser ad said, “How did you ever do without it?”

First Visicalc Advert Byte Magazine

Dan was doing a case study at Harvard at the time involving John Scully at Pepsi Cola as he was developing final version of Visicalc. Dan used Visicalc to run the numbers but had to push the envelope of the software’s capability to getthe answers as Visicalc couldn’t do division yet…

Dan launched Visicalc at a huge press launch, June 1979.

Visicalc Press Launch. All hail to Viscalc!

All hail Visicalc! Eventually…

Dan now has a plaque at Harvard Business School recognising Visicalc changed the world of computing forever. Cool.

So what was the job of a spreadsheet? Why was it widely used?

• It could do the application someone wanted, whatever it was
• Promoted unanticipated uses
• ‘Tailoring at the Ends Rule’
  • Lets people get rid of the tedium, but didn’t define the problem
• A framework

What did we learn from selling it?

• Easy sale if it met their needs exactly and helped a lot
• Payback could come in two weeks. EDS sales guys selling mainframes used them to calculate their commissions…

Hyperdifferentiation

• People will pay more for things that can meet their needs now and their likely future needs
• Products that can do all the common things plus the one special thing that you want it to do are the most valuable kind of products
• Palm – people bought Palm Pilots as they sold the core basic applications bundled on the device but also gave you access to a huge range of other apps. People bought the core apps plus one from the long tail…

Value to purchaser

Bricklin's Lightbulb moment

As computers and distribution models evolved, there are opportunities for new leaders. Look for the opportunities for leadership.

New distribution brings New leaders

Ingredients for success and opportunity

Situations Ripe for Success

The most important thing to remember when designing software:

• What to leave out.

You had to be there…

Different

If there is one strain of conventional wisdom pervading every company in every industry, it is the importance of competing hard to differentiate yourself from the competition. And yet going head-to-head with the competition—with respect to features, product augmentations, and so on—has the perverse effect of making you just like everyone else. Youngme’s message is simply: Get off the competitive treadmill that’s taking you nowhere. Aspire to offer the world something that is meaningfully different. Different in a manner that is both fundamental and comprehensive.

Bio – Youngme Moon is a Professor of Business Administration in the General Management unit at the Harvard Business School. At HBS, she teaches the Consumer Marketing elective in the MBA program. She also teaches in a number of HBS Executive Education programs, including Consumer Marketing Strategy, Strategic Marketing Management, and Marketing Innovative Technologies. Professor Moon has received the HBS Student Association Faculty Award for teaching excellence in both the first-year and her elective course on multiple occasions; she is also the inaugural recipient of the Hellman Faculty Fellowship, awarded for distinction in research.

Professor Moon’s research and course development focuses on innovative consumer marketing strategies. Her ideas have been published in numerous journals, including the Harvard Business Review, Journal of Consumer Research, the Journal of Consumer Psychology, the Journal of Experimental Psychology, and the Journal of Applied Social Psychology. She has published case studies on companies ranging Microsoft to Sony to Intel and she consults with a range of consumer marketing companies in the area of innovation. She serves on the Board of Directors of Avid Technology, and the Board of Governors for the American Red Cross.

Professor Moon received her Ph.D. from Stanford University. She holds an M.A. from Stanford University, and a B.A. from Yale University. Prior to joining HBS, she was on the faculty at MIT. She currently lives in Brookline with her husband and two sons. Her first book, Different, was recently published by Crown Business/Random House.

Professor Youngme Moon

How can you differentiate between 50 brands of bottled water in one supermarket? In almost every instance, the managers of each and every one of those executives can tell you EXACTLY why and how their brand is different to the others. Sadly, for real people, no one cares very much.

It doesn’t start out like this:

Choice - sparkling or still?

But soon escalates:

Water water everywhere how which drop to drink?

And then the supermarket looks intimidating.

Supermarkets are not consumer friendly anymore. They are intimidating.

Wine connoisseurs see all the differences between all the varieties of wine on a wine list. Most people don’t they see white, red, rose, sparkly. They cannot see the difference. The BIG DEAL then, is can you look at your business from the perspective of a normal consumer, not you – the wine connoisseur in your industry? You might care if your company dies. Do your consumers?

Real difference has become rare in business.

We are becoming so good at best practices, that they are actually starting to hurt us. Best practices are backfiring.

• e.g. Competitive vigilance– means being the opposite of complacent.
  • You look at what competitors do and feel compelled to match anything but this just leads to samey, mushy, choreographed behaviours that no one can distinguish between.
• Listening to customers. We are now better at this than ever.
  • But customers are great at telling you how to improve, but they cannot tell you how to be different. (e.g. Volvos are really safe but can they be sexy?).
• Our commitment to focus on excellence means that we are afraid to be bad at anything.

If you are actually looking for an Outlier solution, you should not rely on the views of others. What would you expect a manager to improve?

Market research suggests...

But all that happens then is a more mulchy solution – particularly when you multiply that across a ton of companies in the industry. Why not try the lopsided solution? The more crowded and competitive market you are in, the more you need to be lopsided.

Accentuate the positive, ignore the negative and be different...

There is no formula for how to be different. [This seems to be one of the key themes of Business of Software 2010].

Case Study #1

Imagine you are shopping for furniture. People hate shopping for furniture – Americans hate it and change their furniture as often as their partner as a result. Furniture sales people are trained to remove every obstacle to buying. Surround them by helpful people and customers complain of being pressured. Give them several alternative plans for finance, they complain about confusion. These are key characteristics of a horribly crowded market.

IKEA is different. They say no. There is very little stylistic variety. You have to make stuff yourself.

[I went to IKEA with my son three weeks ago and he actually threw himself off a sofa onto a coffee table to escape – he ended up in hospital as a result. We still love it. Youngme says there is a day care centre for children but it was full!]

Arthur with IKEA teddy in Ambulance on way to hospital

He did get a free IKEA teddy bear.

Case Study #2

Its 2002 and America is tied up in their love affair with huge SUVs. You are being asked to launch a teeny, tiny, ickle wickle car on a teeny, tiny, ickle, wickle budget.

You can either go for the, ‘Its bigger than it looks on the inside option’ or the, ‘This looks like a cool, robust and well-designed car”

The car was the mini.

Mini chose to BIG up the mini-ness of the Mini. Most marketers would have pooed their pants.

Minimini

Mini embraced the negative – successfully. Most product launches focus on the positives and the silky smooth pitches just fall off consumers. Traction requires friction

Case Study #3

All of those brands have found a tribe and customers by embracing their weaknesses.

If you want to be different…

• You have to be willing to ignore your critics
• You have to be able to ignore your customers as well
  • Just ask Google, Facebook, Apple (though most of them won’t respond)

Different and crazy can look the same at first.

Brilliant talk. Different.

Stuff I Learned from Selling Our Company to Microsoft

Over the years, we’ve been approached by several parties interested in acquiring our company. I learned a lot from those discussions, even though none of the deals happened. And then I found out how little I knew. Microsoft acquired the assets of our Teamprise division in November 2009. Taking a deal all the way to closing was, er, very educational. I obviously can’t share any specifics about our deal, but I learned a lot about M&A that I think may be of interest to others looking to sell a small software firm to a big company.

Bio – Eric is the author of Eric Sink on the Business of Software. He is the founder of SourceGear, a source control system vendor. He also founded the AbiWord project, and lead the team that built the SpyGlass browser, now known as “Internet Explorer”. He’s the first to have coined the term “Micro-ISV”.

Eric Sink at Business of Software

Eric and co-founder Corey sold to Microsoft. Eric and Corey were founder, no outside debt, there were two of them. That was it.

Microsoft org chart looked like this:

Microsoft M&A Org Chart

The field of battle.

The People at Teamprise vs Microsoft

All big companies buy companies in the same way:

• You are really outnumbered
• Many of them have indistinguishable job functions
• People you speak to across a table are:
  • Never allowed to do anything
  • Are acting for someone else
• Primary Point of contact is a trained negotiator in the M&A team, not a product team person

Make sure you attorney is expensive enough!

• Somebody who has done private acquisition deals.
• Preferably in the software field.
• Intellectual property is a BIG, BIG issue for big companies.
• Make sure your lawyer gets associates involved. Eric’s lawyer was also negotiating sales of Chicago Sun Times. You really don’t want to be in position of having your attorney hold stuff up.
• Try to use a lawyer that has used both real, and virtual, data rooms – that means they have been doing it for a while…

The Data Room!

• Eric is obviously a geek so is really impressed by the concept of the data room. 🙂
• A Virtual Data Room is basically an FTP site with a log file.
• They charge $35k for the service.

Disclosures

• Happen all the damn time
  • During Preliminary Due Diligence
  • During Discussions
  • During Due Diligence

Intellectual Property

• Be super-careful
• Legal assignements from EVERYBODY  who has BREATHED on the code
• Be super-careful
• Contractors used for code review
• Be super-careful
• University Hardware creates an issue – one contractor may have used a university computer to write some of his code thus potentially leaving rights to code to university
• Be super-careful

The obligation to disclose

• Do they really need this information or are they using this to help their negotiating position?
• Get your attorney’s involved early. They know about this shit.

A deal is more than a number.

• Every detail is negotiated
• Eric’s contract ran to more than 100 pages
• relocation and staff transitions
• Escrow
• Indemnification
• Tax treatment
• Ongoing involvement of founders

Healthy Relationships

• Don’t bottle up your emotions
• But, know when to STFU
• Ask yourself, am I just saying this to make myself feel better?
• Will saying this move the deal discussion in the direction we want?
• Express them in a healthy manner.
  • Memo to self, ‘Man up, Nancy’

Eric felt this was an aggressive negotiation but there didn’t feel like there was any really nasty stuff.  A year later, he still has bad feelings about the point guy from Microsoft but other stuff feels a lot better.

CORRECTION & CLARIFICATION

[Eric dropped over to the blog and commented that:

“But I think the point I was explicitly trying to make was that I do NOT have hard feelings against “Fred”.

There were a lot of emotional ups and downs during the deal process, but the passing of a year’s time brings a lot of perspective. In all honesty, I look back now with a positive view toward everyone with whom we collaborated on that deal.

Even “Fred”.” Eric Sink

Of course I am happy to make the correction and delighted that Eric points it out. One of the great things that came out of Eric’s story was the incredible emotional journey that he had been on in selling the business. Eric, I think is one of life’s gentlemen and does not strike me as the kind of person that would hold anything bad against anyone in actual fact – though it was pretty clear that he found the process far more emotionally exhausting than he might have anticipated. He may have felt differently about ‘Fred’ when the deal was going on… 🙂

The memories of the times that he took calls from his lawyer in church, the weeks of midnight finishes, the crushed life and the strained relationships start to become good anecdotes rather than just painful memories.

For you, this is a life-changing, one off-deal. For the M&A guy, this is just one of three deals he is working on at the moment.

“In negotiation, the one thing that really strengthens your positions is the ability to walk away from the deal.” Eric in 2006.

Experience meant he discovered that wasn’t true.

“You do actually have to walk away. At that point the deal is dead.” Eric in 2010

But sometimes the deal will come back. If you don’t walk away and kill the deal once, you will probably have sold too low.

Closing – the biggest anticlimax ever

• Lawyer to lawyer.
• Never met in person.
• Can’t tell anybody.
• Now what? the announcement won’t be for a couple of weeks.

Two calls from the bank

• Confirming the transfer
• Complaining that the bank branch had been sent too much money for them to handle

• :o)

Q&A

• Did you use advisers? We didn’t use corporate finance advice as we didn’t want to pay someone a percentage of the deal. We might have considered it if they had operated in a time basis. Didn’t feel the need. We probably should have got lawyers involved soon enough but don’t think that this effected the actual outcome.
  • This is not usually the advice that people give when they have used advisers by the way – ML. Most people that have used them find that they bring the experience that the deal guy on the other guy has. Of course that has a market rate.
• How has it changed your life? I bought a few things I wouldn’t otherwise bought – like an $8,000 guitar.
• What advice would you share with others? Be honest and make sure you get your own support system in place to help you emotionally.
• How did you come up with a price? Painfully. We came up with the first number.
• What was the number? I think we are done here! Huge applause.

(Don’t) Panic

Something is wrong. Maybe you are just not checking your emails enough? Actually, it’s not you. The software universe really has gone mad and you need to step back and re-evaluate big time. This is your chance. The talk aims to take a long, cynical look at both the past and the future, give you some new ideas, and pose lots of those awkward, searching questions you try to avoid. All in 42 slides. And with kittens.

Bio – Mark Stephens is the founder of a small UK based software company (which co-incidentally shares his daughters initials). IDRsolutions started in Newspaper publishing at News International in 1999 but now produces a Java PDF library which they are particularly proud to have licensed to Adobe. He enjoys speaking at conferences and was a Lightning Talk speaker at Business of Software 2009 as well as previous performances at Seybold and JavaOne conferences. He has a very dry sense of humour and an MA in Medieval History for which he has not yet found a practical use.

Don't Panic Mark Stephens, your only doing 42 slides, 42 seconds each

Mark Stephens won the BOS Lightning Software talk last year. His punishment was a 30 minute speaking slot at this year’s event. Mark is running 42 slides with 42 seconds per slide which gives him a 30 minute presentation. This is nice as he worships Douglas Adams and was 42 on Friday.

In the 16th Century, India and China were the most important countries in the world but the small European countries were starting to come into their own.

War has been used as a metaphor for business since the ancient times.

Now wars are being fought over technology – Android wars. And technology is the main weapon of choice in industries that are rapidly changing – the future of publishing for example. Data fuels the arms race.

Custer Fxcked

Technology and data though runs the risk of taking the creativity out of though and humanity. Douglas Adams didn’t worry that computers will become more like humans, he worried that humans would become more like computers. He might have a point.

Computers make it easy for mediocrity to look good.

Computers, where mediocrity can shine

Computers will make people’s brains floppy, flacid, compliant, drugged monkeys. Mark doesn’t think this is a good idea. Read some good books.

“In a world of infinite abundance only creativity can ever be in short supply.”

You can’t have a proper software conference without a Star Trek slide.

Need more Star Trek

Some thoughts on being a bit different:

• Change the location of your work. It will make you think differently.
• Where do you feel inspired?
• Hire an intern.
• Give yourself a break.
• Eat well and take exercise.
• Sleep is good for memory retention and the creation of good ideas.

Homework:

• Work on your creativity here
• When you get home, lie about the conference

So long and thanks for all the fish.Digital

Do Worry… Be Happy!

One thing they don’t tell you about quitting your job to become a startup CEO is how much you’re going to worry about things. From “Should I really quit my cushy job?” and “What if someone steals my idea?” to “How can I keep a global team working as a unit?” and “How long before people notice that I really don’t know what I’m doing?” – the list is long and ever-changing. I’ll share some stories and tricks that I’ve used to overcome my fears, and how I’ve learned to welcome these feelings as a sign of imminent personal growth.

Bio – Giacomo ‘Peldi’ Guilizzoni is the founder and CEO of Balsamiq, makers of Balsamiq Mockups, a fun little wireframing tool for programmers, UX experts and yes, even business types. Balsamiq has been a bit of a poster child for a new wave of tiny but ambitious bootstrapped tech startups, netting over $1.6M in sales in the first 18 months of operation and gathering rave reviews. Peldi is a champion of the “radical transparency” trend that’s sweeping the Internet, through his posts on the popular Balsamiq Blog. You can read Peldi’s story in this blog post, or get to know him more through these interviews and his LinkedIn profile.

Peldi Guillzzoni at BOS2010

The first thing you need to know about Peldi is he is totally and utterly barking mad. Madder than a ripe Pecorino in fact. Turns out that mad is OK in this room as I am the only person in the room that doesn’t actually use Balsamiq’s software. And having listened to him speak , I want to join the tribe. Peldi is also keenly aware that most of his heores are sitting in this room.

Lots of Peldi's heroes are sitting in the room at Business of Software

So he is worried about lots of things. Things NOT to worry about.

• Asking customers for money – it is normal to pay for things.
• Pirates
• Lack of time

Things to worry about before you start a startup

• Making the jump into a startup. Read, ‘You need to be a little crazy. The truth about starting and growing your business.’ If you are still up for it, you will have learned some good things.
• Writing a business plan. Even an ugly one. It doesn’t need to a be a classic business plan but it will help you to focus, articulate your value, think about the important things. The plan is for you, not necessarily others.

Balsamiq Business Plan in full

• Read like crazy – especially before you start, you won’t get time when you start your startup.
• Finding advisors and co-founders. There is no formal way for Peldi
• Raising funds. Not always the answer. Maybe you should find a smaller problem that doesn’t require investment
• Do the time. 10,00o hours to become an expert.

Balsamiq is a success:

Balsamiq Growth

But put that into the context of Peldi’s progress in life…

Balsamiq success in context - Do the Time!

• Work life balance.
  • Key. Peldi works when his family sleeps so they don’t know he is ignoring them.

• Picking too small of a niche is not silly. The smaller the niche, the easier it is to lead, market to, lead.

• Competition! Someone stealing your idea. Clones.
  • Embrace it. Better to be at the market than in the desert.
  • Make sure you are working on something that matters to you more than money
  • Create more value than you capture

• Pick your battles and deliver
  • Usability and customer service are what Balsamiq chooses to compete on

• Building the wrong product
  • Fall in love with the problem, not the solution you picked to solve it

• Feedback.
  • Feedback is far better to you than money. Balsamiq gave software to bloggers and said, ‘we don’t want a good review, we want honest feedback’.

• Not getting noticed. Big issue, stuff popping up everywhere.
  • Be so good people can’t ignore you.
  • Be remarkable and let your values shine through. People love Balsamiq in all areas of the blogosphere

  “The Balsamiq story is quite addictive. I want to buy the aplication despite having no solid need for it and a yearly income below his daily income”

• Incorporating. Accountants. Lawyers. Payroll people. POs. Invoices. EULAs. Cash vs Accrual. Duns #. NAICS + ECNN Codes. Hungry Partners. First VC Call.
  • You need GIGA Balls, not mega balls, GIGA balls.
  • You need to learn to fake it. Fake it until you make it. Grow into your brand.

• Hiring People
  • Don’t do it too early, do it when you are going to die unless you do.

• Getting too much attention. Nice problem to have but still a problem.
  • Attention, growth, revenue, employees, attention and quality all have to grow in synch.

• Fear of Confrontation
  • You need to have a system to deal with it.
  • Think! What Would Obama Do?
  • Listen carefully, don’t get emotional
  • Thank people
  • Apologise
  • Wear their shoes for a minute
  • Answer, stand your ground
    

    Face up to Conflict. What Would Obama Do?

• Juggling too many things
  • Write stuff down. Stress comes from thinking, ‘I hope I don’t forget this.’
  • Blog about stuff. It helps you think things through. When you publish it, people see you are human and send you advice. this then becomes cool marketing in itself.

Current set of worries for Peldi

• Speaking at BOS 2010 – been a life goal
• Managing a Global Team. Use Skype, DropBox, Yammer relentlessly
• Feeling like a fraud. Get help! Share the ups and downs with the team. Have some trusted advisers. Ask people you know – they will help.
• Needs of market vs Initial vision
• How long will this last?

Fear is a good sign. Peldi’s tip to help you sleep.

• Drink and pills are not so useful
• Go and look at ‘How its Made’

Here is one of Peldi’s favourites to get you going.

The Primary Goal of Your Website is not to Sell

What’s the primary goal of your website? Not to sell software. With most visitors returning multiple times before making a purchase, your primary goal should be to draw visitors back to your site. In this talk, Rob looks in-depth at why this is the case, and how to make it happen.

Bio – Rob Walling is a serial entrepreneur and author of Start Small, Stay Small: A Developer’s Guide to Launching a Startup. He blogs at SoftwareByRob.com about building self-funded startups and runs the Micropreneur Academy, an online learning community of like-minded founders designed to get a startup from zero to launch in six months. Walling runs 11 one-man technology businesses and has been building web applications professionally for 11 years.

Rob Walling Confesses

Rob is a one person company, outsources everything that he can, errs on the side of specificity at all times.

Software entrepreneurs typically think that the number one goal of a website is to sell software. Rob believes this is the wrong answer. If your software costs more than $ 20, it is very unlikely that this strategy will work.

“The ineffective marketer asks you to buy too soon”.

Reasons people don’t buy from your web site because:

• Not enough information
• No trust
• No $$$
• No need – right now
• Some people will NEVER buy

Examples from some of Rob’s companies. Returning visitors are defined as more than two visits to site (though underestimates returning visitors as someone may visit site from more than one PC therefore returns on returning visitors are even higher.

DotNetInvoice

• Over 3 years, he saw at least 450% more revenue from returning visitors than first timers.

JustBeachTowels

• In one year, 77o% more sales from returning visitors vs first timers
• Per visit value$17 for returning visitors vs $1.53 for first timers

CrazyEgg (Not Rob’s)

• Over 60 days, 1585% more sales to returning visitors

Returning visitors are much more likely to buy and likely to be much more profitable, so, How do you get the right people to return?

Email – always better than social media.

The quality of email interaction is higher, blogs are time intensive, emails have highest click through rates. You can test email quickly and most tests with small time investment will lead to 10% increase in revenue. Email also allows you to do personalised broadcasting, A/B splits, test offers and all sorts of things that just don’t work with social media. You can throttle volume of activity really easily.

Three steps to putting email follow up in place

1. Have a killer landing page that does everything you can to get their email address and permission to talk to them. Invest in good design.
2. Give something away but it has to be unique, useful, cool.
3. Set up the follow-up right.

Goals, address the barriers to purchase.

• Not enough information -. provide informatin
• No Trust -> build trust
• No $$$ -> Try discount options
• No need right now -> stay in people’s minds
• Some people will NEVER buy -> ignore them

You are permission marketing but there are still some things that mean you will get stuck in SPAM filters

Not-so-common Spam Filter Triggers

• “Extra Inches”
• “Dear”
• “Stop further distribution”
• “You registered with a partner”
• “Oprah”
• Poorly coded HTML

Worst words to include in subject lines for open rates

• Reminder
• Specials
• X% off
• Help

Rob wrote a book about engaging customers on your website in a small software business – ‘Stay Smart, Stay Small’. You can get a 72 hour Business of Software discount at http://www.startupbook.net/bos/

Did Rob just sell something…?

Engaging Dialogue

In this session Paul will explore how best to get the customer really talking about their needs their concerns and their aspirations. We will explore how best to use our questioning and listening skills to engage the customer in a meaningful dialogue, which will help not only to identify an appropriate solution, but also to enhance the customer experience.

Bio – Paul Kenny is one of the UK’s top sales trainers, consultants and speakers. He has worked with many customers in three continents, including IBM, Perot Systems, The Guardian Newspaper and tens of others. Paul has developed a portfolio of nearly 100 sales, management and personal development courses. He won a national training award for his work with The Guardian.

Paul Kenny is frank about Frank

Every conference seems to evolve a theme organically. BOS2010 seems to be developing a theme around customer experiences. The stuff you do as a startup becomes part of the cultural DNA of a business. Founders have a unique opportunity to hardwire either: brilliant standards for sales or; programmers contempt for sales. Dharmesh’s talk about Molly the Bear was a critical reminder of how important the customer was and Jason’s roasting of sales in general and Frank in particular, was a real wake up call.

Most founders and technical people hate sales and cannot embrace him. By doing so, you as a founder are totally at the mercy of the Franks of the world. Franks come from the world of Enterprise Sales where sales cycles are long and it takes at least 3 years to be found out. Franks often have have impressive resumes that talk about massive sales achievements but you need to realise that most of the work is done by the brand – Microsoft, Oracle etc. There is a role for Frank but he NEEDS a big, powerful, brand with big expenses and big cars in order to do their job. Eventually, the Franks of the world run out of luck and places to go and then try to move to the world of startups where they think they can cut themselves a nice deal as the founders DON’T HAVE THE BACKBONE TO DO THE SELLING.

Although it is a bit uncomfortable for founders to talk to people, it is just another thing that a founder has to do. It is a lot easier than firing people.

This is Paul’s third BOS conference. Here is what he covered in the previous two:

Paul Kenny 2008 2009 Precis

Biggest question from last year was, “How do you know which stories to share with your customers?”

This is critical and the subject of today’s talk.

Paul’s son Tom wants to hear stories that involve all the things that Tom loves – Horrid Henry, Spongebob, Aliens, Zombies, Fernando Torres and a climactic sporting challenge in which Tom steps in to save the day. Only Paul and Tom’s Mum really know how to tell a story to Tom that works for Tom. They know what he wants, likes and responds to.

Bed time stories for Tom

Same principle applies to customer dialogue.

• Quality of Dialogue is DIRECTLY PROPORTIONAL to Quality of Customer Acquisition.

When there is little perceived difference between two products, you are likely to buy from the person that you like the most. the most interesting people you will ever meet will be the people who are most interested in YOU. People like to be sold to in their language, not yours. “Great sales people ask great questions, tell great stories and put together great deals.”

“The customer’s faith in your product as a solution to their  problem is directly proportional to how well they believe you understand their problem.”

This is the key reason that you NEED TO TALK TO CUSTOMERS. The dialogue depends on where you think you are in the market.

Two by two story matrix

• High Burn/High Risk – You need to know what will drive a decision.
• Differentiation – You need to be able to show how you are different
• Evangelists – Sell the dream
• Dream segment – You need to talk about the future

The average amount of time that sales people take from moving from small talk to talking about their product is 47 seconds. You probably don’t get to know too much about customers and what they want in 47 seconds. You only need to do a little more than the average to make a huge difference to your customer engagement.

what do you need to know about customers?

Hard data Soft data

Most people know some of the hard data about their customers, but you need to know the softer, DNA based stuff – Drivers, Needs, Aspirations.

DRIVERS – never (or rarely) explicit. This is stuff you can only get from talkingto a person.

• Ego – how does this make me look good
• Security – No one got fired for buying IBM
• Ease
• Belonging
• Gain

NEEDS – the functions that are important to them. This saves doing a lot of long boring demos.

• Function – what do they need something to do?
• Timescale – a quick, immediate & inferior solution is often better than a perfect one that takes a year
• Scalability
• Integration
• Affordability
• Result – is often non-obvious (Paul has a Kindle to buy him space. If he has any more books, he will need to buy a bigger house – more expensive than a Kindle).

ASPIRATIONS

• Project
• Team
• Personal

Guidelines for creating a better dialogue with customers

JUST DO IT

Talking to customers trumps having Molly the Marketing Bear to represent the customer. (See notes on Dharmesh). You run the risk of making assumptions without real dialogue.

SELFLESS QUESTIONING

This is very different to asking questions to find the customer’s hot button. If you ask selfish guiding questions, customers will think you are a dick, or even worse, Frank. Appreciative curiosity.

HAVE A QUESTIONING STRATEGY

Dr Evil's Questioning Strategy

Start with the easier stuff and move onto other stuff.

ASK SIMPLE, DIRECT, OPEN, QUESTIONS AND LISTEN

HARDWIRE THE DIALOGUE HABIT INTO YOUR CULTURE

If you only target sales people on revenue, they will only produce revenue. You can also target them on:

• Feedback
• Growth
• Loyalty and CHI (Customer Happiness Index)

REMEMBER

• Hire the sales people who ask the most interesting questions, not the one that delivers the best pitch.
• Avoid Frank.
• You have the Founder’s Advantage.  No one can match your experiences.
• There is something cool about talking to Founders.

Paul has made his slides available at Slideshare: