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Consumers, not tech companies, are paving the way for new products, says Eric von Hippel.
Eric von Hippel, founder of the Entrepreneurship Program at MIT, says companies owe their customers a debt of gratitude.
The reason,he said in an interview with the MIT Sloan Management Review, is that "surprisingly often, ideas for new or improved products come first from users who develop improvised versions to serve their own needs. Manufacturers then may discover, polish, and capitalize on user innovations--particularly if those innovations begin to catch on."
Here are three more of his insights on user innovation and why it's integral to businesses' growth:
Users 'hack' for practical reasons.
"Users who need a new product often take pieces of things they have around and put the pieces together to do what they want," says the professor, noting the smart companies are the ones who recognize this behavior and sell products that can be easily tweaked. One good example is Apple's App Store, which has been successful at selling consumer-made apps.
True innovation takes three steps.
Von Hippel says there are three stages to the the "New Innovation Paradigm." In Phase 1, users innovate to create the products they want. In Phase 2, or the adoption phase, other users "either reject or validate the initial innovation." Phase 3 only occurs if users validate the new product, but if they do, "companies, which refine and commercialize the innovation for sale," will find a new base of users.
Companies should encourage innovation.
Companies should think of "ways to attract designs to you, via toolkits or via interfaces," says von Hippel. Threadless, the T-Shirt company whose designs are designed, submitted, and voted on by customers, does this exceptionally well. The company makes millions in revenue and they haven't produced an item they didn't sell.
Rather than "tell what" you're selling, "show why" they're buying.
Lately, I've been reviewing dozens of sales messages and have discovered a common theme. Most sales messages, whether in emails, presentation or websites, are ineffective because they "tell what" rather than "show why." Let me explain.
Average sales messages tell what the seller would like the customer to believe. The problem with such messages is that the customer has no idea whether these statements are true.
- "We are reliable and trustworthy."
- "Our product saves you money."
- "We have the best customer service."
- "Our customer base includes IBM and Coke."
- "Independent studies show our customers save 20 percent."
- "Our service team has won two industry awards."
The same is true when describing products. Average sales messages tell what the product does or is. Such messages force the customer to figure out how the factoid in the message applies to the customer's own concerns and own situation.
By contrast, great sales messages show why the product is (or should be) important to the customer.
- "Our software automates supply chains."
- "Our marketing experts help build brand awareness."
- "Our gadgets have dual framistats."
- "Our software makes your products available for sale 10% faster."
- "Our experts can help you double sales by building brand awareness."
- "Dual framistats mean your gadget will work even when dropped."
If you want to increase sales by having a great sales message, go through all your marketing and sales materials and convert your tell what messages to show why messages.
Yes, it IS that simple.
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Need to accomplish big things? Here are 5 steps to help turn your objectives into reality.
In mid-July I added kayaking back into my life. Most people don't consider New York City a logical choice for getting close to nature, but happily I was able to find a place to store and launch my boat on the Hudson River, only a 10-minute walk from my home. Just as soon as I got back on the water, I decided to set a major goal. My intention was to circumnavigate the 28 miles around Manhattan in a single day. My previous kayak feat was crossing Long Island Sound in 2007, a 13-mile paddle. I hadn't been kayaking for four years and was unfamiliar with the strong and erratic currents, so I gave myself a year to accomplish the goal.
I am happy to say that last Sunday, I completed the Manhattan roundtrip, ten months ahead of schedule. It took nine hours on a beautiful day and was a wonderful way to usher in autumn. The process I used to tackle this goal is the same I use for all my objectives, personal and business. When I follow this methodology I am usually pleased with the results; failure comes every time I stray. I hope these steps help you tackle your awesome objectives.
1. Vet the Goal Thoroughly
Not every goal is worthy. Often unachieved goals aren't met because the motivation isn't really there or they were truly unrealistic. I could set a goal to be a professional basketball player, but at 5" 6' in height and 48 years old, the odds of success are astronomically low. Building a Fortune 500 company would be more likely, but for me even that goal would have no place in my preferred destiny, making it hard to emotionally make room for the necessary time and effort. Spend time internalizing your goal and seriously questioning why it's important. Explore the strengths and resources required for success and compare them to your current weaknesses. Ask yourself if you are truly willing to make sacrifices for the accomplishment and whether the rewards outweigh the risks and commitments for everyone involved.
2. Write It Down and Share It
This simple approach is unbelievably powerful. Studies have been done that prove you are 50 percent more likely to achieve a goal that you write down, and 75 percent more likely if you share the commitment in writing with a friend. It sounds simple, but seeing the goal in writing daily helps you focus on the objective even when your mind is occupied elsewhere. This may lead to immediate recognition of opportunities that will support the process, even when you're not looking. For my longer-term BHAG of putting a book on The New York Times bestseller list, I took this step to an extreme. I tattooed "New York Times Best Seller" on my chest backwards, so I see it in the mirror every morning. Seeing it each day has helped me move much closer to accomplishing that objective given my experience and resources. It guides my choices and efforts daily.
3. Do Your Homework
Few things worth accomplishing come easily. The greatest sense of accomplishment comes from surpassing goals that challenge the mind, body and spirit. If your goal is audacious, you will require information beyond what's currently in your brain. Time to become a smart learner. Research what you can about the process and the environment impacting the goal. Business goals are most often missed due to unrealistic assumptions combined with a lack of diligence. Give yourself every chance of hitting the goal by surfacing every potential obstacle in your way and exploring every possible solution.
4. Find an Expert Guide
There is little glory in reinventing the wheel when it's totally unnecessary. Powerful objectives will have more than enough challenge even if you learn hints, tricks and shortcuts from those who have succeeded previously. For my kayak trip, I enlisted very helpful Manhattan Kayak Company guides to help me navigate the currents and provide safety. That allowed me to focus on being in good shape and pacing myself. They also suggested improvements for my paddling technique on YouTube, which made my trip easier and left me with no soreness the next day. There is no shortage of resources available today for just about any task. If you can't find a live person to share, the Internet has most everything you'll need.
5. Commit Publicly to a Regimen
Focus and discipline are key to any big accomplishment. Doing something extraordinary requires changes in patterns and behaviors. In my case, I had to make new time in my schedule to train regularly. It wasn't easy, but I was committed enough to the goal to make the extra effort instead of just hoping I would magically be ready, as often happens in business. Sales teams often miss big goals because they just do the same thing thinking they can get a different result. Adapting to new behavior is hard. It requires a conscious effort. But no need to do it alone. Let your inner circle know what you are trying to accomplish and let them provide correction and encouragement to keep you on the right track. Then you can keep your head down and push hard for the finish. The greater victory will be much sweeter when shared with a supportive team.
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Everything you need to keep pace with business while you're overseas.
Business travel can go wrong in any number of ways. You could, say, spill coffee on the dress shirt you were planning to wear to an important meeting. Or you could wind up with a hotel room that faces an absurdly noisy intersection.
Those are things that can be difficult to prevent. But there's one thing you can and should always prepare for in advance: how you're going to get work done, especially on an overseas trip. Below is my list for tech essentials to pack.
1. Bring a tiny laptop.
This tip applies to domestic travel but it's even more important on an overseas flight. You might not always know your seat or the type of plane you'll be on. A smaller laptop works best in tight confines. On one recent flight, I used an Acer Aspire V5-122P-0643 that has a fast quadcore processor and 4GB of RAM. Because it's a 11.6-inch netbook, it worked fine even when the guy in front of me tipped his seat back. The battery lasted a good five hours, which was about right for overseas flights to places like the U.K. And the price is right--$450 for a second laptop is perfect.
2. Get an international SIM card.
The most obvious choice here is to go on a carrier site like ATT.com and order a SIM card that works with your phone for international use. With a Samsung Galaxy Note II, I had no trouble using an AT&T SIM card that provided both phone and data service. Rates vary depending on the country and your plan. Another option is to use something like the OneSimCard, which I tried in an HTC One smartphone that was already unlocked (since it's the Google version). Setup is a bit tricky--you have to use a SIM card app to adjust some settings. OneSimCard provides an app that lets you make Internet calls. Rates vary by country and incoming calls are often free but outgoing calls run between 25 cents and 69 cents per minute. (Some U.S. carriers charge up to $4 per minute overseas.) I usually bring two smartphones on every trip, one as a back-up. For foreign travel, this is also handy in case one of the phones can't connect to the local carrier signal for some reason.
3. Bring a universal power adapter.
You can find these online at Amazon.com and other shops. There's usually a switch to select your power outlet type, such as the two-prong European style. You insert the adapter into the outlet, then plug one gadget into the adapter. With the Acer Aspire I used, there is also a two-prong converter that snaps onto the main power cord for use in Europe. But there's another option. I brought a couple of back-up battery chargers for my gadgets like the MyCharge Hub 9000. Once fully charged, you can usually keep your phones and tablets running for an entire trip--up to about two full recharges. Plus, you can charge up to three gadgets at the same time.
4. Get some cable savers.
Cables are the bane of domestic travel, but they cause extra headaches on an international trip-they get in the way of your gear. I use Recoil Winders, which come in three sizes and cost about $10 each. You fold the cable in half and slip over a hook, then recoil to wrap around the spindle. I also use thicker cords like those from Eastern Collective that seem to last much longer than the thin micro USB cables you get in the box with your phone or tablet.
5. Bring a backpack.
For domestic travel, I usually prefer a messenger bag that provides quick access to my phone and laptop at a coffee shop or during a meeting. They are super slim and light. On long flights or in remote locales where I know I'll be walking longer distances, I'm prone to use a backpack like the Bare Lido. At times, it's better to cinch the backpack over both shoulders and go light. The canvas material is strong and the design looks ideal for Euro travel. For something beefier, I've used the Airbac business bags that have extra padding for a laptop--they use a unique air support system to ease the burden.
6. Use a portable router.
Lately, I have not packed a mini router along on domestic trips because Wi-Fi and 4G are so readily available. For overseas travel, I'll usually bring something like the TP-Link TL-WR710N-US router along. This compact model plugs directly into a wall outlet and allows me to re-share the hotel Ethernet connection in my room. (Don't forget to bring your own Ethernet cable.) In some places, Wi-Fi can be expensive and a 3G or 4G data signal might not work with your international SIM card.
So which gear do you bring overseas? Post in comments!
Three companies competing with Google in the race to put a computer on your face.
Google Glass may be getting all the wearable-device buzz these days, but these three companies are creating their own high-tech specs that could (almost) pass as regular sunglasses.
1. Vergence Labs
Los Angeles-based Vergence Labs tries to straddle the line between Wayfarer style and Internet technology. A subtle button on the side acts as an On/Off switch for the device’s HD camera, which can record or stream video straight to Facebook. More features may come: The company plans to open its technology to outside developers. Prices range from $299 for 8GB of storage to $499 for 32GB.
2. Recon Instruments
Designed for long-distance runners, triathletes, and cyclists, these glasses display real-time metrics on heart rate, power, distance, and cadence. Vancouver, British Columbia-based Recon Instruments is outfitting the glasses with an HD camera, full-color display, microphone, and speaker. They will also display texts and caller ID from your cell phone. Priced at $599, the glasses will begin shipping in February 2014.
These glasses from French company Optinvent display information via a Wi-Fi connection or a Bluetooth-connected mobile device. The glasses are equipped with GPS, a full-color display, a front-facing camera, motion sensors, a microphone, and speakers. Though not yet for sale, the glasses will hit the market in November.
It's not enough to just screen out jerks. A bad cultural fit can ruin a whole company's mood.One jerk can ruin an entire office. That’s why our very first rule when we started our company was a strict “No Jerks” policy. But it doesn’t stop there: It is equally important to avoid hiring someone who might be a great person but simply doesn’t fit into the company culture you have established. One bad hire can ruin the mood of everyone around them. We’ve worked hard to ensure we are building our company around the right people, who bring with them the right skills to ensure success. Like anything else, the key to success has everything to do with focus and execution. At Launchpad we’ve implemented practices that will ensure we remain a place where people like to come and work every day. As you’re building your staff, consider these four ways of ensuring cultural integrity: 1. Be inclusive. When we interview people, we make sure a cross section of the agency meets with the candidate before making a hiring decision. That often includes not just the people who they will work for, but also those who will work with and for the person. Many companies avoid having the people who will report to someone participate in the interview process, but we feel having their input and buy in is critically important. 2. Listen to everyone. Really everyone. On a few occasions the senior team felt a candidate was a great fit, but when feedback came from the folks who would be working for them every day it was a very different story. So we didn’t extend an offer. The first time this happened I think people were shocked that we listened and valued their input that much. We didn’t pull the trigger on these hires because those staff perspectives mattered. Their concerns were valid and they raised points we would have never considered from our vantage point. 3. Look outside the interview. You can tell a great deal about a candidate by what happens outside of the actual interviews. Are they easy to work with when setting up meetings? How do they interact with those who they feel are not making the hiring decisions? What kind of questions are they asking HR? Everyone is different and so is every company culture. You’ll often learn more from understanding how they go through the process than you will in an interview discussion when candidates know they are on the spot. 4. Trust your gut. On several occasions we have had candidates that seemed so right for the position, but there were one or two things that just left nagging concerns. We learned the hard way that we need listen to that little voice in our head. Literally every single time we’ve overridden our instincts in one are because someone seemed perfect in other ways it has backfired, and in each case the person did not last long.
Sure, you've heard about the sharing economy before. But this time you need to listen.
It's communism. It's an unsustainable fad. It's a seismic social and economic shift that will forever change the way people consume.
Most reactions to "the sharing economy" fall into one of these categories, and chances are decent that at least two out of three are correct. But those who dismiss collaborative consumption as a business narrative they've heard before--that is, naysayers in the first two camps--simply aren't paying attention.
It's true that the P2P networks of today--Airbnb, Kickstarter, TaskRabbit--have technological roots spanning the open-source movement of the early 1990s and the earliest P2P auction websites (yep, eBay). Still: The sharing economy of 2013 is not the Red Hat play of 1998.
This is not about achieving economies of scale on intellectual capital or challenging the definition of ownership in a digital economy. It's not even about eliminating the middleman and connecting people one-on-one to eke value from outgrown clothes and vanquished video games.
"What's actually happening is that these sharing-economy companies are going places where Adam Smith's 'invisible hand' cannot," writes Dominic Basulto (@dominicbasulto) for the Washington Post. "They are re-calibrating supply and demand, giving consumers access to otherwise unused capacity or idle assets." They're companies led by capitalists, sharing economy or not.
Now don't get us wrong. We acknowledge that today's collaborative consumption was made possible by the technological investments and social revolutions of earlier generations. So perhaps the storyline is a familiar one. But this version is different--in large part because of its heroes and heroines.
"Forty years ago, even 20 years ago, a young person's first thought, or even second or third thought, was certainly not to start a business. That was selling out--an idea that has rather tellingly disappeared from our vocabulary," writes William Deresiewicz in the New York Times. "Today's ideal social form is not the commune or the movement or even the individual creator as such; it's the small business. Every artistic or moral aspiration--music, food, good works, what have you--is expressed in those terms. Call it Generation Sell."
Despite what you may have read in Time, the Millennials are not "lazy, entitled narcissists" seeking instant celebrity. They are born entrepreneurs who've grown up watching Google and Apple innovate at terrifying speed and thinking that business-model disruption is, quite simply, business. The founders of Facebook, Airbnb, Tumblr, and FlightCar are mostly Millennials, and they are successfully creating markets where none existed 10 or even five years ago. At this point, the question is not whether collaborative consumption will catch on (it's already a way of life for a generation), but whether government regulation and taxation is powerful enough to quash it. They same question could have been asked of the first post-Industrial entrepreneurial generation as well.
Is it a coincidence the oldest Millennials were born the same year Apple launched the Macintosh with its now-iconic "1984" TV ad and just after Inc. unveiled the Inc. 500--the first-ever index of the entrepreneurial economy? Yeah, we didn't think so either. Seems like there's an equation here somewhere: sharing + business + fearlessness = what? Something sizable, we think. The sharing economy has arrived.We built this engine. Now let's see what she can do.
Your employees might have you pegged, but how well do you know yourself?
Your employees might have you pegged, but how well do you know yourself?
Your employees probably have you pegged--as a relentlessType A charger, a ponderer who can’t make decisions, a reclusive visionary, or a hothead who throws things. But how well do you know your own leadership style?
There are several widely used personality tests out there, and you may know your Myers-Briggs, Color Q, or DiSC type. Our tool--which is based on leadership styles identified by psychologist and author Daniel Goleman--isn’t intended as a substitute for other personality evaluations. But if you jump in and answer honestly (as the boss you are right now, rather than the one you aspire to be), you just might get the affirmation, reality check, or wake-up call that you need.
Thin and light laptops usually mean poor performance. Not so with these three brand new performance models.
The idea of a thin and light laptop makes sense for business trips and meetings. You slide a svelte notebook into your messenger bag and off you go.
Unfortunately, my experience using the thinnest models is that they are thin in another way: on actual processing power. You can run a Web browser and browse a few photos, but forget about Adobe Photoshop or a massive spreadsheet with detailed charts and reams of data. There just isn't enough oomph.
Recently, I tried a few "air" notebooks running Windows 8 to see if they met my needs. I tend to use Google Docs for light writing when I travel, but I'm also a power user who will load a 3D modeling app on a whim to design a part for the Makerbot. As a journalist, I also use Photoshop routinely to edit very high-resolution photos in the RAW format. Each of these systems powered through my tests with no problems. They booted in only a few seconds and performed like a desktop machine.
1. Sony VAIO Pro 11/13, $1149
The first thing you notice about the Sony VAIO Pro (which comes in a 11-inch model and a 13-inch model) is how light it is. I tested the 11-inch model and it weighs less than a food tray you'd find in the cafeteria--only 1.9 pounds. There's a high-speed SSD drive inside to speed up data transfers, and the high-end configuration I tested uses an Intel Core i7 processor. The case is made from a durable carbon-fiber material. The touchscreen was responsive in my tests. The Duo 11 lasts seven hours on a charge, but there's an optional 14-hour battery pack. The 11-inch is only .68-inches thin. If you go with the 13-inch, it's also .68-inches thin.
2. Acer S7-392, $1449
The sleek, all-white Acer S7 touch notebook uses Gorilla Glass on the top cover for extra protection and an eye-catching look. Like the Duo 11, the Acer S7 lasts about seven hours on a charge. One plus: the S7 now comes with 8GB of RAM for a performance boost. The model I tested had a Core i7 processor; the touchscreen worked flawlessly for me. Another big perk: the S7-392 has built-in Wi-Di (Wireless Display) for connecting over wireless to an HDTV. That helps with presentations, but you'll need a receiver on the HDTV like the Netgear Push2TV. The S7 measures only .51-inches thin but weighs 2.8 pounds--a bit heavier than the VAIO Pro.
3. Samsung ATIV Book 9, $1499
The ATIV Book 9 notebook from Samsung weighs 2.6 pounds and is .50-inches thin with a 13-inch non-touch display. Like the Sony and Acer thin and light models I tested, this laptop uses a fast Intel Core i7 processor. It's the shortest-lasting of the bunch at only five hours, one-third the staying power of Sony's extra battery at 14 hours. One interesting perk, though: the ATIV comes with a technology called SideSync that allows you to see the actual screen of your Samsung Galaxy phone on the laptop's screen.
Thousands of start-ups will go under for lack of Series A funding. That's a problem, all right. But not the problem you think.
Ash Rust had good reason to think his start-up would take off. He's a co-founder of SendHub, a start-up that lets companies set up corporate phone systems using their employees' smartphones. In 2012, Rust and co-founder Garrett Johnson raised $2 million in seed funding in two weeks. Their service worked well, and more than 5,000 businesses signed up. So when it came time last spring to hit up VCs for the several million dollars in Series A funding SendHub needed to keep growing, Rust expected smooth sailing.
The results caught him by surprise. "We were told we weren't far enough along," he says, "that the market was too competitive, that we just weren't the right company." By his count, he and Johnson sent thousands of emails to potential funders and went to about 100 meetings, all over the course of three months. But they came up empty-handed. In June, with only three months of funding left to stay afloat, SendHub laid off two of its 12 employees and cut expenses in half. "It was easily the most stressful period of my life," says Rust.
Rust's experience fits the template of the "Series A crunch," a story that's been roiling the start-up community for the past couple of years. It goes like this: After slogging through six months to a year of frenzied product development and user testing, seed-funded tech start-ups are fatally hitting a wall-;the million to several million dollars in VC funding they need to scale up their cool new services is nowhere to be found. The result is the cruel and needless throttling of a vast stream of promising fledgling companies down to a mere trickle of survivors.Share of seed-funded companies that won't be able to get follow-on funding: 61%Source: CB Insights
That's the story, anyway, and it has the start-up community vibrating with angst and debate. But that's not the whole picture. The Series A crunch is really just shorthand for a broader, longer-range shift in the start-up ecosystem, one that has unleashed an explosion of new companies and a revolution in the system that funds them. Yes, it's true that the situation has created far more demand for venture capital than there is supply of it, and many new companies will perish in infancy as a result.
What many entrepreneurs don't realize--or, more likely, would prefer not to admit--is that this is not a bad thing. For all the hand wringing, the Series A crunch is not a sign that the system for funding start-ups is broken. On the contrary. This is how it's supposed to work.
The Crunch Is Real--But it's Misunderstood
It's true, the odds of a seed-funded start-up getting Series A funding have dropped substantially over the past few years. The exact numbers are much debated-;and also depend on how seed and Series A funding are defined. (Seed is typically a few hundred thousand to a couple million from angels and early-stage VC firms. Series A typically ranges from a few million to $15 million from VC firms.) But almost everyone agrees that a much lower percentage of very-early-stage companies is getting follow-on funding, with a typical estimate suggesting there has been a drop from perhaps 1 in 3 being funded in the past to 1 in 6 today. According to a report from research firm CB Insights, the crunch will probably strand more than 1,000 start-ups this year.
But it's not because there are fewer seed-stage companies that go on to get funded at the $5 million or so level. It's because the number of seed-stage companies has ballooned--to more than 1,700 in 2012, up 64 percent since 2011, according to CB Insights. "It's become much easier to start a company and raise seed capital," says Keith Rabois, a partner at VC firm Khosla Ventures. Rabois held key roles in the early growth of PayPal, LinkedIn, and Square and has supplied angel funding to some 70 companies. "It just hasn't become any easier to raise a Series A. The funnel is wider at the bottom and the same at the top, so there's more of a narrowing, and that's creating more disappointed entrepreneurs."
One of those disappointed entrepreneurs is Benjamin Zises, who founded RetailMLS, an online real estate listing service for retail spaces. His company raised $1.9 million in seed funding in 2011 and 2012. When those funds began to run low and Zises started contacting VCs earlier this year, he collected what would ultimately prove a long, unbroken string of rejections. "We've really had a lot of trouble," he says, adding that he has kept going by offering employees stock in place of much of their salaries.
Still, the narrowing of the funnel isn't necessarily bad news for entrepreneurs. The key to understanding why lies with looking at why so many more companies are getting seed funding and what's going on with those that don't make it to a Series A.Average amount raised per angel or seed deal in 2012: $880,000Source: PitchBook
Seed Funding Is Easier to Get...
One reason so many more companies are getting seed funding is that there are so many more investors to provide it. Until recently, seed funding was mainly the territory of angel investors, traditionally wealthy former entrepreneurs who hit it big and who can write checks for a hundred thousand dollars in exchange for a small percentage of a company. But now a variety of other players are getting into the angel game.
In particular, Silicon Valley is seeing the rise of angel syndicates and crowdfunding collectives that let smaller investors, who wouldn't otherwise have enough money to be angels, pool their resources. One of those is FundersClub, which, as of August, has pumped more than $100 million into 31 start-ups, with its numbers growing fast. Alex Mittal, the CEO of FundersClub, co-founded the organization in 2012 to "democratize" funding, after living through the time-sucking strain and hassle of raising money for his three start-ups.
Another organization, AngelList, founded in 2010, has helped reduce friction in angel rounds by matching founders and angels online. To boost its impact and free up even more angel money, AngelList founder and CEO Naval Ravikant recently unveiled a new service that allows a single angel to act as a lead investor in an angel group that invests in a single company, with that lead serving as sole signing authority in order to simplify the process. "The lead angel takes 20 percent or so of the profits, providing a huge incentive to keep working with the company," says Ravikant. "And the entrepreneur only has to deal with the person they trust in the first place." Ravikant led the first bundled investment himself, putting in $25,000 and raising $350,000 from other angels online.
Another growing source of seed-stage funding is VC firms, which have essentially been forced to become active very-early-stage investors. That's because angel funding has become so prominent in the company-building process that by the time founders start meeting VCs, they've already established close relationships with one or more angels, stealing from the influence VCs have long enjoyed in Silicon Valley and making it harder to get in with the hottest start-ups when they're ready for larger funding amounts. In the race to beat out other investors, VCs now act as angels--and they tend to be somewhat less discriminating than angels have traditionally been because they can afford to be, given that a $100,000 check is coming out of a massive fund rather than their personal savings.
...And You Need Less of It
Even as seed money has gotten looser, start-ups need less of it to get off the ground. Development tools for building a high-functioning website and the services behind it have become cheap, high powered, and easy to use. The cost of servers and other hardware has continued to drop. "Three years ago, companies could for the first time get all the way through a prototype of a service before they even raised seed money," says Ravikant. "Two years ago, they could make it through launch before raising money. Now, they can start to get traction with a user base by the time they come looking for seed money."Average amount raised per Series A round in 2012: $5.3 million Source: PitchBook
Even some of the technologically ambitious start-ups are finding they can get by with a fraction of what it used to cost to get off the ground. Patrick Riley, co-founder of Ark, which is creating a search engine for finding people, notes that several years ago, his company would have had to build its own servers to meet its needs. But now, they're inexpensive commodities. "It's been cheaper to build this company than it was to do my Ph.D. project," says Riley.
The result is that instead of needing as much as $1 million or more to get going, start-ups are often able to run with $100,000 or so for six months, which can be plenty long enough to get to a fairly polished product and a loyal user base. With companies needing less money and more cash than ever available for seed funding, it's obvious why there has been an explosion in the number of start-ups vying for Series A funding--to more than a thousand a year.
The Hurdles Forgetting Series A Funding Haven't Changed
The basic requirement for getting Series A funding is simple and hasn't changed in a decade: Have a better chance of getting to be a billion-dollar company than most of the other start-ups competing for funding. Getting a chunk of a single Facebook, Twitter, or Instagram is so phenomenally lucrative that it greatly outweighs whatever a VC firm has lost or won in all its other dozens or hundreds of bets on start-ups.
"It has nothing to do with how likely it is you'll be profitable or whether you're going to have 10 million users," says Jason Freedman, founder and CEO of commercial real estate site 42Floors, his third company. "There's no room at VCs for companies that are going to merely be very good. If you can't prove you have a chance of building a truly great company in eight years, no one will want to fund you for the next two."
That's one of the reasons VCs gave for turning down funding for RetailMLS, explains Zises. "They said we could be a $200 million business, and that wasn't enough for them to want to invest in," he says. "They have nonrealistic goals." On the other hand, search company Ark, which is gunning for a chunk of Google's market, is being wooed by VCs. "Anyone can make a Groupon for dogs and get it up quickly," says Riley. "Only a small number of people in the world can design a search engine and roll it out at scale."
Another factor in the Series A crunch equation is the fact that the amount of money available for Series A funding has barely budged in recent years, mostly because that money is determined by how much pension funds pump into VC funds--and pension fund investing tends to change little year to year. More start-ups competing for that money, and those start-ups doing more with less money, means that on paper, at least, the numbers that a start-up has to present to a VC to make the grade have all gone up-;way up. "The bar is at least twice as high on what VCs expect," says Brian Pokorny, a longtime prominent angel investor, most recently as a partner at angel investment firm SV Angel, who ran a start-up called DailyBooth. "If whatever market traction you used to have to demonstrate to get funding was X, it's now at least 2X."
That's a major reason SendHub was turned down by VCs, even though it already has tens of thousands of dollars in monthly revenue and sales are growing 25 percent a month. "Showing revenues can actually be a drawback, because it gives the VCs a clear measurement that they can find less than overwhelming compared to some other start-up," says Rust. "But if you're prerevenue, you can sell the company on dreams for its multibillion-dollar potential."
Revenue isn't the only metric VCs look at. Growth in user numbers is another big yardstick, but even low user numbers can be overlooked if there's a surge in growth or an unusually high level of engagement among users. Or if the service is starting to capture a previously untapped and potentially large bucket of users. AnyPerk, a start-up that hooks up employers with discounts for their employees, took off last year. It quickly signed up a string of top-tier customers and is clocking 40 percent monthly revenue growth. Now, the VCs are very interested. "They don't care about our pitch or who we are, the way they did in our seed round," says co-founder Taro Fukuyama. "They just want to see that we have good numbers."
All in all, most observers agree, the entrepreneurs who are making it through to Series A these days don't need to be significantly sharper--nor do their ideas need to be substantially more brilliant-;than those who did it four years ago. They just need to be able to keep up with the technology and the market in order to push their start-ups further along the path toward demonstrable potential greatness than was the case four years ago.There were 1,749 seed deals in 2012 and 692 Series A deals in 2012. Seed-funding deals increased 64% from 2011 to 2012 and Series A deals decreased 2% over that same period.Sources: CB Insights; Pitchbook
Who, then, are the expanded hordes of entrepreneurs who aren't making the grade? It's largely newbies and people who haven't yet figured out they just aren't that great at creating a business. These entrepreneurs wouldn't have made it four years ago, and they're not going to make it today--there are just more people today ready to give it a go and who are getting a chance to fail because of the increased availability of seed funding. "The Series A crunch is the great culling of lesser entrepreneurs and ideas," says Freedman.
In fact, almost everyone interviewed for this article agreed that, for all the difficulties it creates, the Series A crunch isn't causing any truly promising companies to bite the dust. The founders being turned down probably shouldn't be trying to raise a Series A round, many argue. They got a shot and ended up proving that their idea doesn't make for a great business. When they get a no from the VCs, they're getting the right answer.
The Series A Crunch Is Good for Entrepreneurs
Many insist that this culling of start-ups is in the end good for all entrepreneurs and for several reasons. For starters, those entrepreneurs whose companies are destined to fail are much better off being shut down eight months into the journey rather than years later, after they've sweated a lot more blood and have dozens of employees who are dependent on them. "The crunch is only going to stop those who wouldn't have succeeded anyway," says Jessica Mah, co-founder and CEO of inDinero, maker of a money-management tool of the same name. Mah raised $1.2 million in seed funding for inDinero, and at 23, she is on her second company. "If you're actually good at this, then you'll learn from the experience and be much better the next time around," says Mah. "If you're not good at this, you want to find out as soon as possible."
That's not to say there isn't a dark side to the crunch. There is, and it can be measured in the pain and disappointment most entrepreneurs experience when they can't keep their companies afloat after a year of frenetic activity, high hopes, and, toward the end, increasing desperation. "It's the equivalent of throwing someone into the pool to teach them to swim," says Khosla's Rabois. "Some people do really well with that sort of struggle--it makes them grow faster and become stronger because of it. Others sink and feel thrashed and destroyed, and end up becoming emotionally fragile in a way that's hard to recover from." The result is that some people who might have made successful entrepreneurs if they had gone through a gentler, more supportive system are driven out of the field by the race-into-the-brick-wall trauma of the crunch.
Rabois's advice for dodging this trauma: Don't bank on getting VC funding unless you're obsessed. "The only people who end up making successful founders are those who just can't stop themselves from pursuing their idea," he says. "They can't sleep because they're thinking about it all night, they can't stop talking about it, they can't focus on their relationships. Those people have no choice but to take that leap of faith, and they might actually have a good shot at it if they have the right skill set. Everyone else isn't cut out to start a company in this environment. They should join someone else's company."
Indeed, adds Rabois, the funneling of failed entrepreneurs into employment is another of the great benefits of the crunch. The fact that so many people want to start companies has created a serious dearth of affordable talent for great start-ups that find themselves competing for software engineers with the likes of Google. If it weren't for the crunch kicking so many gifted technology and marketing people out of the company-founding game and into employment, even some of the best start-ups would be foundering for lack of people to hire. "The limiting resource on tech start-ups is not funding; it's talented people," says Rabois. "If the talent pool gets too fragmented among too many start-ups, most of them won't be able to reach the critical mass of talent needed to succeed." Of course, that's easy for him to say.
But even if your company runs out of funding and fails, that doesn't make you a failure, argues Matt Brezina, an angel investor who is co-founder and CEO of Sincerely, a company that produces a number of gift-giving apps; his first company, Xobni, sold to Yahoo in June. Brezina contends that starting a business--even one that eventually flops--is one of the most effective management education and training programs in the world. As far as investors are concerned, there's no stigma attached to launching a company that fails to take off. In fact, you will have a much better chance of attracting funding the next time around. "Going through that process is the best training experience ever," says Brezina. "When you've gone through it, investors know you can hire, you can raise money, you can execute on a business idea. Investors want to see that experience behind you."
There's A Way to Beat The Series A Crunch
Entrepreneurs can do an end run around the Series A crunch. For starters, groups such as AngelList and Funders-Club, which have mostly aimed at seed funding, are moving aggressively into bigger rounds. Outbox, a start-up that digitizes postal mail, was turned down by a number of VCs, but it pulled together a $5 million Series A in June largely based on bundled funding from some 70 investors put together via AngelList. That option won't be available to every company that can't impress the VCs, but it can help some.
And there's another way to beat the crunch: Focus on building profits early. That strategy tends to be a poor one for scoring big rounds of VC funding, because early profitability usually requires focusing on small niche markets and then reducing the customer base even further by charging handsomely for your service. Most VCs want little to do with start-ups willing to settle for a tiny and less-than-fast-growing market, even if they're making good money at it. That's why VC-funded companies tend to ignore profits and concentrate on churning big user numbers any way they can. But as long as you're making money, you can keep going and growing and thumb your noses at the VCs--as well as at all your funding-starved fellow entrepreneurs--while you're doing it.
One start-up that's going this route is PlanGrid, whose iPad app provides an elegant way of handling design blueprints. After a $1.5 million seed round last year, the company has already hit profitability, and it has no immediate intention of raising any more money. "My bigger problem is convincing our seed investors that we don't need a Series A," says co-founder Ryan Sutton-Gee. Eduardo deCastro also decided against raising money. He's a co-founder of HashFast, a start-up that sells specialized hardware for the computing-intensive tasks that support the bitcoin virtual-currency market. DeCastro didn't like the terms VCs were offering-;and ended up not needing the cash after customers forked over a combined $6 million in orders for the company'sfirst product.
Brezina's company, Sincerely, looks as if it may turn out to be a slow-growing, profitable, VC-less company, and he says he's fine with that. "We're not taking off in the market," he says, "but this might be exactly the right way to build the company." The Series A crunch, as painful as it may be for founders who get far enough to feel its squeeze, clearly isn't preventing the good companies from moving ahead. That's what SendHub's Rust ultimately decided. He finally raised $2.8 million in Series A funding, after all the initial rejections led him to focus on groups such as FundersClub and AngelList. "This has been a serious test for me and the team," he says. "But what it's made me realize more than anything else is that I love doing this and wouldn't want to be doing anything else."
We'd never counsel financial irresponsibility. But every now and then...
"A custom adventure with Visionary Air. You charter a plane and log hours of flight training on the way to your dream destination. I'd fly to Jackson Hole for backcountry snowboarding with my best friends."
"A flying car by Terrafugia. When I was little, I wanted the hoverboard from Back to the Future. Terrafugia feels like the adult version of that."
"A plot of land in New York or Vermont. I would love to create a sleepaway camp for special-needs children."
"A personal chef. I don't have time to cook. Eating well is hard enough, and our office is stuffed with snacks like peanut butter-filled pretzels."
"A Hyperloop operated by Elon Musk, so I can go 4,000 miles per hour without getting carsick."
Research professor Bren Brown explains the ways uncertainty, risk, and emotional exposure are essential to a successful entrepreneur journey.
When it comes to giving feedback, delegating responsibilities, or encouraging innovation, all the good stuff happens when you're vulnerable.
Here's how, as a leader, you can harness uncertainty.
Why vulnerability is the first thing you look for in other people, but the last thing you want to reveal in yourself.
Indeed, research professor Bren Brown says you can't innovate without vulnerability.
A new partnership between Intuit and Square could help streamline your bookkeeping.
Later this fall, small businesses that use Square's mobile credit card readers might have an easier time managing their bookkeeping. Intuit has announced that it is launching a new service on November 19 that will synch Square with Quickbooks.
Though many details about the partnership still remain unclear, an Intuit spokesperson noted that Square Register, Square's point-of-sale software, will be offered as an option to current QuickBooks users. And Square Register users will be able to easily transfer their sales data into QuickBooks.
Intuit already has its own mobile credit card processing device, GoPayment, which automatically synchs with Quickbooks, but, until now, Square's 2 million-plus users were out of luck.
"With the Square integration, a local retailer or restaurant may choose Square, while an invoice or service business--like a travel agent or accountant--may select one of Intuit’s payment solutions, such as GoPayment or QuickBooks Point of Sale," says Dan Wernikoff, senior president and general manager of Intuit Small Business Financial Solutions.
Intuit has yet to release pricing information for the new service. For now, the company will continue to offer GoPayment, whose most popular plan costs $12.95 per month.
One entrepreneur explains how biking directly benefits his daily business life.
You've heard about how poorly the motorcycle manufacturers are doing these days. Sales and profits are down, some plants are in danger of closing, and now dealers with multiple dealerships in one city are being asked to consolidate into one location. They say it's because 'discretionary spending' is down. But I have a question: When did owning a motorcycle become discretionary?
I believe that owning a motorcycle is as American as entrepreneurship--and vital to a founder's long-term business success. I learned many years ago that the skills and techniques necessary to be a successful biker directly transfer to my daily business life.
1. Running a business is one long road trip.
The first thing bikers learn is how to get from here to there safely and successfully. Bikers know how to select the right destination, plot out the right course to get there, and prepare for the unexpected. Bikers know how to overcome adversity along the way, whether it's bad weather (the economy), poor road conditions (market fluctuations), or crazy cagers (competitors). Both biking and business are nothing more than vehicles designed to take you where you want to go: one physically, the other economically.
2. Both business and biking require you to assume reasonable risk.
And if not done properly, they can both cause severe damage to you. Staying upright requires awareness, timing, and a keen ability to sift through the background noise and B.S. that surrounds you. So the lesson from both is not about overcoming fear, but instead understanding and embracing it. Because riding scared is a fast ticket to the hospital--or business failure.
3. I like hanging out with real people.
Bikers and entrepreneurs are a similar and bold lot. Both groups are independent, adventurous, strong-willed, and utterly intolerant of fences. Go to any biker hangout and you'll see business leaders and professionals sitting next to mechanics, carpenters, and full-time bikers. They come together to celebrate the culture of riding, to exercise their passions. And they come together to have the type of real-life, frank conversations that can only happen between two people with nothing to gain but an honest point of view. When's the last time that's happened to you at a chamber of commerce meeting?
4. Passion is the fuel of desire.
When that desire is properly channeled, you achieve excellence. On a bike, it's about feeling the crisp air while navigating the winding road. In business, it's putting yourself out there on the winding roads of the marketplace. With both, happiness comes when you turn our passion into performance.
5. Biking is a total attitude adjustment.
Ask any entrepreneur who rides and he'll say the same thing: I ride to get away from it all for a while. I do some of my best thinking in the saddle because my synapses are popping right along with that V-twin. Riding an open road seems to charge my brain impulses with an even hotter spark as the sights, sounds, and smells combine to rev up all my senses.
I'd definitely rather be riding my motorcycle thinking about my business than sitting in an office thinking about my motorcycle.
But this is just my opinion. I could be wrong. So, if you disagree or simply want to comment, please do so in the section below. I look forward to your point of view.
In November, Dwain M. DeVille will co-host and co-lead the first-ever Inc. Riders Summit, a three-day motorcycle road trip through the Nevada desert for entrepreneurs. For more information about the ride, the entrepreneur-led business sessions, or the networking, click here.
Senator Cruz got plenty of attention for his marathon speech decrying the Affordable Care Act. But is he actually leading?
If pragmatic leadership connotes a capacity to move agendas ahead by appreciating the subtitles of winning people over, then zealot leadership--the type of leadership recently displayed by Senator Ted Cruz--is the exact opposite.
Zealot leadership is not simply ideologically committed leadership. It is not simply a strong adherence to a particular goal or idea, but rather a personally uncompromising sense of calling, is based on an entrenched pursuit of an idea that you believe is indisputable.
Adherence to a particular goal or outcome is a wonderful leadership trait, but in the hands of a zealot leader this virtue becomes a handicap. Zealot leaders forget that the key to leadership is essentially getting results by moving agendas ahead.
As a zealot leader, Senator Cruz has forgotten that leaders need to:
1. Get beyond their base to move agendas ahead Zealots often spend time talking to their fellow believers and reaffirming their ideological base as if this reaffirmation will energize their agenda.
Pragmatic leaders, on the other hand, appreciate that if the base is the only focus, then the base can quickly become a cult. Pragmatic leaders, no matter how committed they are to their core believes, understand that they must get beyond their base and avoid alienating those with whom they may not totally agree with, but have much in common with.
2. Never present commitment as self-righteousness Pragmatic leaders understand that conveying a strong sense of commitment and a deep sense of appreciation is a way of empowering others. The more they share their passion and belief in their agenda, the more they’re likely to spark an interest in others.
In the hands of zealot, commitment and passion often sound like self-righteousness. When commitment and passion become self-righteousness, even your closest allies may become a bit weary, fearing a level of inflexibility that in the long run may not be appropriate given the complexity of any situation. When self-righteousness replaces passion there is a sense that the subtlety of truth is often forgotten.
In such an instance even those that are closest are likely to be cautious of your leadership.
3. Realize that repetition is not persuasion All pragmatic leaders know they have to sell their ideas, but to succeed they have to do it subtly. They have to do it consistently and tactically. They cannot hope to bully the message across by the sheer force of repetition. Exhausting your opponent is not winning your opponent over.
Taking the microphone, grandstanding, and repeating the message over and over will always be seen as an attempt to celebrate yourself rather than an earnest attempt to convince others through the art of dialogue and conversation.
No matter how accurate your message, repetition makes the messenger the issue, thereby delegitimizing the message and engendering frustration from even the most sympathetic of listeners.
Zealot leaders can be left, right, or center; they can be complete revolutionaries or staunch traditionalists. It doesn’t matter. In its drama, zealot leadership will always have its share of short-term benefits. It gives people pause so that they can reflect, it brings a tension to an agenda, and it creates a sense of urgency.
You can give credit to Senator Cruz for doing all that. But when zealot leaders go over the top, when they forget that leadership is the art of winning people over, when they forget the need for coalitions, when they engage in self-righteousness as truth, and use repetition as tactical tool--then they forget that leadership, in the end, is about getting results.