Product Market Fit

There is little else that matters to a start-up than product market fit.

Actually… If you are a seed stage company, nothing else matters.

It is so important, that I want to write a blog post dedicated entirely to Product Market Fit.

For those who have never heard of this term, it refers to determining whether there is actually a market for whatever it is a start-up is building — i.e. Is there a market for your product?

I have made the mistake before of building a product with little product market fit (ShopReply). I have also built a start-up that had instant product market fit (Lind Golf). I have also pivoted from a start-up without much product market fit, to a concept that has a lot more* product market fit (CalReply).

Notice I said “a lot more”. I did not imply that CalReply has product market fit. That is because I don’t believe product market fit is not something you either have, or you don’t have. Product market fit is a relative and elastic concept since the extent to which you might have product market fit will vary in accordance to the size of the market you are addressing, and the pain factor of the solution you are solving.

My “back of the napkin” definition of product market fit is:

A product with 10 or more non-related customers that generates $1.5m in annual recurring revenue with 10% annual churn or less, where there is a foreseeable path to $10m in revenue in the next 24 months by scaling andrepeating what got to you to the first $1.5m in revenue.

This will vary depending on your business model, but I’m talking about a B2B SaaS product here. Having a great product and lots of users is not enough. Revenue, or a clear path to revenue is what matters.

Another important factor of product market fit comes down to your expectations as a founder, the expectations of your investors and the type of company you want to build.

You might create a product that solves a problem for a relative niche, however investors are not interested in niches. They want $100m plus valuations post Series A, and the potential for $1bn valuations later.

That said you, as a founder, might be happy serving this niche and building a lifestyle business that generates $1–2m a year in ARR. So in your mind you might have product market fit. If you ask for investment with this mindset, investors will push you to think bigger… 50 x bigger.

So while you might think you have product market fit, investors look at companies like Airbnb, Uber, Google, Amazon and benchmark product market fit based on their products, and the size of the market that these companies address. They want to invest in the next unicorn.

Lets take Twitter as an example. If you started Twitter you’d be pretty sure you had product market fit after the first few million users started using the service on a monthly basis. That is a great achievement… A few million monthly active users. A fraction of start-ups ever achieve this level of traction. Twitter definitely had product market fit at this stage. Fast forward 6 or 7 years, and Twitter is a publicly listed company being compared to Facebook. They have ~300 million active users, however they also have 800 million inactive users. These are people who signed up to Twitter, tried the service, never to return. Twitter is also a public company under a lot of scrutiny

So, does Twitter have product market fit? Of course they do, however what I’m trying to demonstrate here is that product market fit is in the eye of the beholder. The average person doesn’t identify with Twitter like they do with Facebook. Furthermore, Wall St expects the company to live up to its valuation so in Wall St’s mind, perhaps the product is broken if they are meant to be a mass market consumer social network, but there are so many inactive users. This is why I believe there is no “one size fits all” for product market fit.

The more cash you raise, the higher your valuation, the more will be expected of you to deliver deeper, wider and more sustainable levels of product market fit, and ultimately revenue growth.

How do you know if you have product market fit?

The thing with product market fit, is that it can be elusive. You might think you have product market fit but you might be solving a really painful problem in a market that is not sufficiently large enough to ever become huge. This is the elusive part… As a start-up you think you are doing great when you hit $1m in year one, however you now need to get to $10m in the next 24–36 months. There need to be a lot more customers left in the market that got you to the first $1m in ARR. Then you need to get to $20m, $50m etc.

How to get to product market fit

Here are four rules you can follow to help get to product market fit:

1. Money cannot not buy product market fit

One of the biggest misconceptions of start-ups, is the correlation between money raised and future success. Raising a lot of money very early on has almost no correlation to future success. At the seed stage it simply means you are a good sales person, have convinced investors to write a cheque, and have something sufficiently interesting. It does not mean that anyone in the big wide world actually cares about what it is you intend to bring to market.

Many companies have failed raising too much, too soon. Two examples that come to mind are Color and Clinkle. Jet.com seems like they could be on a similar path, however I don’t know any details and am just speculating since they have raised A LOT of money, are far from lean.

I would argue that companies who raise smaller amounts of seed capital actually have a better chance of success because it forces discipline. If forces you to build essential features, get out of the office and make your time count. You don’t have time to get comfortable. You need to figure out if your hypothesis is right and start bringing dollars in. An endless cheque book will only prolong the inevitable if you are on the wrong track.

Remember, Google was profitable on $8m in funding.

What will get you to product market fit is having a visionary open-mindedness around your offering, as well as a product that can be tweaked slightly to open itself up to new markets and verticals if your original ideas don’t stick.

So what does money do for seed stage companies?

Money buys time. In addition to a visionary open-mindedness, time is what you need to get to product market fit. You need time to meet with potential customers and validate your idea. You need time to iterate and change your product and business model based on feedback from customers.

When we raised our $1m seed round for ShopReply we had a couple of customers who used our product but it become obvious very quickly that generating revenue would depend on the platform processing very large amounts of gross merchandise volume. At the time it was tough to admit, however I was realistic with myself and knew that this would be incredibly difficult given the transaction volumes we were seeing from early customers. At that point in time we were still very lean with only three people. To cut a long story short (I’ll save it for another post) we decided to pivot to CalReply.

Because we ran lean, we had sufficient funding left over to have a real crack at an entirely new product. Where we were fortunate, is that it only took three weeks to add support for calendars to our platform so we did not have to start from zero on the product side. We did have to start from zero on the customer/sales side. I decided to go all-in on CalReply and within a few months got very lucky (I’ll leave that story for another post).

The lesson here, is that you need to be very conservative during your seed round because it takes time to prove product market fit. Chances are it will take a lot longer than you think so if you don’t listen carefully to market feedback and iterate on your product quickly (or pivot entirely), you will run out of money and die in the trough of sorrow.

In addition to all of this, you need an insanely committed team, a visionary founder, excellent engineers, a heap of luck and excellent timing. So there are about 5 or 6 key variables that are working against you at all times when you are at the seed stage. It’s not easy. Most start-ups fail.

2. Stay Lean

The most important thing you can do in the search for product market fit, is stay lean. When you raise $1m or $2m in your seed round, it is too easy to think you need to create a culture defined by ping pong tables, nice offices, stand-up desks and a large team.

The truth is that you need to keep the team tight, save every penny and be as scrappy as hell.

Here is why…

Lets say you raise $1m in seed funding and you have a team of 4 people (1 founder, 3 product/engineering people) on average salaries of $120k each, fully loaded at $150k each. You will be burning around $650k/yr when you add a few travel expenses, hosting and other costs to the mix. With this money, you need to build the first version of the product, find product market fit AND get to initial traction.

Lets say it takes 9 months to get version 1 out the door (9 months is relatively quick by the way — only a team that has experience in start-ups, is sufficiently product minded, and has strong engineers and designers can do it this quickly). This means you get to the starting line after about 9 months. Once you are at the starting line, your product is ready for paying customers. Over the next 3 months you might be lucky if you meet with 10 customers where your business has a high probability of product market fit. By now it is a year in and you’ve spent $650k. You now have $350k left in the bank.

With the remaining $350k you need to:

  • Continue to improve your product
  • Get initial traction so you can raise more money!

Now lets assume 3 of the 10 customers love your product, and want to buy it. They ask for pricing and an insertion order. By the time these customers sign off on the terms, you’re probably looking at another 2 months of money burnt. You now have $120k left in the bank. Now lets assume each deal is worth $25k/year and you sign three of these, you’re back to $195k.

You now have three customers who you have convinced to give you some money, however you are still far from initial traction which is around $1.5m ARR run-rate.

The lesson here is that even with a sizeable seed round, start-up economics are stacked against you. You need to be lean, while ensuring you have enough money to find product market fit, and get to initial traction.

3. Don’t get emotionally attached to your product or offering

If your customers are not emotionally attached to your product, you should not be either.

Think long and hard about what you are trying to achieve:

  • Do you want the freedom of running your own company?
  • Do you enjoy the creative process of going from Zero to One?
  • Do you love hustling or coding or selling?
  • Do you want to make a lot of money?
  • Do you want to build a great culture and team?

All of these desires can be fulfilled with any product even if its totally different to your original vision. If you start selling eCommerce software but end up building a SaaS calendar platform, so be it. What is important is that you end up with something people want and are willing to pay for, while having fun and enjoying the journey.

Not being emotionally attached can be tough. You need to dig deep and be very real with yourself if its not working out.

4. Keep your product simple

I am extremely proud of the ShopReply product, and while nobody uses it today for commerce, it is an insanely awesome platform that became the foundation of CalReply. We built a ton of great features that we thoughtwould get us customers. In hindsight we made it too complex and spent a lot of time on features that were never used. Luckily there were only two salaries being funded at that stage, which goes back to being lean.

The reality is that many of the best platforms such as YouTube, Soundcloud, Airbnb, Instagram, and Twitter are fundamentally simple products. Complexity does not make your product better. It probably makes it worse. So figure out what your core value proposition is and deliver a great experience around that but don’t try and be all things to all people. You shouldn’t have to. Your core offering should offer enough functionality to provide significant value.

How do you know if you have product market fit?

Here are some signs that you might have product market fit:

  • You can explain what you do in 30 seconds and pitch your entire product from 1 slide. I can pitch CalReply to any customer from a single slide if I have to (I don’t do this, but I could). It’s a simple product that solves a real problem that is easy to understand.
  • Customers that you are pitching for the first time tend to ask for pricing on the first meeting or call. This is a great sign.
  • You have 10 or more unrelated customers buy your product for meaningful sums of money — e.g. $15k/yr+
  • You’ve closed 10 or more sales where all customers are using the exact same feature set and you did not have to add new features or customize the platform for each new customer
  • You can pitch your product via a web-ex demo and sign up a customer who can start using your product almost instantly (I plan to talk about the importance of “instant utility” in a future post)
  • You know who your ideal buyer is, whether it’s the CMO, CEO, CFO, social media lead etc
  • You confidently believe there are thousands of other companies or customers that would also pay similar amounts of money to use your product
  • Customers are responsive to your follow-up emails and don’t disappear after the first meeting

This blog was cross posted to lindventures.com/blog

Raising money

I have to admit that I’ve been a bit behind on my blogging lately. Since November I’ve been pretty flat our closing an investment round for BuyReply.

Last week we announced that BuyReply had closed a $1m seed round from a consortium of Australian and US investors led by Adrian MacKenzie and Square Peg Ventures with participation from Valar Ventures in San Francisio which is Peter Thiel’s international fund. Additionally we bought in 6 local angels to make up the rest of the round.

BuyReply was covered by the Wall Street Journal, Tech Crunch, AFR and a bunch of other outlets around the world.

It was my first time raising funds having bootstrapped my first company, Lind Golf so it’s fair to say it was a new experience.

I though I’d to share a few of the lessons that I learn’t along the way. To seasoned entrepreneurs they might see naive however if you’ve never raised money before, you might find these points helpful.

1. Back yourself before you ask others to back you

I invested a considerable amount of my own money and time in BuyReply before I looked for outside funding. Doing this will give you a better chance of receiving a healthy valuation and it will also align you with your investors as they can see you have skin in the game and are committed to the business.

Depending how far you get with your own money, you’ll be able to demonstrate your resourcefulness. How far can you get with very little resource? We were able to build a fully working product and run three meaningful proof of concepts before we asked for money.

A note on founder vesting: My view is that this should be inversely proportionate to the amount of cash the founder(s) personally invests. Some investors will want all your shares to vest over 4 years however if you’ve already taken a huge risk financially, why should you have to earn your company twice? Negotiate hard here if you can!

2. Your pitch deck should be a product not a PowerPoint

When we originally met with Valar we had a pitch deck and an idea. We were told to come back with a product and a customer. When I met with Adrian I had a working product and a proof of concept business deal in the pipeline so the conversation was very different.

You are doing yourself a disservice by trying to raise funds from a PowerPoint presentation. In the lucky chance that you do get funded, you’ll get a terrible valuation.

Investors want to see a working version of your idea. This demonstrates that you can transform ideas into products. It shows that you can manager a team and attract the right resources. It shows that you truly believe in what you are doing because you’ve jumped off the cliff before you’ve found funding so to speak.

Most importantly it gives your investors something to see, touch, feel and play with. At the seed stage they are investing in people and ideas and they need to be convinced of both.

Anyone can build an impressive PowerPoint presentation. It takes more than that to execute.

3. You can’t fake an orgasm

Passion sells. When an investor backs an entrepreneur they need to be convinced that the founder is 100% committed and passionate about their business and vision. You need to sell the dream and take your investors on a journey which they want to be a part of. You need to convince them without an inch of doubt that you are whole heartedly committed, and that is something that cannot be faked.

4. Tell a compelling story

Raising money is not just about having an impressive product. It’s about having a story as to why your idea is novel, unique and worth backing. It’s about knowing where you want to be in 1, 3 and 5 years time and taking your investors to that place in the future. You need to sell your vision and your ability to execute to get to that position.

5. The entrepreneur runs the process

I thought that investors run the investment process and entrepreneurs build the business. I was wrong. In our case myself and one other ran the entire process. Once we had a term sheet, I engaged the lawyers, negotiated the deal, bought in other investors and drove the deal over the line. In some cases the investors might run the process however in this case, it was run by myself and our team.

6. Don’t use corporate lawyers or private equity lawyers. Use startup lawyers.

Startup financing is a very specific skillet and it needs to be done at a low cost. While it sounds good to use the biggest most well known firm in town, chances are they don’t have the specific skills needed to close a venture round in a reasonable time frame at a reasonable cost. We had to incorporate in Delaware, flip our AU entity into a US entity, establish a share plan for employees, set up license agreements and do it as cost effectively as possible.

If you want to keep costs low and do it the right way, make sure you engage a firm who specialises in this. The documents and work required is very specific and can be turned around quickly and affordably if you use the right people. We used Richard Horton and his team who are probably the best guys in the business for Australian –> US venture financings. They did an incredible job and moved fast.

7. Momentum matters

Raising money has a domino effect. If you can convince one or two influential investors to back you, the rest of the process becomes significantly easier. Some investors like to be the first money in and some prefer to be the last. Once we had the first two investors committed, the rest of the round filled up pretty quickly on the back of that momentum. You need to capitalise on early momentum and move quickly. Try to get the big names in first for as much as they are willing to commit then leverage that to bring in others who were already interested.

The trick here is to approach investors very early on. You don’t want to be selling the story at the 11th hour. Have conversations 6 months out and inform potential investors about your startup. Tell them you are raising money but don’t come across as desperate. Once these people hear you have interest from a couple of lead investors, it takes just one call to ask if they are in or out. Do the story telling before the momentum builds so that you don’t need to sell the story at the 11th hour.

Additionally, investors like to see good management capabilities. If you can convince a credible executive to join your board during the investment process it will show investors that you can attract the right people and increase their confidence in your abilities.

8. For founders, venture money is better than strategic money.

We had three interested parties who were strategic investors. As an entrepreneur it might make sense in your mind to bring in a customer as an investor however customers are only interested in using your product for their own benefit whereas investors need to make a return on their equity. So if investors make a return on their equity, then as a founder, so do you!

Furthermore, if a customer is interested enough to invest, chances are they will become a user of your product in any case. Try get venture money not strategic money if you can.

9. Don’t accept unfair terms

When you need money it can be tempting to accept any term sheet you receive however if you truly believe you have a great product, team and vision, then you deserve to receive a fair deal. Seasoned investors understand they are taking a 1 in 10 chance and should give the entrepreneur a fair deal. That means a priced round at a healthy valuation without any tricky terms.

If your investors are trying to shaft you from day-1, find someone else who really believes in you. You’re in it for the long run.

Don’t be afraid to walk. I walked away from two term sheets before I got what I wanted.

10. Investors need you more than you need them, but remain humble

There is no chicken or egg scenario when it comes to raising capital. Investors need something to invest in, I.e. businesses and founders, and while this might seem arrogant or naive, you need to maintain a demeanour that reflects a sense of confidence and belief that the “train has left the station”. Investors will flock to a founder that has confidence and conviction, and a great idea, however confidence and conviction are vastly difference characteristics to arrogance and ignorance.

Finally, be patient and DFTBA . It took almost 10 months from our first investor meeting to close the round.

Earning equity

When founding a startup there are hundreds of decisions to be made during the course of the founding years that can significantly impact your business.

One of the most impactful decisions you’ll make will be how, and who you choose to grant equity to.

If you are taking outside funding and hiring employees you’ll need to make these decisions pretty early on and you’ll need to live with them for the life of the business.

When you have something hot, everyone wants a piece of it. People will try and convince you as to why they are worthy of being a founding employee, how they can add value during the early days when you need help getting established. It is very easy to give in to requests by colleagues friends/associates who might not have what it takes to be a founding employee. When you have 5 staff chances are you need 2 or 3 engineer type people and 2 business/marketing/sales people however if you have a technology product then they should all have a level of technical competence. Finding people that satisfy this mix of skills is not easy.

During the early days you need to be tough and true to yourself as to who is worthy of equity. You need to listen to your instincts. Chances are your mate who can code or sell is not the right fit. Recruiting the right hires is a process in itself and needs to be done thoroughly, and equity must be granted deservingly.

With his in mind, I am of the opinion that there are only three ways to receive equity:

  1. Be a founder – This means being the one who incorporated the entity and started with 100% of it. This is the highest risk, but highest return way to own a piece of the action.
  2. Earn it – This means working for the business over a period of time so that you earn shares that ‘vest’ according to the option pool, usually a 4 year vest with a 1 year cliff.
  3. Pay for it – The other way is via an investment in the company at a valuation that is fair to the founders and fair to the investors and leaves  enough skin in the game for the founders to be incentivized and raise additional funding if needed.

In my opinion there is no other way to get equity. At the very early stages when it’s just the founders and no investors, it’s very easy to part with equity however at this stage it’s unlikely you’ve worked with these people before and therefore it’s risky to just give them something without being able to work together to see if they are the right fit. You need to date before you get married. The same applies in startups.

My advice here is not to part with equity (outside of the founders) to anyone until you’ve got a formal investment in place, and as part of the term sheet insist that all employees, directors and advisors be a party to the option plan and its associated vesting terms. This means that the CFO or the whiz executive you’ve just found has to earn their right to own a piece of the business.

As the founder you can play man in the middle between the option plan terms and your stakeholders by advising them that all stakeholders, including director grants, are subject to vesting. This removes the need to have those uncomfortable conversation around equity. My key point is to try and get your vesting terms in place prior to granting equity to anyone (during you Seed round), otherwise you’ll end up making promised you can’t keep.

Oh… and as a founder, don’t ever forget the risks and sacrifices you’ve made to get to where you are today. Chances are those people asking for equity are just seeing the tip of the iceberg, but with this is mind, A player employees are always worthy of generous equity grants. You can’t do it alone.

Strategic Investment

Entrepreneurs often fall into the trap of chasing after VC funding while failing to explore the strategic options that might be available to them. We have become accustomed to reading the fantasy stories posted on Tech Crunch so it’s become commonplace to believe that raising from a brand name VC is the right thing to do. The reality is that VC’s exist to provide rocket fuel when needed and their early stage funds often exist to enable their late and growth stage funds to ‘see the flop’ when more funding is needed as start-ups mature.

For all the noise around capital raising, I’m surprised how few entrepreneurs raise money from strategic sources during the early stages of their business.

Strategic sources are investments where your investor is able to benefit themselves from the products or services you create. In other words, they double up as an investor and a customer. If you were a manufacturer of tyres, would you rather Mercedes-Benz invest in your business, or a bank invest in your business? Taking investment from a source that doubles as a customer provides you with some important benefits:

  1. Feedback - There is no faster way to find product market fit than to have your investor be your customer as well. The feedback loop is fast and transparent as both companies have an alignment of interests.
  2. Credibility – If your investor is your customer and they happen to be a large trusted company or corporation, this can often bring significant credibility to your offering as larger competitors are likely to trust your product if they see their counterparts using it as well.
  3. Speed to market – If your investor doubles as your customer you can often gain traction quicker than competitors who raise funds then have to find customers.
  4. Income – If your business is going to help your investor/customer generate revenue or reduce costs, then you can generate income from your investor. If you raise from a VC this wouldn’t be possible.

Furthermore the job of an investor is to generate returns for their shareholders. Corporations often have different goals and agendas and will often take a more strategic approach to investments rather than viewing them from a purely financial perspective.

Sometimes the best scenario is raising funding from sources that are strategic as well as financial. You might want to raise from a strategic source, get product market fit, then raise from a VC. There is no right or a wrong, all I’m saying is that you should think outside the box when considering your source of capital.

Convertible notes Vs Priced rounds

There has been some debate lately about two forms of investment structure used by VCs, namely “priced rounds” and “convertible notes”. Fred Wilson first posted about it on Saturday here then Dave McClure chimed in, followed by Mark Suster via another blog post.

At its simplest, in a “priced round”, each investor in a funding round is told the price per share and is issued shares at that price. Meanwhile, a convertible note is a type of loan that converts to equity when the next round of funding is closed, usually with some form of discount.

I found this conversation interesting as it provided insight into how these experienced VC’s structure their investments. I wasn’t sure how many deals were based on notes versus how many were priced. When Fred said he had never invested via a convertible note I felt very reassured as I recently declined such a deal. The reason I don’t like convertible notes is because they do not align entrepreneur and investor. There a tension that one side might end up better off than the other and the note incentivises you to make short term decisions to bolster valuations for the next round which might not be the right strategy for the business over the long term.

We recently received a term sheet from an investor which proposed a convertible note. As an entrepreneur it is difficult to be aligned with an investor on such terms that could result in losing vast amounts of equity if things take longer than expected. While founders will have their own views, I value alignment over valuation. Convertible notes with ratchets don’t represent an alignment of interests. If you want to build a billion dollar valuation over the long term, founders and investors need to see eye to eye. My view is that a priced round is the only way to achieve alignment if the founder prefers this.

To quote Fred in point #2

“I don’t understand why folks don’t understand it.”.

The excuse that investors use is that ‘it is hard to value a startup, so lets leave this to the next round once you’ve got some traction’ however startups are not mean’t to be valued traditionally as there are usually little or no cashflows from the outset.

Investors need to back the idea, the market, the vision and the team and figure out what funding is needed to realise this vision. If the opportunity ticks the right boxes then the next step is to work out how much is needed, how much the founders are prepared to part with, set a 1x liquidation pref, and get started. The valuation should be based on what the founder needs, and how much they are prepared to part with.

I wouldn’t sleep as well at night knowing that I might end up parting with 40, 50, 60 or 70% of the company if we don’t reach specific milestones quickly. If I was on the other side of the table as Fred is, I’d rather the founders I invest in focus on product and the business rather than have the stress of knowing they could lose equity over the long term. The reality is that businesses are not built overnight and that many of the consumer internet business that are worth billions today never had a revenue model when they started out – Google, Twitter, Facebook etc.

A convertible note with a ratchet is nothing but a ticking time bomb especially if you don’t yet have a revenue model. Founders need the breathing room to figure things out and the right investor will appreciate this. Our business does have a revenue model but its still a new product and we need to market it and get it out there and that can and will take time. I’d rather build the business without a ticking time bomb under my seat and with the peace of mind that I know where I stand, and that means an equity deal.

Startups should not be about financial engineering.

They should be about software engineering and marketing. Founders deserve to have the peace of mind that they can get on and build their product and business and in my view, the only way to ensure the founders full attention is focussed on building company value is by pricing the equity up front if thats what a founder wants.

The truth about raising money

I urge you to read this article by Ben Kaufman:

http://www.quirky.com/blog/post/2012/09/what-raising-money-means-to-me/

Ben writes what raising money means to him. Last week Ben raised $68m from Andreessen Horowitz and KPCB. This brings Quirky’s fund raising to $97m. I saw Ben in action last year while I was in New York and he is an incredible entrepreneur so I wasn’t completely surprised when I read about this round. While I’m not a fan of his business model (product manufacturing) he now has a war chest behind him to make it work. Another thing about Ben is that he is just 24 years old!

I was going to describe which parts of the article resonated with me but I ended up copying and pasting most of it, so I recommend you read the whole thing.

My favorite line was this:

Congratulating an entrepreneur for raising money is like congratulating a chef for buying the ingredients.

The future of media

I just read an awesome blog post written by Albert Wenger from Union Square Ventures. Albert has financed some of the largest consumer internet franchises on the web including Twitter, Zynga, Foursquare, Kickstarter and Tumblr. He know’s what is what!

A while back I wrote a post called “The future of eCommerce” which outlined my vision as to where I see online commerce going. His recent post has an uncanny resemblance to what I described back then.

I explained that the future of eCommerce is going to be driven by the following three factors:

  1. Mobile
  2. Frictionless payments
  3. Social platforms

Alberts blog is titled “Attention Scarcity, Transactions and Native (Mobile) Monetization”

  1. Attention Scarcity = Frictionless payments
  2. Native (Mobile) = Mobile (twitter, SMS and email – the lowest common denominator of technologies on smartphones)
  3. His use case is an example of buying via Twitter = Social platforms

What Albert is saying is that we need to capture consumers when their purchase intent is at its highest while they are engaged with their medium of choice, whilst making it easy for them to pay.

Marketing 101 is all about endorsing a celebrity with a brand (think Nike + Roger Federer), putting the celebrity on TV, broadcasting them to a large and engaged audience, and creating an emotional connection with the viewer. This is how brands are built. Almost all established brands have been built this way. It is what they teach you in marketing kindergarden.

As a cyclist I watch the Tour de France every year. I see these guys pumping up Alpe d’Huez with sweat beading from their foreheads. They are my hero for that moment and I watch in awe taking into consideration how gruelling the ride must be. If you are a soccer fan, you sit there glued to the TV watching your heros play the game. Every pass of the ball stikes an emotional cord. Fans want to be the players. Fans want to wear what they are wearing. This is why people pay $149 for a pair of Nike shoes that cost $15 to manufacture. This is why we shop at Nike Town not Joe’s Shoe Store.

The problem though, is that until now it has been impossible to turn purchase intent into a transaction at the moment where purchase intent is at its highest. In order to make a transaction, consumers have to move away from the medium they are engaged with, whether it be Twitter, TV, newspapers or magazines, and go to a store or web browser to buy. There is too much friction in this process.

Albert describes this here:

Because at the moment most routing is still of the disrupting and annoying kind that tries to take your attention and move it somewhere else altogether, such as a different web site altogether. The primary reason behind the need to disrupt and really move you elsewhere is that most web services have not yet found or deployed their native way of making money, which is largely due to the inability to transact within the services themselves.

According to Alberts example, he is saying that the consumer needs to be taken away from the Twitter stream and moved elsewhere on the web to a place with a low conversion funnel before they can buy. In reality, it is much worse than this. While watching the soccer, if I want to buy a Barcelona jersey, I have to leave the medium I’m engaged with (TV) leave my house, go find a store that stocks this product then buy it.

While my purchase intent is at its highest while watching TV, it diminishes over time, so the sooner I can capture a transaction, the higher the chance of a sale. 

As time goes on my circumstances change, I get distracted, my financial position might not afford a jersey, my wife might talk me out of it or Barcelona might lose the game – i.e. before half time I might have wanted to by the jersey badly enough to transact on the stop but at the end of the game I no longer want to. Had I been able to make that purchase instantly, before half time, I’d have done so.

In reality, the transaction point is not a website away (perhaps it is from Twitter) but if you take into consideration traditional marketing methods, the transaction point is miles away. If you see somethinig you like on TV, hear something on radio or see something in a magazine or catalogue, you still need to visit to a store. Even if you don’t need to visit a store, there is significant friction in buying online. You need to leave the couch, find a computer, search for the product, find a size, add it to cart, enter your payment details and so forth.

The opportunity therefore lies in bringing the transaction point to the medium – Twitter being one of those mediums.

  • What if you could bring the store to the TV?
  • What if you could transact within the Twitter stream?
  • What if you could buy off of the page of a magazine?
  • What if you could buy instantly while listening to radio?
Albert describes this here:
 The primary reason behind the need to disrupt and really move you elsewhere is that most web services have not yet found or deployed their native way of making money, which is largely due to the inability to transact within the services themselves.
It is not only web services that have not found a native way of transacting in stream. It is ALL offline mediums that don’t yet have a native way of transacting. This includes television, radio, magazines, catalogues etc. In order to transact we see something we like, then we go to a place where a transaction point can occur which is either in store or on the web, but what if the transaction could occur off the medium itself? What if I could buy Roger Federer’s shirt off his back while I’m watching the game in real-time using NATIVE technologies on my mobile phone (by native I am referring to technologies that dont require an App download). What if i could purchase when my purchase intent was at its highest via a single click payment mechanism? This is what Albert aludes to in his last paragraph when he talks about Facebook, Apple and Amazon storing credit cards.
FG says:

The platform we have created (BuyReply) solves this problem, and I look forward to sharing more with you shortly. We enable instant transactions from any online or offline medium including Twitter via a secure virtual wallet!

Accepting overseas payments as an Australian Start-up

There has been a bit of hoo-haa around Startmate’s decision to incorporate their latest round of companies as Delaware corporations. It has been said that much of this decision was to do with challenges in accepting payments for services, with part of the blame being placed on the payment infrastructure within Australia.

The truth is that Australia will never be as good as Silicon Valley as a start-up hub. This is a view I share with Niki. I view Australia as a great place to build products (because there is less competition for engineers) and the US as an excellent market to sell your products, and eventually sell your company. I suspect that incorporating in Delaware makes it easier to do the later when the time is right. A US acquirer would much rather acquire a company incorporated in the US than they would acquire a company incorporated in Australia. It’s just easier.

Furthermore, what needs to be understood is that the revenues generated in the US will be bought back to Australia to fund the local development teams who are working on these start-ups. By incorporating in the US, the start-ups are simply removing friction that might be a problem down the track when/if an acquisition opportunity presents itself.

I also believe VC in Australia is a really tough gig. The smart ideas (and entrepreneurs) will always gravitate toward Silicon Valley based funding. The average/smaller/copycat ideas will get Australian money because these ideas are not addressing markets big enough, have already been done or are not being executed well enough, to get the attention of US investors, and if you are  a VC (Australian or otherwise), what is the point of investing in small ideas?

Perhaps there is a market to seed ideas here, but the right businesses should be raising Series A rounds from investors in the US who have the right relationships and networks to scale your business and sell it down the track. This is what Startmate does really well.

Back on the topic of payments, it is very difficult and expensive to settle payments for a US denominated web service from Australia. However it is possible. We’ve figured it out.

Over the last month we spent a lot of time trying to figure out a workable payment model to accept payments in US dollars from US customers with an end game of the funds being settled into an Australian bank account so that we can pay expenses in Australia. One such example is to set up an NAB multi-currency account and accept payments in US dollars via eWay. By doing this you are receiving funds in US dollars in to a US denominated bank account held by an Australian bank. This works, however the costs of opening an NAB multi-currency account are ridiculous – too much for a start-up. NAB multi-currency is expensive.

After a lot of brain storming we eventually figured out how to sell in Australian Dollars, US Dollars, Pounds, Yen, and New Zealand dollars. The solution is to use the US version of PayPal Website Payments Pro.

This enables us to accept credit card payments directly from our website  into PayPal subaccounts denominated in each of the currencies mentioned above. The US version (not the Australian version) of PayPal Website Payments Pro enables you to build a checkout that does not redirect users through a PayPal login flow. The entire flow occurs via your website allowing you to programatically pass credit card details through to PayPal without customers requiring a PayPal account. By doing this you are bypassing the need for bank accounts in multiple currencies and other administrative hassles required to reconcile and maintain these accounts.

For the cost of processing a transaction (around 2.2%) we can have one main PayPal account with subaccounts that are denominated in any currencies that PayPal support. As funds build up in US dollars we can either leave them there, withdraw them to a US bank account, or transfer the funds in the our Australian PayPal account then withdraw these funds to an Australian bank account for free.

Our pricing page will have a drop down menu like Twilio’s pricing page where you can choose your currency. Your subscription and usage charges will then be billed in the currency that you sign up in.

We have therefore managed to architect BuyReply to accept payments in foreign currencies without having to open up overseas bank accounts or incorporate in the US.

How to avoid issuing preference stock

When looking to raise capital, entrepreneurs can often be drawn to venture capitalists without fully understanding the terms that come alongside their money. Venture Capitalists are in the business of making a return on their capital. They want to build and flip as quickly as possible and return a profit to their limited partners. Very few of them take a long term view. Only the best ones do.

It is often the case that VC’s interests are not completely aligned with the interests of the entrepreneur. In fact, the VC I was working for before launching Lind Ventures said she ‘has no intention of holding an investment for longer than 9 months’. She said it’s all about ‘building and flipping’ and my response was something like ‘I suppose had you been an early investor in Facebook, you’d have flipped it after 9 months too?’. That was the end of our conversation and I left the company shortly after.

When VC’s invest they get preference shares. That means that during a liquidity event, they get paid first, up to a certain level, then the difference that remains is split evenly between preference shareholders and common stock holders. If the company goes public preference shares are converted to common and split evenly. However chances are you won’t go public. A very small number of startups do. If you’re lucky you’ll be acquired by a larger company with a strategic interest in owning your business. And preference shareholders will get paid first.

What I suggest as an alternative means of raising funding, is to start a conversation with potential acquirers instead of selling preference equity to a VC. The idea here is to sell a small amount of common stock to the entity that might end up buying your business in 3 or 5 years time. There are many advantages (and some disadvantages) to this approach, most notably that such strategic investors are motivated with longer term goals than a VC.

‘Investors Fallacy’ @ Twitter

I’m not sure if Twitter is cashflow neutral or not, however I assume they are not considering their only real revenue comes from promoted tweets…

I view Twitter long term as a necessary public service of the world, not specifically as a business. In a similar way to that we need certain utilities in our lives, whether it be phones for communication, electricity, gas, garbage collection etc… They are essential elements of everyones lives.

Television got around this by governments launching state owned, opinion neutral television stations. In Australia we have ABC. I’m not sure what the equivalent is in the US.

Being state owned has its own issues but life without twitter would be worse than life with twitter for many people, and therefore it should continue to operate regardless of its financial position.

Twitter has a serious utility value at a global level as proven through the STOP SOPA effort + Arab Spring, therefore there needs to be a realistic way to sustain its existence.

The problem is that its operating costs are so high (900 people). Reddit was able to be run by Conde Nast with 1 developer. Twitter is a simple service however it now has a huge valuation and therefore investors are expecting a huge return. Had the valuation stayed low and/or realistic then they would be an excellent takeover target for a company that can do what Conde Nast did with Reddit (obviously with a lot more people).

It’s almost as if Twitter is plagued with an “investors fallacy” which has caused it to meet expectations which are just simply not possible within the contraints of its simple, yet useful offering.