Startup Lessons - Having industry momentum at your back

Two years ago, I partnered with an awesome CTO, Alex Lines, to start a company called Path 101.  We didn’t get enough traction on the product and business to continue it fulltime, so we’re now working on it as a nights and weekends project as we take on other jobs.  This is the 2nd of a series about what I learned starting up a company. First one is here.

A few months ago, I wrote about the three types of deals VCs do.  One thing I realized was that aside from just betting blindly on an experienced entrepreneur or funding a later stage project, was that when VCs put money into something that's innovative, they tend to do it in an innovative sector.  So, it's not just about the idea, but they want that idea to live in an ecosystem that is in flux or generating new and interesting approaches.  For example, BazaarVoice (a First Round portfolio company) helps power social commerce with a variety of applications that help amplify customer voices to both sellers and to other customers.

No matter what they started with, social shopping was definitely an interesting area when the company started in 2005 and got funded in 2006.  It was clear that reviews and social media were helping sell product, so a bet on a suite of tools that helped companies create conversations around commerce would seem to have the wind at its back.

That's exactly what we didn't have at Path 101 in the jobs space.  In fact, what was fascinating to me, and unexpected, was how negative VCs were on the jobs area--especially for something so monetizable.  There there had been very little innovation in the way that companies hire and the way people find their jobs online in the last 15 years--except for LinkedIn--and investors largely saw that industry as a hopeless dinosaur.  Sure, there were business model innovations, like TheLadders and Indeed, but these were mostly about subtle changes in the way these companies made money.  It was still job ads and resumes at the end of the day.  The average VC didn't quite believe there was a disruptive job play to be had, so the idea of thinking of us as that play was a stretch. 

I can't exactly blame investors either.  Often times, investors bet on the "pivot"--the ability for a startup to stop what they're doing and have a strategic shift in the product or business plan.  It probably happens a majority of the time, and so an investor needs reasonable assurance that the team is going to pivot into something good.  If you're in a dynamic industry that is primed for innovation, not only is it easier to see where the next big thing is going to come from, but you get more experimentation from customers.  They're more willing to try new things because they know business is changing, but they're not sure exactly now. 

On top of that, it's easier to get press if you're in an industry with some buzz around it.  If you were to do a new geolocation startup, like Hot Potato, everyone will want to talk to you because there's obviously something happening in this space.  No one was really that excited about talking about new models in the job space.  Heck, the only blog actually covering new models in the space, Cheezhead, stopped publishing over a month ago.  

The other thing was that ideas don't happen in silos.  It helps to surround yourself with a vibrant community of entrepreneurs--and in the job space, there were only a handful of people I felt like I could talk with about new models.  Everyone else was basically minting cash on businesses that I couldn't understand how they'd even be able to exist in five years.  That meant that our inflow of new ideas and great feedback was pretty limited.

It's hard, because there wasn't another industry that I really wanted to change so badly.  Careers was my thing.  I'm extremely passionate about helping people figure out what to do with their careers, but ultimately, creating a startup in this space was an uphill battle from the beginning.  I'm not saying this was a fixable problem--just more like a warning to new entrepreneurs.  Take a look at your space.  Wipe your finger on the tables.  If it's too dusty, you may want to wait a little bit before trying to move the furniture around.

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Startup Lessons – Figuring out the details of the product roadmap ahead before you start

Two years ago, I partnered with an awesome CTO, Alex Lines, to start a company called Path 101.  We didn’t get enough traction on the product and business to continue it fulltime, so we’re now working on it as a nights and weekends thing as we take other jobs.  This is the 1st of a series about what I learned starting up a company.

Raise money--That's the first thing many entrepreneurs think of when starting a business.  They plot world domination schemes that hinge on their ability to get an angel round together, without answering a lot of important product questions first.  That's fine if you're Rich Barton from Zillow and Benchmark gives you 7 million bucks to go do to real estate what you did to travel at Expedia.  If you're running leaner and you're raising "Get something up" or "just feed ourselves for a little while" money, you need a lot more questions answered. 

That was our first mistake at Path 101 and I'll take the blame for that one personally.   Or, you could think of that mistake in a different light and say that I should have realized that we were going to have to be a lot more experimental and iterative.  That would mean needing closer to a million dollars than the 350k we raised—and we definitely could have gotten more.  We just had this innate desire to be lean and only take what we thougth we needed.  Nowadays, I tell people to take twice what they think they need, especially if they’re doing this for the first time.  Maybe it should have been a little of both, but regardless, wireframes, specs, etc  should all be done before you take money.  Granted, these will all change, but you can go a long way to honing in on the product roadmap in great detail on your own time. 

For example, Aardvark worked on their product design and user interactions for 8 months before writing any code and before taking a big slug of cash.  The social answers platform started out with a dude on the other side of a chat account manually interacting with users in a structured way in order to product test.  They knew a ton about how their product was going to work and what it needed at the onset of development--and that's something you can do nights and weekends or bootstrapping.  It doesn't need a designer either.  Just tell me your best thinking on exactly what the product will do, in detail--talking basic wireframes here--at each milestone and how much money it will take to get there.

Milestones are important because not only does it help to estimate cost, but it helps figure out revenue and funding potential.  You can (and should) take a wireframe to a customer and say "If we build this, will you buy it...and if no, why not?" 

VCs may be a little different.  They probably won't take a vaporware presentation very seriously unless you know them or someone vouches for your ability to build something.  Get a warm intro.  Scared that they'll take your idea?  Someone can steal your idea a month after launch anyway, so what's the difference?

At Path 101, everyone we talked to thought that the idea of pulling resumes off the web to figure out career paths was really interesting.  We talked about what data you might want to pull out of the Resume Genome Project but not a lot about what the data actually needed to look like to be useful to a user.  There was no way we were going to get that right on the first try, but there's no reason we couldn't have had three or four iterations of that done--not just to show investors but to show developers, too.  This would have helped us get a sense of technical challenges that maybe we weren't considering or just to generate more interest in our vision.

There wasn't a good model out there for what we were trying to do, so answering a lot of the questions about how users were going to interact on the site would have gone a long way.  Instead, we did a lot of this research (and made more mistakes) when we should have been developing to more specific, vetted milestones.

That was lesson number one--more to come.

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Unintentional Benefits and a Test for NYC Seed

Last December,  Owen Davis from NYC Seed decided to make my company, Path 101, the fund's first investment.  Given my recent announcement that I'm taking a full time job at First Round Capital and that the Path 101 team is going part time, I have to imagine we've been written off as an investment--from a financial point of view.  God help the next company that has to pitch to the NYC Seed board now.  The board is a room full of about a dozen folks, which is about ten people too many for making early bets on seed stage companies.    Undoubtedly their mindset after the news will shift even further to risk mitigation versus additional risk taking, especially after what our experience might be saying about the funding environment. 

That would be a mistake, however.  Experienced angel investors know that a 50% loss rate is about average--they expect half their portfolio not to return any capital.  That's how the business works.  So, if another NYC Seed company fails soon, that would pretty much be well within normal expectations.  I feel like a group of government folks isn't really going to buy that, but they have to.  The Bloomberg administration trumpeted the fund as a way to spur on innovative technology ideas and fill the funding gap for cutting edge startups.  If it had to only pick from companies that could break even on $200k, you'd see little in the way of large scale market disruption coming from these companies.  In other words, you don't pick the next Google by mandating that the company generate enough funds to cover itself within the next nine months.  You might as well invest in a couple of accounting firms or food stores--very little chance of losing your money on those. 

In fact, one could easily make the argument that a heck of a lot of good could be done while still losing the whole entire fund--laying a big fat goose egg.  People learn a lot from failure, and having a culture that excepts high failure rates is critical to a truly innovative scene.  Also, when companies don't work out, founders and employees often move on to other startups, taking their experience and making themselves more prepared for the next challenge.

Take the investment in Path 101, for example.  By enabling us to continue an extra year, we were able to build better relationships with the innovation community and investors.  I was able to pitch and continue communication with Josh Kopelman from First Round Capital.  In turn, First Round is now opening an office here in NYC.  There's no doubt in my mind that First Round will invest *at least* $2 million more dollars in NYC than they would have anyway now that they have an office here--so this development is actually a net positive for the city.  We all said there wasn't enough early stage capital located in NYC, and now, we have a new top tier VC fund setting up shop right in the Union Square/Shakeshackville area.  Add in the fact that my partner Alex Lines is joining Betaworks.  Who knows, he could hack something up that winds up becoming huge.  In a way, NYC Seed enabled him to find someone to fund his hacking.

Plus, we've now unleashed machine learning PhD/scientist Hilary Mason's data mining expertise on the NYC startup market.  After moving here to NYC, she's now looking for neat data projects to work on, particularly locally.  She has a highly soughtafter expertise and our company attracted her back to NYC in the first place. 

By allowing the Path 101 team more time to be out there in the market, NYC Seed unintentionally deposited some innovative human capital back into the innovation ecology here.  The results are likely to be way better than anything just our one company had a realistic shot at, but I wonder how this fund will be measured...  Net returns or overall economic impact.  I hope the board will take a broader view of the impact of the fund and even extend it's life past the mandate for $2 million.  It certainly can't help the portfolio's risk profile if Owen is making bets thinking he's only got six bullets left in his gun and that's what he's going to be judged by.

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Economic Stimulus for the Worthless Resume

Whether you realize it or not, as a jobseeker you are participating in a marketplace.   Even when you're not a jobseeker, you're part of the equation.  Employers are the demand and workers (or resumes) are the supply.  In this economy, demand is low and supply is high.  Employers have more workers in their ranks than they need, so layoffs and cuts continue to pile up.  They also have stacks and stacks of resumes from people wanting work--even willing to work for free.  Right now, most HR departments could probably recruit from their own inboxes without ever spending a dime on job postings or resume databases.

Actually, I'm not kidding.  That's probably closer to reality than many big job boards are willing to admit.  Revenues at Monster, Careerbuilder, and Hotjobs have taken a nosedive recently.  Because these companies have totally inflexible business models, jobseekers who post to those boards are feeling the hit, too, but they might not realize it. 

Many people aren't getting any bites on their resume  and assume that's because companies aren't hiring.  That's partly the case, but it's also because those job boards are charging fees to look at your resume and contact you.  In today's market, this is a bad deal for companies who already have plenty of resumes in their inbox.  The market had decided that the incremental value of *another* resume in their inbox is near zero, if not zero already--so why pay for something you already have?  More and more people are uploading their resumes to Monster and the big job boards when fewer and fewer companies are willing to pay Monster to see them.  That's right--receiving your resume is essentially worthless to an employer right now... and the big job boards are making it even harder for you by trying to charge companies to see them.

It's the same with job postings.  Why pay to post a job when you can just email your network and ask "Does anyone know anyone good who needs a job?"  You know what the answer to that is these days.

In any transaction, one or both parties needs to pick up the tab for the cost of the exchange.  If companies are less and less willing to pick up that cost in a tough economy when it comes to jobs, it's really going to have to fall on the consumer.  Lots of people recognize that cost will mean additional time and effort on their part, but how many people are actually investing real money into their job search?

On the higher end of the market, users of TheLadders are paying to see only the best jobs and many are paying getting their resumes edited as well.  Is that helping them get in front of employers or getting them a better shot at a job?  Jobs on TheLadders aren't necessarily exclusive, but one would imagine that it does indicate some level of seriousness if you're paying in to see a job. 

What else is out there?   There are lots of conferences and career coaches--essentially content, but the thing with content is that you don't really know if it's worth it until you consume it.  Career content can't be advertising backed in this economy, because as we said before, companies aren't paying to reach you and see more of you now. 

If I were job seeking now, I'd be paying for a Google and Facebook AdWords campaign--putting money behind my efforts at getting in front of the right employers.  Apparently, I'm not alone in that.  In a recent survey that we took at Path101.com, 55% of job seekers would pay to promote themselves online.  Even more interesting was that 23% of people would pay to promote themselves even if they weren't job seeking.  

What do we mean by that?  How about making sure you're ranked first in all the places people might go to look for you?  Take WeFollow.com for example--the Twitter user directory.  If you were an athlete trying to generate a bigger fan following, paying up to be the "Featured User" on a list of top Twitter users tagged "sports" would be worth it.  I think this is where MyBlogLog could have gone, too.  How many people would have paid a little extra to be a profile that lingers longer on Fred Wilson's blog, for example, perhaps with a direct link to their blog.  What about Disqus?  Featured comments?  You could argue that would lower the quality of these lists, but on the other hand, wouldn't you make sure you had a quality/relevent listing if you were paying to make sure it ranked high?

I think there's an untapped market here--to bring the power of sponsored search to the job seeker and individuals to help them promote themselves in the right places--similar to what Indeed.com does on the job side.  I wrote about this about a year ago in relation to people putting cash behind their best blog posts to gain exposure.  Enabling people to get more active about their own self promotion is something we're working on now at Path 101.  Uploading your resume to a big job board is like sending it into a black hole--and candidates can't do anything to actively get noticed as part of that process, even though they want to.  

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Venture Realities: Startup financing news from the frontlines

I had a fascinating conversation with an early/seed stage investor yesterday who basically described the market as follows...

He said that, over the course of all of their deals (over 50), they've done a very good job figuring out what a team will need to do to raise venture capital.  Their investments are basically meant to supply a team with about 9 months of capital to go out and build something and "jump 9 feet", because that's the milestone they see for VC--whatever 9 feet is for that particular comapny.

That had been going pretty well up until deals that were done in the first half of last year--right around the time that Path101.com got it's first angel financing.  Now their companies are coming back into the market, as planned, for financing.  They're reporting that instead of the 9 feet they were training for, they're now being asked to jump 15 feet by the VCs.  Somehow, companies are supposed to get straight from product to revenue--without iteration or even traction in between.

If you're an investor and you can get a Series B company--one with revenue traction--for Series A prices, why would you ever do a Series A?  It's not unfair--it's just good business.

Welcome to raising capital in 2009.  Go straight to Series B or do not pass go.

This investor was basically doubling the size of the rounds he was doing--splitting them with a partner fund--in order to give companies longer runways to actually make it to sustainability.  He described your angel/seed funding like a rocket ship.  You need to decide how big of a fuel tank you need to take you into orbit, because, these days, if you run out before you get there, there's no refueling mid-flight. 

We'll be talking to our board tomorrow and the theme of the conversation is more or less "If financing happens, great, but we're not going to wait around for it."  We're still in conversations with investors, but our product plan has prioritized immediately monetizable features.  We're shooting for 45 days, give or take a few bug fixes here and there, to launch both recruiter and candidate services we can sell.  We've cut our burn pretty low and we're working on some in person job search seminars to help extend the runway.  We're not going to disappear tomorrow, that's for sure--but we want to still be here six months from now and beyond.  That takes a solid plan and some rolled up sleeves.

What am I telling startups now?  Forget raising 250-500k.  If you can raise a million, do it--because the chances of you creating a break-even business on 250k-500k is pretty low.  If you can't raise a million, then only focus on building something that a customer is willing to pay for TODAY.  (That should focus your product roadmap just a bit.)  Anything in between will be a bridge to nowhere. 

UPDATE: Fred wrote this post yesterday about becoming the default behavior for your market--ahead of figuring out how to monetize it.  I think the problem with that thinking is that it basically only gives you one shot.  You're playing startup Russion Roulette when your goal is to become the default activity and you have no Plan B.  At least of you monetize in some way, if it takes you two or three tries to become the default, you have the runway to iterate.  We're all aiming to become the default activity for our consumer base and the service we provide--but it's not always clear how to do that.  Lots of people wanted to be the Google of events--it never happened, but not for lack of trying.  In new markets, it's not always clear what model wins out, and often times the last one standing wins.  It's hard to be the last one standing if you're not making money.  The key is to make money in a way that doesn't hinder your growth. 

In hindsight, I wonder if perhaps we at Union Square Ventures did the world a disservice back in 2005 when we started blogging as a fund--opening the kimono on the world of venture capital and making it seem like it was within arms reach.  Maybe the world was better off when businessplans@venturefund.com was the black hole where your ideas went.

We have a new black hole where all the ideas go today--but this time we call it the economy.

Before all the transparancy, those who really wanted to pursue their ideas, out of necessity, went and got paying customers for their business day one.  If you built a great business, the VCs would find you, but short of that, you didn't have all of these conferences, bootcamps, etc. making you feel like you're just an investor away from the next big thing.

People would tell me, "Oh, you're lucky that you used to work for a venture fund, because you understand what they want."  In hindsight, I don't know about that.  I might have been better off not knowing that venture capital existed, aiming for profits from the beginning--and then just being nicely surprised if some dude shows up at my door with a few million in cash asking to buy a minority stake in my business.

Venture capital is like winning the lottery.  Somebody wins, but statistically, it's not you.  Don't wait for an investor to go build the business.  We're not--not anymore, anyway.

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