Harsh Realities From 500 Startups Founders

OnStartups recently published an article entitled “The 11 Harsh Realities Of Being An Entrepreneur.” Certainly all of them hit home for anyone who’s ever tried to start a company.

So a few of the 500 Startups founders decided to share real examples to back up each of these harsh realities. With all of the splashy headlines, stories, and buzz surrounding startups, very little of it serves to shine a light on the heaps of blood, sweat, and tears that go into building a company from scratch. How there are probably many more failures and mistakes than the media makes it out to be. How un-glamorous startup life really is.

If you’re feel discouraged after reading this, don’t be! Rather, take comfort – especially if you’re a current founder and going through some tough times or struggling. You’re not alone!

Without further ado, here are some real stories from 500 Startups:

Your First Iteration of an Idea Will Be Wrong
“We launched at TechCrunch50 with a product focused on disposable email addresses which was far too narrow. But that led us to our Organizer product which has very broad appeal. It took too long to admit we were wrong.” (Joshua Baer, OtherInbox)

Your Friends And Family Won’t Understand What You Do
“My mom keeps asking, when I will get a “decent dayjob” ;-)” (Kris Hiiemaa, Erply)

“It’s not always that they don’t understand, it’s the unsolicited advice that gets me! When you have a little startup, every last person *without* startup experience seems eager to give you their 2 cents… it’s often completely off topic or downright obvious. So I made a kind of obnoxious but useful resolution to be upfront and say “I only take business advice from people who have already been there and done it.” (Robert Laing, myGengo)

You Will Make Less Than Normal Wages For A While
“I only realized how little I had earned during the first year of our startup when my wife and I were trying to rent a new apartment. My taxable income for 2009 was… $4,000. I was pretty shocked I had managed to survive for 11 months on basically nothing.” (500 Startups Founder who will remain anonymous)

“Upon graduating, I turned down offers to make 3 to 4 times what I get paid as a founder. To be within budget I slept on a futon and had most of the furnishings for my apartment donated to me — even still I cut into my savings and began taking on debt. One year later I still make less money on an hourly basis than the interns who get internships through InternMatch.” (Nathan Parcells, InternMatch)

Everything Takes Twice As Long…If It Even Happens
“I remember working on a ‘two week’ project which was a Q&A section of our site… 18 months ago. It’s going to launch at the end of this month. Haha.” (Robert Laing, myGengo)

“Shipping the WakeMates… ’nuff said.” (Arun Gupta, WakeMate)

Titles Mean Nothing. You Will Be a Janitor
“In the almost two years that we’ve been building EcoMom, I’ve been the CEO, loading dock worker, fund raiser, legal clerk, delivery guy, trade show set up guy, purchasing guy, accountant, graphic artist (barely), credit card puller outer, food getter, vendor schmoozer, customer service manager, blog network coordinator, and many other titles. Each day brings a new role, to add to all of the others. And when someone calls for customer service and I say “this is Jody” there is almost always a long pause, which lets me know they were expecting a woman to answer the phone (makes sense since our company is called EcoMom and we serve mostly women). Some people might complain about all of the work that is outside of their job description, but I don’t really think about that. I think about what it takes to get the job done and having done all of these jobs, I know what others are capable of and it makes it easy to hire for these positions, have empathy for the people who are taking on these roles, and allows me to pitch in when things get overwhelming.” (Jody Sherman, EcoMom)

“As the weakest-nosed member of Estately’s founding team, I was de facto Chief Janitorial Officer (in addition to CEO) in charge of taking out the trash 48-72 hours after it had fully matured. I also vacuumed our old offices every 3-6 months to conserve cash (because you need a break from mental work every so often). I also paid myself as much as a non-unionized janitor, but union wages are now here to stay!” (Galen Ward, Estately)

“Everyone in our startup takes out the trash on weekly rotation. As CTO, I must make the phone-call to order the custom municipal trash bags when we run out (this is Japan…).” (Matthew Romaine, myGengo)

There Is No Silver Bullet
“Pitching to investors and customers puts you in this mode of explaining everything away as a total breeze… “Oh yeah we’ll use AdWords, we’ll get $2 back for every $1 we spend” etc. Bullshit. I can’t actually think of anything that was easy. But at least you know it’s just as hard for your competitors.” (Robert Laing, myGengo)

Customers Will Frustrate You
“We were once on a video call with a customer who pointed a .44 Magnum at his head and then at the screen after a comment we made. He ended up being our first paying customer.” (Gagan Biyani, Udemy)

“Our market is in Korea and cultural differences completely permeate the web culture. We were frustrated to discover that Korean web users don’t actually know the URLs to their most-used web services; they go to a Korean search engine and search for it *every single time.* Ranking on Korean search engines costs a *lot* of money, so we don’t rank. Some of the early users of our service who signed up never came back because they could never find it again.” (Darien Brown, YongoPal)

You Can’t Do It All Yourself
“After getting rejected by Y Combinator in 2008, my soon-to-be co-founders couldn’t take on the risk. I decided to do it myself, and ran out of steam (and moral support) after about 12 months and decided to fold.” (Sid Viswanathan, CardMunch)

“Anyone can delegate stuff they don’t like doing. What’s hard is delegating things you *like* doing.” (Robert Laing, myGengo)

“We have had extraordinary support from friends, family and mentors who believed in us and our company from very early on. Some chose to make introductions to people at the top of their network before we even had a landing page and which propelled our company forward, others lent us their homes and cars as we came to work in a new city. All have given us the motivation to push through the challenges and scary moments while building InternMatch from the ground up.” (Nathan Parcells, InternMatch)

Building A Team Is Hard
“The phrase ‘Good people are hard to find’ is quite an understatement. I spent three years going through ten people and two founding teams before finding a set of co-founders who really clicked. When that happened, the difference was like night and day. There’s no more valuable asset for a startup than its founders, and it’s worth doing whatever it takes to find the right people.” (Ryan Damico, Crocodoc)

“When I was bootstrapping, I was overjoyed to find a human being that would support me. But the skills and attitude you need from someone very early on are often completely different from the skills you need to build a business long term. You realize quickly that people who may have been instrumental in the early stage of the company can actually become dead weight when you reach a certain size, because they haven’t changed with the company. It’s really painful to remove them, but necessary for the company.” (500 Startups Founder who will remain anonymous)

Finally, this wasn’t part of the original OnStartups list but it was contributed by one of our founders as #12:

You will LOSE all of your money that you ever earned, and then a bunch that you still have not earned. If you’re not prepared to put it all on the line, you’re not prepared for a start-up.
“The economy tanked, we ran out of money, and still didn’t have the “right” model figured out. The whole team of ten had already gone more than two months without any pay, vendors were waiting for payment, and still no funding in sight. Thanks to the disastrous economy, the real estate market collapse, and my unwavering (some say foolish) personal support of the business, my prior seven figure personal net worth had been reduced to $30,000, which I had stocked away in cash in a safety deposit box. Already on the brink of personal bankruptcy, I said “F&%* it”, and brought all $30,000 in one day (in cash) and handed it out in envelopes to the entire team evenly to get us through the next six weeks. Just over one year later we’re rapidly closing in on profitability, have signed half a dozen game changing partners, and are on track to build what I believe will be at least a $100MM company.” (TJ Sassani, Zozi)

Livin’ La Vida Startup – in Beantown

Meet Optimus Prime, aka 500 SuperMentor Roy Rodenstein. Roy co-founded Going.com, a pioneering startup in local events and ticketing acquired by AOL in 2009, and led product and online marketing. Before that he led product marketing at a search startup acquired by IBM, and was a researcher at the MIT Media Lab. Roy (@royrod) was a founding member of HackerAngels and blogs at how2startup.com. In this post, Roy gives you a taste of what the startup environment and startup life is like in Beantown (Boston).

Driving up 101, looking at the mountains off in the distance. Ads for engineer jobs in the billboards on the highway. A pool in every apartment complex. Hearing “try google.stanford.edu” for the first time. Biking from Mountain View to the PARC campus on Coyote Hill overlooking Palo Alto, and taking Caltrain back in the evenings.

My memories of life in the Valley are many – they were wonderful times. Fast forward two graduate degrees, and after doing early research in what became known as social networks at the MIT, I settled into the startup life in Boston. There are some analogues- instead of the pilgrimage to Sand Hill Rd. in search of mucho VC $$, there’s a well-worn path to Winter St. in Waltham. And working at the cooler startups here is not that different from the west coast. At my first startup job out of grad school, the company was backed by Sequoia’s Mike Moritz, we got dinner brought into the office every night, and part of the hiring process was candidates playing (aka getting smacked down) by the CEO at ping-pong. There are many things that make the startup scene in Boston special though…

Hanging Out

(I’m 2nd from the right) With entrepreneurs at Dart Family Dinner, one of many events at NERD

If you spend a bit of time here going to startup events, chances are you’ll soon find yourself at NERD. That is the cleverly named Microsoft New England R&D building which has played host to everything from Startup Weekend to Techstars Investor Day to the Boston Angel Bootcamp to Open Angel Forum. For a more casual spot head to Andala Cafe in Central Square, with some of the coolest Middle Eastern inspired cushy seating around which seems to attract entrepreneurs. The Au Bon Pain by MIT in Kendall is a common hangout spot for the Boston Globe’s tech journalist Scott Kirsner, and is also the site where I first blurted out the idea that eventually became my startup, Going.com. (It all started in 2005 because it was too hard to find awesome things to do on a date, and four years later we were acquired by AOL.)

“77 Mass Ave” is a meme known to all MIT students as the ‘tute’s main entrance, which leads to the Infinite Corridor. A decade after graduating, I still love walking through it and feeling the buzzing activity from current students. At the end of the Corridor is the Media Lab, the most interdisciplinary school in the world with sculptors working next to physicists next to hardware hackers next to musicians next to ethnographers next to Marvin Minsky, father of AI (whose class I was lucky enough to take).

The (Recruiting) Scene

If you like being a big fish in a small pond, Boston is a good place to be. If you’re a cool startup, it’s much easier to attract and retain great technical talent because there’s just a lot less competition from other cool startups. Actually finding people is another matter…

Day-after-Halloween 2009, testing the straw hat look, waiting for the T in Harvard Square

In the valley you can’t swing a cat without hitting 5 hackers. If you have an event and get a couple of interesting founders or speakers attending, presto, you get a bunch of hackers showing up. In Boston there are not many places or events with a high concentration of techies. Startup Weekend is definitely one of the best at tapping hackers and designers, and Hackers & Founders is ramping up. Geographically, Cambridge’s Kendall Square (Akamai HQ and site of the Cambridge Innovation Center startup space, and of more biotech firms than you can shake a stick at), Central Square (home to Techstars, Zynga Boston, and the oneforty crew’s rocking parties), Harvard Square (birthplace of YCombinator, and of … that site that that Social Network movie was about), and Davis Square (where the reddit guys used to throw rooftop parties) are some of the highlights.

Even if you find a great hacker or designer, they’ll often be highly suspicious and reticent to make the jump. Many of the best designers in town have been locked up at agencies or in-house at large companies for years, wary of setting out on their own. But I have managed to recruit an SEM guru from the Google AdWords team and pull other rabbits out of hats. While in the Valley you might open with “We’re like if Animoto got busy with Google Wave in the back of a Tesla, and we’re going to totally make the iPad look like MySpace,” in Boston you’re best off pitching stability along with a more sober level of excitement. “We have plenty of money in the bank, an experienced team with a vision to own the X market, and we’re doing the coolest AJAX hackery around- but we have a real revenue model and deals to prove it” works well. If all else fails, take the candidate AND their significant other to a nice Italian dinner in the North End (doh, just gave one of my best tricks away). Yes, it can really test your recruiting chops to get top talent interested. The good news is once they join you you don’t need to worry (much) about Google or Facebook or UberCab poaching them.

Hometown Inspirations

While the latest rage with consumers, Instagram or whatever it is this week, may rarely start in Boston, there are so many sexy and solid businesses to admire here. Kayak, the minimalist travel search engine. Skyhook Wireless, the original geolocation vendor to Apple for the iPhone, and Quattro Wireless, Apple’s acquisition as its mobile advertising platform. ITA, which probably has the largest weapons cache of math PhD algorithm hackers around thanks to its brain teaser ads on the T (the nickname for Boston’s subway- the Red Line will get you to most startups). HubSpot, the epicenter of the Inbound Marketing megatrend, and growing like wildfire. Zipcar, Compete.com, TripAdvisor, BrightCove, ScanScout, RueLaLa, iRobot, IdeaPaint, SCVNGR, Backupify, the list is longer than most people -even here!- realize.

Inspirational entrepreneurs, hackers and investors abound too: John Resig, creator of jQuery; Tom Leighton of Akamai; Robin Chase of Zipcar; Jeremy Allaire of Allaire and now Brightcove; David Cancel of Compete and now Performable; Dharmesh Shah of HubSpot, the most prolific, modest hacker you can meet; Paul English of Kayak, whose talks on full-court-press recruiting are now legen-wait for it-dary; Dave Frankel and Eric Paley of Founder Collective, the #1 most active first-round microVC according to the WSJ’s new stats.

Of course, several of the 500 Startups have roots in Boston too. If you need to transfer money abroad, Iker Marcaide of innovator peerTransfer is your man. And I can personally attest that Alex Moore’s email sanity lifesaver Baydin is so useful that when I have to use a computer that doesn’t have it installed I want to throw it out the window. Of course I would never use its amazing Send Later feature when emailing you 🙂

So What Does It All Mean?

Startup life in Boston is different than in California. Maybe it’s a little like the weather. In LA people complain when the temperature drops below 80. In Boston, as long as it’s sunny, 47 degrees is considered gorgeous (yes, people say exactly that). Likewise, the Boston startup community is very tight-knit. You can’t just walk into any bar here and find your startup sisters and brothers, but once you do they’ll do anything to support your fledgling idea. I guess you just come to appreciate things more when you have to work for them a bit.

A picture of the first Going office, aka my co-founder’s apartment. That red couch was my “desk” for a year.

Go F*#% Yourself! Unconventional Ways to Bootstrap Your Startup Idea

(…and by f*#%, I mean “fund!”)

Meet Zorro, aka SuperMentor Rob Garcia. Rob oversees product strategy at Lending Club. Rob has over 12 years of experience building extraordinary digital user experiences as a consultant and entrepreneur. His super powers include destroying evil user interactions, envisioning innovative products, and building user-centric armies.

We all know about the traditional angel investors and venture capitalists as your main source of capital when starting a business. But they typically prefer to jump in when there is a something tangible to look at (beta product or proof-of-concept). Before you get to that point, most entrepreneurs finance themselves to build the minimum feature-set that will wow both customers and potential investors. So how do you fund your idea until then? Fund yourself!

Traditional Funding Sources

Perhaps your idea is good enough that you have family, friends, angels, and even venture capitalists ready to go on it with you. The reality is that not many ideas get funded at this stage. Instead, you try to scour time and resources from your friends and business network to get your idea up and running. You will most likely incur expenses on your credit card or your savings will be depleted to get you through this phase.

In fact, this is what happened to Lending Club’s founder, Renaud Laplanche. Renaud financed his first company primarily with credit cards. Then he looked at the statements, asking himself “What am I doing paying 18% to the credit card companies??”

The bad news is that the current financial crisis has made everyone more conscious with their money, making it even harder to bootstrap your business idea. It has been documented extensively how venture capitalists are being extra cautious while credit card companies keep increasing their rates for no other reason other than just to keep the service available, even to good credit card holders.

Well, don’t despair… the good news is that tough times are also the hotbed of innovation, and the financial industry is no exception.

Unconventional Funding Sources

Several alternatives have emerged recently connecting people with money to those who need it, and this is nothing but great news for entrepreneurs. Super angels, peer-to-peer lending, microfinance, crowdfunding, and private family funding are some of the financial innovations coming out of the Web 2.0 revolution that can be very useful to entrepreneurs:

Super Angels: A new trend in angel investing, Super Angels are very active angel investors who make hundreds of small investments in short periods of time hoping to ignite some great ideas and hit it big time. They’re fast, nimble and fun… and typically more responsive than your run-of-the-mill angel investor.

Peer-to-Peer Lending: Get up to $25,000 with a 3 or 5 year fixed rate personal loan from strangers at Lending Club or Prosper.com.  That’s right: s-t-r-a-n-g-e-r-s! You can get funded by other people and you don’t even need to know who they are.   Nearly 8% of the loans on Lending Club are used for business purposes.  Before you jump on one of these sites, make sure your credit history shows responsible financial behavior and a good credit score to qualify.  Interest rates on peer-to-peer loans are typically lower than those of similar loans at a traditional lending institution.

Microfinance: Get a small business loan from Kiva or Microplace to help you get started.   Even though these sites have primarily focused on entrepreneurs in third world countries, they opened to US-based businesses last year, with help from fantastic organizations like Accion USA and Opportunity Fund.

Crowdfunding: Let the “crowd” fund you through widgets and websites that allow you to appeal to the world (starting with the 4 Fs: fans, friends, family and fools) and through your social networks (Facebook, Twitter, MySpace, LinkedIn, etc), then collect the dough to get you going.  This has worked modestly well for the music industry with sites like SliceThePie.com and SellaBand.com leading the crow funding movement.  Kickstarter.com and IndieGogo.com have taken the concept and applied it to any endeavor from art to code (wait, coding is an art too, right?), but 40Billion.com is the first one to focus on startups.  Also, Chipin is a nifty little widget that allows you to collect money for any cause.  The last entrant in this space is Profounder, the brainchild of former Kiva cofounder Jessica Jackley.

Private Family Funding: Have a friend or family member who is willing to give you a “social loan” until you hit it big?  Don’t just take the money and create an awkward situation that could damage your relationship for years to come… nothing worse than hiding from uncle Bill at the Thanksgiving dinner.  Instead, formalize the loan via sites like VirginMoneyUS.com or LendingKarma.com, which let you create the necessary legal documentation to track the loan for a modest fee.  You get the benefit of negotiating the loan terms directly while building your credit and your startup.

See? Bootstrapping is more exciting than ever before. There are innovative options that did not exist just 3 years ago, and they should not be ignored. If you have the right idea, the passion, and the drive to make it happen, don’t let it die. Give it a chance.

Images courtesy of James Cridland, configmanager, Lewis Scott/New York Times, and Daniel Marsula/Post-Gazette.

Coming Soon… Inbox Love

Brought to you by 500 Startups and two of our esteemed mentors & founders – Jared Goralnick (AwayFind), and Joshua Baer (OtherInbox), Inbox Love is a one-day conference on the future of email and the inbox as a platform. Coming to San Francisco in early 2011.

Stay tuned!

Why We Started A Company to Eradicate Credit Card Debt

ReadyForZero recently announced that they closed a seed round of funding. We’re excited to welcome them to the 500 Startups crew! In this post, co-founders Ignacio “Nacho” Thayer and Rod Ebrahimi share their story on what inspired them to build a startup focused on credit card debt. ReadyForZero is currently in private beta, but you can visit www.readyforzero.com and sign up for the waitlist.

We’re technical guys. We left infrastructure startups and big search companies to accept an invitation to join Y Combinator in the spring of 2010. We were a technical team that would take on a technical problem. Less than 6 months later[1] (footnotes in the style of Paul Graham) we’ve evolved into a technical team trying to hack a very non-technical problem. We’re striving to eradicate American consumer debt.

A little about us

Rod, my co-founder, started an ISP[2] while he was still in high school. In the late 90’s, at 17, he was lured into the second California gold rush by former Netscape executives. He went back to college for a degree in Cognitive Science and Human Computer Interaction instead of following his colleagues to Google and other sexy startup opportunities. Most recently, he was the first non-founder at Membase (the data management layer supporting Zynga), where he led their first product launch.

I worked on statistical machine translation for 6 years – first at USC, then at Google. Google was an amazing place to work, and the Translate team was second to none[3]. But Google started maturing, as did machine translation as a field, and I decided to look for fresh challenges. Leaving Google is quite shocking both technically and socially, but I’ll leave that for another post. What I took away from Google and machine translation was an appreciation for data. More is better. More than everyone else is best.

Starting ReadyForZero

Here are the observations and beliefs that led us to start ReadyForZero:

• Indebtedness is all around us. All around you[4]. We strike up conversations with old friends, new friends, people at coffee shops, online, in our office, in the supermarket, and we find all kinds of people are in debt. If you actually talk about it with people you know, you will be surprised. We’re relatively young (for now), and we have found many young people struggling – from professionals that make $300K a year to graduate students[5]. What do they have in common? Their debt causes them a lot of stress. According to Paul Graham, “hair on fire” problems, like debt, make for ideal startups.
• The stigma associated with personal debt needs to be lifted, decimated, and eradicated. Over-consumption and irresponsibility are problems, but people get into debt for many different reasons. Common patterns that we’ve seen are lack of education and lack of options. Ignoring and marginalizing the problem lets finance charges fester. The credit card industry made about $75B in revenue from finance charges in 2006[6]. Recently people have begun sharing their stories about debt, on and offline (the Huffington Post articles about debt stories and the CNBC show ‘Til Debt Do Us Part’ are great examples). Let’s keep encouraging people to be open and seek education early.
• There can be better options for people in debt. This is not fantasy. Existing institutions and risk assessment models have not evolved to accommodate the new reality: Debt is a part of American life. College grads start their careers with average of more than $20,000 of student loan debt[7]. The entire credit establishment is using technology from the time of Sputnik. TechCrunch founder Michael Arrington recently couldn’t get a credit card from American Express. The industry is out of touch.

We believe that the current options are so bad, so predatory[8], so unaligned with consumer interests, and so inefficient, that there is a valid, honest business in helping people get their balances back to zero. Naive? Maybe. Bold? Definitely. Unlike existing options, ReadyForZero connects with people and empowers them with the right information, personalized advice, and access to the better lending products.

What we’re doing

We’re building a product that will give people insight into their financial situation and help them get to where they want to be. Specifically:

• We can automatically link credit card, bank account and credit report information to provide a personalized and structured plan for getting out of debt.
• We’re trying to improve on traditional ways of gauging your creditworthiness to give people fairer financial products.
• We’re forging relationships and creating information products for lenders to help them provide targeted consumer products that don’t exist today.

If you want to be done with debt and are ready for zero, our goal is to give you what you need to help you conquer it.

Where we are

The financial industry is hard to break into, and we’re still learning about the space. Information is hard to come by. But through sheer tenacity, we’ve made unbelievable ‘Hail Mary’ connections with the Right People to make some awesome deals happen[9]. We’re aggressively building product and have recruited some old friends to help us out with marketing and design. We have larger-than-life advisors on board and incredibly connected investors that _hustle_. We are excited about the future.

Go Giants!

Ignacio & Rod
ReadyForZero

[1] Y Combinator is about 3 months long (June through August). 18 hours a day * 3 months = 1620 hours. Incidentally, that means my weight increased about 4.5 grams per non-sleep hour of YC. This is roughly equivalent to 1 paul gram. Note that I didn’t follow his advice to maintain an exercise schedule.
[2] The old-fashioned way, with a screwdriver and a line tester, instead of with AWS credentials.
[3] Really. Google’s results ranked 1st in the yearly NIST competitions every year they’ve participated: http://www.itl.nist.gov/iad/mig//tests/mt/2006/doc/mt06eval_official_results.html
[4] 1/3 Americans don’t pay off their credit card balances every month. This is almost 100 million people. Think about how mad you are when there are 10 people in front of you in the post office line. This is like 10 million of those. That’s how mad we are at debt.
[5] The average outstanding balance on graduate student credit cards is $8,612 in 2006 (median is $3,874) and only 20% pay off their cards in full. From “Graduate Students and Credit Cards in 2006: An Analysis of Usage Rates and Trends”, Nellie Mae.
[6] http://www.creditcardreform.org/pdf/credit-card-facts-stats.pdf. And if you’re thinking that banks are just being fairly compensated for risk that they’re taking, see: Adam J. Levitin. “A Critique of the American Bankers Association’s Study on Credit Card Regulation” 2008. Available at: http://works.bepress.com/adam_levitin/4.
[7] From: http://projectonstudentdebt.org/files/pub/classof2009.pdf. Also includes information about percentages that graduate with debt.
[8] Debt consolidators and settlement companies make so much money that they can afford to pay $30 *for each click* on one of their online ads. If you know what Google’s keyword tool is – just check it out.
[9] This is no accident, Rod is a tenacious entrepreneur. He doesn’t need to use the door; he just walks through walls. That’s critical in the financial space (see Paul Graham’s recent post about Bill Clerico, founder of WePay). Plus, he’s a sweet talker on the phone.

The Meeting of the SuperMentors

It was a dark and stormy night. In a secret lair hidden far far away from mere mortals, the SuperMentors of 500 Startups convened. They came from all over – Gotham, Metropolis, the planets Vulcan, Cybertron, and Naboo, and The Shire. In just a few hours, they devised a master plan for world domination. That and some killer ideas on how to help the startups of 500 Startups go to infinity… and beyond!

Such an affair can best be documented in picture form:

After a long day of saving lives and fighting crime, the SuperMentors arrived to the secret lair understandably famished. They recharged with sustenance and invigorating conversation.

The Incredible Hulk (aka David Shen) talks shop with fellow SuperMentors.

Daredevil (aka John Zeratsky) reunites with old partners in crime.

The secret lair is PACKED. SuperMentors ready to roll.

SuperMentors listening intently to the 500 Overlord.

Thor (aka Bradley Heilbrun) and The Punisher (aka Rick Boardman) duke it out.

SuperMentors divided into smaller groups to brainstorm. Team Cybertron had a lively discussion.

Team Gotham searching for truth, justice, and the 500 way.

(View all photos)

When this much AWESOME and POWER congregate in a single location, not much can be done to contain that – as evidenced by the excitement generated in the Twittersphere by the SuperMentors:

@elliotloh: The last time I saw a group like this was the incoming college hires at my first job. This time everyone has a track record. @500startups

@bwitlin: Hey @davemcclure, looking forward to the superfriends meetup tonight @500startups #letthegamesbegin#icallmysecretpowerislasereyes

@shaherose: I spy at least 4 kick ass canadiens here @500startups mentor night!

All in all, it was a fantastic event. We are indebted to the SuperMentors for their passion and commitment. The world waits with baited breath to see them use their superpowers to help the startups of 500!

Making Your Startup A Platform

Meet Green Lantern, aka super-mentor Ben Lewis. Ben is a co-founder and VP of Product at Tapjoy, a platform offering mobile publishers solutions for application discovery, rich advertising, and virtual good sales. Before life as an entrepreneur, Ben was a product manager at Google and worked on consumer products such as Toolbar, Search, and Checkout. Ben was also an engineer on the original Xbox Live team.

As one of the cofounders of Tapjoy, I hear a lot of ideas for iPhone and Android based companies. These ideas usually fall into one of the following two categories:

• I’m going to build an app or game
• I’m going to build a platform or ad network to help other developers

The $100M question is which method is the best way to build a successful company. In short, I don’t believe there is a universally right answer to that question. But having been on both sides of the ball I’ll describe some of the pros/cons to each that I’ve seen and share my experience with Tapjoy.

How Tapjoy got started
Tapjoy started out as an idea between my co-founder Lee Linden and me. In the summer of 2008 we decided to build an iPhone game. We knew the market was growing and saw people making hundreds of thousands of dollars even though the app store was only a few months old. So we started designing a tower defense game that would eventually launch as TapDefense. Three months and a lot of hard work later our game launched. It’s a story that has been repeated thousands of times since then by developers across the world. However, we were fortunate enough to see our game rise quickly to the #1 overall position in the Top 25 Free Apps list where it remained over Christmas and generated over six figures in ad revenue that month. Not bad for two guys doing this in their spare time.

It was that Christmas break where we decided to pursue Tapjoy full time. I quit my job when I returned to San Francisco in January and Lee joined me soon after. Of course, the big question remaining was how to grow our business. We started by building tools to maximize our revenue:

• An ads mediation platform to improve ads revenue
• A cross-promotion engine to increase the viability of new titles
• High scores
• A virtual goods store (this ended up being our most successful tool by far, leading to a 4x increase in revenue over banner ads)

Some of the developers we knew asked us about using these tools in their titles so we bundled them into a library that we could offer. At first this was something we only shared with a few close friends, but it quickly expanded to dozens of apps, then hundreds, and now thousands.

Today the focus of the Tapjoy platform is a virtual goods and virtual currency monetization system. We help games and apps with virtual goods make money with an alt-pay system. For users who are unwilling or unable to pay through in-app payments (many iPod Touches for instance have no credit cards associated with their account), the users can complete a marketing action in order to earn those virtual goods. These marketing actions translate directly into dollars flowing through Tapjoy to our publishers. By far the most successful marketing action is to download another app. Even developers of free apps are more than happy to pay for these incented installs. And today, with hundreds of live publishers and thousands of live advertisers (app developers), Tapjoy is the #1 paid app distribution network on the iPhone and Android platforms.

A few things I learned in this time
While both are challenging, I will say that it certainly isn’t as easy to build a platform as it is to build a single app/game. But the upside is that you have reduced risk. Assuming you can get partners on your platform, it’s only natural that some of these titles will be hits, thus giving you enough exposure to be successful. That much we realized back in the early days of Tapjoy. But here are some things we didn’t understand until living through them:

1. You are always selling. The success of your platform depends on the number of partners using it. Even if you’ve never spent a day of your life in sales, be prepared to start. At a small company everyone needs to pitch in and help grow the business. Conferences, parties, reunions, etc all make great opportunities to add to your sales. When even a single partner can materially affect your overall numbers, it’s important to make a sale at any opportunity.
2. You are always on call. When your big partners (or your small ones) have a portion of their business dependent on your company you need to be available 24/7 to support them. Our (admittedly small) company couldn’t take a real vacation until after we were acquired and added much needed troops to our workforce.
3. Reputation is key. Want to raise a Series A round? Any serious VC will be contacting your partners to see what kind of platform you run. Want to get acquired? Same deal. This is a very open community and the people you’re looking to for an investment or acquisition will know someone who is working for you. When we were looking to expand we had many of our big partners tell us “X was asking about you. We said good things.”.
4. Cash is key. One very important thing to keep in mind if you raise little or no money (like we did) is that when you get paid and when you have to pay are two totally different things. As a small company you aren’t in a great position to demand strong payment terms by your partners. If you want to work with big companies like Google or Microsoft, you’ll get paid when they want to pay you. And that can sometimes mean 60 or 90 days after you’ve spent their money. Likewise, if you’re paying out partners they often demand payment within 30 days or less. If you’re not careful this can create a cash flow situation where your bank account dwindles as your platform grows. We were able to mitigate this problem by capturing a higher volume of small company partners rather than a lower volume of large company volumes. The small companies tended to pay quickly which overshadowed our accounts receivable for the larger companies, keeping our business cash flow positive. If you don’t have the luxury or fortune to depend on this I highly recommend raising more money or negotiating accounts receivable based bank loans.

When it works
Perhaps the biggest benefit of all to running a platform is watching other people’s businesses grow and knowing you’re helping to make that happen. I’ve been able to write very large checks to partners I now consider my friends.

As tough as it is sometimes when your partners are upset or your servers are crashing, it can be a pretty amazing experience to embark on building a platform that powers other startups like yourself.

Tapjoy was acquired by Offerpal Media earlier this year, which has since re-named itself to Tapjoy. You can check out a video interview of Ben and his co-founder Lee here.

Blogging Is Like Oxygen

This morning, I came across a couple blog posts today on the topic of having a blog (yes, very meta):

• What can you learn from 7 awesome corporate blogs? (from KISSMetrics’ blog)
• Five reasons why corporate blogs fail (an older post from Technorati)

Reading these made me take a step back and reflect on the 500 Startups Blog, as well as other corporate blogs I managed while I was at Google and YouTube. Everyone seems to include a blog and/or Twitter account as part of a big launch checklist. After the big announcement, more often than not these two properties start to gather cob webs because blogging and tweeting aren’t considered high priority. To me, this is a huge mistake. If you’ve neglected your blog, either make time for it or hire someone to be its editor-in-chief and give it the attention it deserves. If you don’t have a blog, get one and start writing.

Corporate blogs accomplish one or more of the following goals. In no particular order:

1. Be the source of company news & announcements – product launches, events, etc.
2. Demonstrate thought leadership – a fancy way to say that the blog will produce unique content relevant for the company’s customers. This might be tips, best practices, case studies, yada yada.
3. Be a channel through which the company positions itself and shows its culture… i.e. some personality!!
4. Become its own micro-community. Oftentimes blogs are made that much more valuable because of the active community and commenting that happens with each post.

For 500 Startups, all of these goals apply to us – especially #3. Being open and transparent is very important to us, and our blog will help us stay true to that. The type of fodder we tend to post about includes the latest news with 500 Startups, share the immense amount of experience and tips possessed in the minds of our mentors and startups, cool things our startups are doing, the evolution of the 500 Startups work space, and much more. While we want to show the world what we’re all about, I think a more important goal here is that our blog content actually be helpful to people and not just marketing fluff.

I’ll close with a few specific tips I’ve found to be useful when running a blog. There are a ton of things I could list, but I’ll keep it short and tangible:

• Create a blog pipeline that shows upcoming posts, when they’re scheduled to go out, and current status. I like to do this with Google Spreadsheets and/or Google Calendar, but whatever tool(s) you prefer is fine. Just as long as you have some sort of schedule.
• Post at minimum 3xs/week.  If you’re up for the challenge, then try to post every day.
• Establish topics what you will/will not post on your blog. This is good to do from the beginning, before your blog is live. It helps give a sense of purpose for what you want to use your blog for and how it’s going to help your company. It’ll also help you curate content.
• Designate an editor-in-chief. Have one person who owns the blog. It is critical to have someone serve as the editor-in-chief and manage the schedule, curate blog post topics, edit for style/tone/grammar, and grow readership.
• Syndication is king! Make sure your blog RSS works, your posts have “Tweet This” and Facebook “like” buttons and other sharing mechanisms, have a email subscription feature, etc.
• Don’t be a robot. If people comment on your blog, respond back to them. This goes for Twitter too.
• DON’T BE BORING. There are TONS of blogs out there. You’re competing for people’s attention. Step out of your comfort zone and don’t be afraid to shake things up.  I wrote the first version of our official mentor announcement. It had all the right content, but it was pretty dry and standard. Dave said, “Let’s do SUPERHEROES!!” I thought he was crazy. But it was perfect. (It also gave me a chance to sneak in some Big Bang Theory references… did you catch them??). The best part was when mentors started tweeting out their superhero alter egos.

And with that, I’m off to find myself some lunch! Would love to hear your own blogging tips – post a comment or @-reply me.

How to (Sustainably) Make the Startup Office More Livable

Meet one of our super-mentors, Captain Underpants (aka Dave Schappell). In his own words: “I’m the founder, CEO and door-desk-builder at TeachStreet – a Seattle-based local/learning startup, helping people find great local (and online) teachers/schools/classes, and helping those schools and teachers with effective online advertising/lead-gen/payment processing tools.”

In this post, Dave talks about how to make your startup office space livable while not breaking the bank.

Let’s face it – all pre-entrepreneurs dream of a garage-, basement- or coffee shop-catalyzed startup, run with a frugal mindset and a just-do-it mentality (we all hate The Man and his cubicle farms, right?!?)  And a huge percentage of startups do just that, for a few days, weeks or even months.  But after the shine wears off, you start longing for a little bit of space between work and loved ones (or fellow coffee patrons).

This post helps share some best practices that we learned along the way.

1. A (nice) office doesn’t need to cost you a lot.
We’re in downtown Seattle, next to a Whole Foods, and in the same area of town as the new Amazon.com headquarters.  We’re paying $13 per sq ft (per year), at the same time as other startups are blindly paying in the $20s.  That gets us a nice 1,700 SF space that we comfortably fit ~10 employees, plus a number of non-employees (who we charge per-desk fees… see #10 below).  So, that’s $1,842 per month (before netting out our subleases) – yes, that’s not ‘free’, but it’s not bank-breaking either.

2. Get a Real Estate advisor/rep
I honestly don’t know how they make money (I assume they get a % of the lease amount, and are busting their butts because they know that some of these startups may become the next Google), but our Real Estate advisor/consultant/tenant rep is awesome – find one like him near you.  He represents the biggest companies in town, but treats our little startup the same.  Benefits include finding us all available space, negotiating down rates (as much as 30% off list price), and helping with any lessor issues.  You’re foolish not to have someone manage this for you.

3. Office furniture can be acquired cheap
I know everyone already knows this, but Craigslist is amazing. We outfitted our original office for less than $200, not including desks. We also bought some raw materials and assembled a number of door desks in a few days. It probably wasn’t worth the sweat and labor vs. IKEA, but it’s still always cool to have a door desk, no?

Video of team during construction below. (Doesn’t that look like fun?)

4. Snacks!
Early on, we asked the team what could make the office a little more palatable (pardon the pun) during the long work hours/launch sessions.  Their answer was “snacks would be nice”.  I was shocked at how easy this one was to say “yes” to – for less than $75 a week (a tiny amount compared to salaries), you add some variety and a ‘perk’ that you don’t/won’t find at larger companies. It’s crazy that more companies don’t do this!  We made this less of a chore for any one person by having the responsibility for ordering shared among all co-workers (one person gets snacks each week).  That allows for some personal preferences to be accommodated, and it makes it a community task that’s sort of fun.  (Note – AmazonFresh delivery service makes this one quite easy)

5. Paint & Comfort-ize
After inhabiting our office for over a year, someone commented that it felt a little like an asylum, with white walls, no comfortable furniture, no decoration, etc.  So, one of our more creative souls picked out a bunch of paint swatches, bought some supplies, and we made a day of no-TeachStreet-work and got to painting, couch-buying and decorating – end result looks pretty sweet, if we do say so ourselves, and we all did it together!

6. Cleaning Weekly
In addition to sharing ‘snack duties’ each week, we also have one person responsible for emptying the sink (when the elves magically leave dirty dishes without cleaning them…), emptying odoriferous trash cans, excess garbage, etc. We occasionally ‘splurge’ on a cleaning service (about once a week). It costs all of $150/month (<$40/week) for this extravagance, but it removes the need for anyone to sport the vacuum cleaner.  Trust me, this one’s worth it.

7. Weekly celebrations (yes, make it happen every week!)
Beers on Friday afternoons, along with some ping pong, music, and fun. In addition, we have a quirky team exercise where a different team member teaches everyone else ‘something new’ each Friday (it fits with our TeachStreet brand/mission) – almost all startups can find something that fits with their mission too.  It’s nice to not talk about work, and unwind a little bit before the weekend (when even more work often occurs).  And, we share beer-buying duty too… usually the same person who’s ‘Teaching Something New’.

8. Reward (TV, music)
We recently pondered moving to a new neighborhood, which would mean an increase in $/sq ft but a reduced commute for many of us.  We decided against it, for a variety of reasons.  But we still wanted to celebrate a string of recent successes.  We chose to pimp up the office a bit more – voila, a $749 big-screen (from Costco) and a $300 Sonos for group music – pretty sweet, eh?  And, you can follow our kick-ass shared TeachStreet Last.fm music channel (any terrible songs are courtesy of our CTO @daryn and his warped tastes)

9. Dogs. Arf!
If you’re the dog-loving variety, include them in your lease.  Just be sure to make dog owners accountable for cleaning up after any messes.  And, if anyone is allergic to dogs, fire them. (Just kidding. Or am I?)

These are our security dogs, Zach the Dog and Stella the Frenchie. (By the way, isn’t Stella much cuter than Nickey, the ferocious 500 Startups guard pug?)

10. Sublease
Invariably, most of you will lease a space slightly larger than what you need.  You’ll also happen upon fellow entrepreneurs who only need 1-2 desks until they validate their business and/or secure some funding.  Share some of your space (and get some other entrepreneurial energy in your office)!  We charge a below-market $250/desk to a few folks, and thus reduce our net out-of-pocket rent expense to <$1k.  And, yes, we’re a venture-funded startup, but we see no reason to waste that $ on things that don’t help customers.

I’m sure I missed a bunch of other great ideas, so please share yours in the comments below.

I hope that some of the above helps you to make the jump to your own World Headquarters in a way that doesn’t strain your resources. You’ll be amazed how many of your friends are envious of your office. It’ll hard for them to hide their jealousy when they wander in and experience the energy behind an organic startup space, complete with dog!

Acquisitions: Pulling Back The Covers – Part 2

500 Startups Mentor Ryan Junee continues with Part 2 of his thoughts about startup acquisitions. Catch up on Part 1.

This is a continuation of my previous post in which I talked about some of the key things you and your team need to think about when deciding to sell your company. In this post I will describe the actual negotiation process and some of the important terms you will need to know.

Negotiations

A lot has been written about negotiation strategy and tactics, and I’m far from an expert, so I’ll let you research the general stuff on your own. In the context of a potential acquisition, the first thing you need to do is get a strong internal sponsor/champion at the acquiring company. This is probably the person who found and approached you, unless that person is not very senior in which case it may be his or her boss, or further up the chain of command. Usually it’s someone in the product or engineering team who really understands what you have achieved, and really wants you to be part of the company. Find this person and do everything you can to make them love you. They will be the one who tells the M&A team to go ahead and get a deal done.

You will probably have a bunch of meetings at the company demoing your product, talking about the technology and your shared vision. Hopefully there’s a strong synergy between your vision and theirs. Hopefully they like your architectural choices and the technology stack you have chosen. Hopefully they are impressed by how much you have accomplished with so few resources (this is where startups really shine compared to large companies). If all goes well, at some point you will be introduced to the M&A team, sometimes called the corporate development team, who will take over and handle the tactical negotiations from here on.

Acquisition negotiations are a strange things. At first no one seems to come right out and say just what is going on and what the purpose of the discussions are. Often companies are just ‘exploring how we could work together’ – but there seems to be a shared understanding that a potential acquisition is really what’s being talked about, and eventually someone, usually from the M&A team, will come out and say it. This is when things move into high gear!

You’ll want to quickly assemble your team of lawyers and advisors (which I discuss below) who will help you through the negotiation process. Before you have this team assembled, there are a couple of things you should make sure you do from the beginning to start out on the right foot. First, don’t immediately sign a no-shop agreement. A smart acquiring company will ask you to do this right away, but you need to resist. Explain that you’d be happy to sign an NDA and keep the details of your discussions confidential, but you aren’t ready to sign a no-shop agreement until the discussions progress and you have a better understanding of the actual terms. In my opinion it’s ok to sign a no-shop once you have agreed on a termsheet, but before you reach that stage you should not.

Secondly, have your BATNA ready (“Best Alternative to a Negotiated Agreement”). You need other options if you are going to have any leverage in the negotiation (again, much like dating 🙂 This could be other interested acquirers (which is why it’s important to not sign a no-shop agreement, so you can go out and get in front of other acquirers now that you have interest from one), it could be investors interested in funding your company so you can continue independently, or it could be simply walking away and continuing to do what you do best. You have to show that you don’t need this deal, make them want you as much as you want them. And even if you don’t have other options yet you need to be projecting this attitude.

The negotiations will progress through a few phases. There will be a due diligence phase where the acquirer digs deeper into your product and technology. They may even put you through a formal interview process (since they are basically hiring you). Next you will begin negotiating a termsheet – a short document (usually 4-6 pages) that outlines the key terms of the deal, and streamlines the process by ensuring you have agreement on all the important stuff before engaging expensive lawyers (I talk about some of the key terms below).

Eventually you will reach agreement and sign the termsheet. This could happen relatively quickly over a week or two, or could drag on for a couple of months depending on how closely your expectations match and how hard you negotiate. Term sheets are not legally binding, but they aren’t usually broken if both sides have been honest in the negotiations thus far. For this reason (because the deal has a reasonably high likelihood of going through), it’s ok to sign a no-shop agreement at this point.

The final phase is negotiating the definitive agreement. Whereas a termsheet is only a few pages, the definitive agreement may be well over 100, and is mostly legalese that lawyers on both sides will relish the opportunity to argue over. Depending on how thorough you were at the termsheet stage and how hard you decide to negotiate, this phase could again drag on for months.

If the deal doesn’t fall through, then at some point everyone on both sides is happy and signing day arrives! After penning your autograph on stacks of documents you can sit back, relax and let your writers cramp subside. But you’re not quite done yet. Usually there’s a bunch of administrivia that needs to be taken care of after signing and before the deal is officially ‘closed’. This can take a few days or a week or so. Closing day will eventually arrive, you’ll login to your online bank account and a huge smile will appear on your face, techcrunch and a hundred other blogs will write about you, and you will join the ranks of entrepreneurs who have successfully sold a company.

Of course come Monday you’ll have a new job and a new adventure to embark on, so relax while you can.

Lawyers and Advisors

I mentioned above the importance of assembling your team to help with negotiations. This basically boils down to lawyers and advisors. I first want to explain that lawyers and advisors are very different – you need to make sure you have both. To put it simply, lawyers are focused on minimizing risk. They will pore over the details of an agreement and make sure you aren’t exposing yourself to things that could come back to hurt you. They want to protect you. What lawyers generally won’t do is present you with creative ways to reach a better outcome. As an entrepreneur, you are not only interested in minimizing your risk, but also in maximizing the upside of the deal. This is where having experienced advisors is key. Hopefully your advisors have done a few deals in the past and have a few tricks up their sleeve that that can be used during negotiations. To give an example, one of our advisors was a very experienced tax accountant and figured out a way to structure the deal that helped us minimize the tax we would owe to the government. Venture Hacks explains this well in their article Lawyers are referees, not coaches.

In case you are wondering whether you can just do this yourself – why you need a team at all: first, it would be absolutely crazy not to have a legal review of the agreement you are about to sign, preferably from a lawyer experienced in dealing with these sorts of transactions (not Uncle Bob who has a small family law practice back home).  Secondly, consider that this is probably the first time you have ever sold a company.  Your acquirer may have already acquired dozens of companies this year!  The M&A team you are negotiating against lives and breathes this stuff every day.  You are at a massive disadvantage if you don’t bring some experienced folks to your team to even things up.  It’s particularly advantageous to have advisors on your side who personally know executives on the other side.  Having a back-channel in addition to your formal negotiations can be tremendously useful in streamlining the whole process.

I talked about the negotiation process above, and how moving from term sheet to definitive agreement can last a month or more. This is the time when your lawyer really becomes engaged, and is the time you need to be very careful about where your lawyer spends his or her time (aka billable hours). It’s often joked that lawyers are the ones who make out best in an acquisition. Legal fees are high, and lawyers just love arguing over minutiae and charging you for it. You will have to actively manage your lawyer, keep them reigned in and focused only on what you mutually decide are the most important points. Set an expected budget upfront. Ask what they can get done for this amount. Tell them not to worry about arguing over minor points that you don’t care about. Keep in mind that they are probably used to negotiating big deals where legal fees can easily run above $500K, they aren’t necessarily used to your small early stage exit. Legal fees of $50-$100K for an early stage deal are not unusual.

The Nitty Gritty

Here I’ll outline some of the key terms you will be negotiating. Again, I’m bound by confidentiality agreements so I won’t be discussing the specifics of my deal, but just some general terms to give you an idea of what to expect.

• Consideration – the amount you will be paid, the form it will take (cash, stock or both), how it will be paid out (usually some percentage up-front and some percentage over time tied to continued employment, perhaps tied to milestones)
• Structure of the deal – usually either a stock purchase or an asset sale. You should consult your lawyer and tax accountant on how this will affect you.
• Employment arrangements – the types of jobs founders will be offered and an indication of salaries etc
• No competition – an agreement preventing the founders from competing with the acquirer for some period of time
• Non-disclosure – requiring parties to keep terms of the deal (or maybe even the fact a deal exists) confidential
• No-shop – preventing the company from meeting with other potential acquirers or investors for some period of time (usually the expected time for the definitive agreement to be negotiated).
• Due diligence – outlining the information the acquirer will need from the company.
• Indemnification – outlining the representations and warranties the company is making to the acquirer, and requiring the company to reimburse the acquirer if they are sued for any breach.
• Escrow – some portion of the consideration may be held in escrow for a period of time to cover the indemnification mentioned above.
• Expenses and fees – who is responsible for legal fees (usually each party pays their own, but you may be able to play the ‘starving entrepreneur’ card and get some help)

It is important to understand all of the terms in your term sheet before signing. I would recommend paying specific attention to the structure of the payments and possible tax consequences. As I mentioned we were able to structure our deal in a way that helped minimize taxes owed.

While negotiating the definitive agreement, your lawyer will really dig into the indemnification clauses and make sure you aren’t signing yourself up for more risk than necessary. To give you an idea, you will be asked to represent that you fully own all your IP, have not breached others intellectual property rights, have not made any fraudulent claims etc. In order to satisfy these representations, and as part of the due diligence process, you should expect an audit of all the code in your product that was written by third parties, which includes all open source libraries and the licenses attached to them. You need to make sure you clean from an IP perspective.

Keep Working

I’ll end this post with one piece of advice that was drilled into us by Paul Graham, one of our advisors. Keep working. Assume that the deal is going to fall through (deals often do). Keep building the company, developing new features, gaining new customers etc. Not only will this leave you in a comfortable position if the deal actually does fall through, but it will also help with your negotiations when the acquirer sees your company continuing to grow during the process (which may be several months). In our case we launched several new features and received a bunch of press during the negotiations, which I assume helped reassure the acquirer that they were making the right decision.

I hope this post has pulled back the covers and shed a bit of light on the acquisition process. If you are going through the process, I’m happy to answer any questions – drop me an email.