Tag Archives: startups

How do you segment startups? Here are 3 models, but we need more

I love the approach, analytics and data associated with segmentation. The act of taking large numbers and breaking them down into manageable smaller parts fascinates me.

Yesterday, I had a chance to talk to a friend about segmenting startups. There were 5 ways we tried to segment them and finally figured out that 3 made sense and the rest were not useful or actionable.

Here are the 3 categories of segmentation we came up with.

  1. Segment by stage of company. (Idea stage, Prototype, stage, Traction, Growing, Scaling)
  2. Segment by growth rate (slow growth, medium growth, fast growth and rapid growth)
  3. Segment by category (eCommerce vs. SaaS vs. Media, etc.)
  4. Segment by location (where they are based)
  5. Segment by type of funding (Bootstrapped, Angel, VC, etc.)
  6. Segmenting by market opportunity (large existing market, vs, disruptive new company)

Segmenting by stage of company: This is the easiest to understand. Most companies call themselves in various stages based on their funding stage as well, so we figured #5 and #1 were fairly close. There were enough differences when a larger company was bootstrapped, so they were “Growing” and “Bootstrapped” but those are fair and few between.

Segmenting by growth rate: We wondered if this was similar to stage of funding as well, but there are enough differences. A slower growth “Startup” would be going through multiple rounds of seed and early stage funding, so we felt this was useful segmentation.

Segmenting by category: This is the one that most startups use as well besides stage. Companies call themselves as an eCommerce company, Consumer Internet, B2B startup, etc. Most startups use this as a way to segment themselves besides stage.

Segmenting by location:Companies tend to email me and segment themselves from “silicon valley” vs. “New York”, vs “Bangalore” for example. Not sure where we could use this, but this is one other way we could segment them. I suspect after you do a first level filter, this might be a follow on segmentation.

Segmenting by type of funding: Compared to 7 years ago, startups are taking longer to get to VC series A for some companies, but others are still taking less time. Some end up bootstrapping for longer, and still others go from accelerator to accelerator, trying to raise seed round, post seed rounds, bridge rounds and still trying to get ready for a series A raise. I dont think this is going to help us action them in a particular way, so this, albeit interesting is not very useful.

Segmenting by market opportunity:

There are other ways to segment startups, including the type of founder (hacker, vs. sales person, etc.) and founders background (serial entrepreneur, first time founder, etc.)

I wonder if there’s anything we missed. I’d love your input.

Standing on the shoulder of giants – how startups get distribution done faster

The whale shark is an unusual fish. It travels an incredible 5000 miles off the cost of Caribbean each year. It does though help a lot more fish when it makes this journey. Many small fish and other sea animals live on its back and travel with it.

Intellectual pursuits have been similar. Issac Newton is quoted saying:

If I have seen further than others, it is by standing upon the shoulders of giants.

That’s one of the key items I have learned about distribution and growth hacking over the years. If there is a large “installed based” of practically any product, it is possible to jumpstart your new startup idea on its back.

Startups cannot help other startups. Except for giving advice, which is practical and practitioner-led, there’s not much a small startup can do to help other smaller startups.

The new “large” installed based in technology lead themselves to help new startups more than previous ones. While SDKs (Software Development Kit) and API’s have existed for a long time, the new age companies are helping bring their installed based to new innovations lot quicker by exposing their customers to new technologies via 3rd party solutions built on their solution. Some of them are doing so with the intent of being a “platform”, but many dont have a choice but to grow and build relationships via API’s.

I was talking to an entrepreneur yesterday about how they can improve discovery and distribution for their SaaS application.

The first part of the problem is just discovery – people getting to know about their product.

The second part of the problem is distribution – people trying their product.

The last and most challenging part of the problem is engagement – people using their product frequently.

Discovery Distribution and Engagement
Discovery Distribution and Engagement

The 3 problems are distinct enough to have different people responsible for them at your startup. Typically, the discovery is a “marketing” effort, distribution is a “sales” effort and engagement is a “product” effort.

New startups, especially consumer (eCommerce) are finding that being on the app store alone is only solving the distribution effort, not the discovery or the engagement problems.

SaaS companies are finding that discovery can be solved by SEO and SEM, and distribution with “freemium” pricing, but engagement is their toughest challenge.

Finally games have always found that engagement is their biggest challenge.

Depending on your company, and the market, there are some criteria to keep in mind when you are trying to decided where to “spend” your time and energy. Then using a large company in the space to solve that problem is the best way to grow fast.

So, if discovery is a problem, then I’d suggest listing on multiple marketplaces and directories and getting the word out via customers. If there is a large company in the space and they have an API or marketplace, list your product on both. The rising tide of customers will lift your boat as well.

If distribution, however is the problem, then ensuring easy “provisioning” on the larger company’s platform will help the most.

Finally, to solve the engagement issues, making API tie-ins to a larger company’s product – e.g. using Line’s API for new stickers or in app purchases will help.

If you have examples of how you have leveraged a larger company to make it easier to discover, distribute or get user engagement, I’d love to hear from you.

How to conduct and document a “day in the life” audit of your customers? #startup

Once you understand how to segment your startups customers and the 3 most important steps to segmenting your customers, most people start to put a framework for validating customer segments. I tend to use the the Kanban method for Continuous Visible Customer development, which allows me to keep iterating on customer’s problems, pain points, and validating key assumptions we made.

One of the most important challenges that startups face is one of getting their users time or attention. For B2B startups besides the time,they also have to help save money or increase revenues, etc.

Time, for most people is rather hard to convince people to find. Even if you believe they do have it, users are unlikely to commit unless it entertains them (games, media) or it saves them more time (apps, eCommerce, etc).

The best way to understand how a product will add value to your users is to do a time and activity audit of your customers.

The output of your time and activity audit is to come up with your a) product value proposition, roadmap and be the north star for new features b) be the guide to help target your marketing efforts and c) help your sales persona mapping.

Day in the Life of a PR Associate
Day in the Life of a PR Associate

Here is the final output of the day in the life audit for BuzzGain, and the visualization I used to talk about the day in the life.

Day in the Life Audit Drives Product Direction
Day in the Life Audit Drives Product Direction

While the final output of the day in the life looks pretty, the process to gather the data and come up with the analysis is anything but.

There are 3 possible ways for you to collect and organize the day in the life data:

1. The increment method: In this approach, you have to “shadow” your users for a day and document every 15 / 30 minute increments. I used this for 3 users on 3 different days and did it in 30 minute increments. This was done so I could understand where they ate, who they worked with, when they had meetings, what “activity” they performed, etc. I would color code the activities into 3 (meetings, work and other – red, black and blue worked for me on a simple print out that I got from Outlook.

Daily Calendar
Daily Calendar

2. The mini-milestone method: In this approach, you are unable to shadow the customer, but you meet them 3 times – early before they start their day, afternoon at lunch and late afternoon before they leave for home. You are trying to get a highlight of the key time “blocks” and activities they spent time on. Do this with at least 5-7 users, instead of 3 if you are adopting the previous method, since users either forget or lie to make themselves sound more busy and important than they actually are.

3. The prioritized activity method: In this technique, you ask your users for their top goals, priorities or objectives for the period they are measure – monthly, quarterly or annually and the amount of time they have to spend to achieve those priorities. Then you can check in for 3-4 weeks, every week to see if the major “buckets of their time” are being spent towards achieving those priorities and what activities are contributing towards achieving those. This is typically done when your users are senior-level executives.

3 bonus tips for you during this process:

1. Your audit helps recruit your users as well (they can be beta customers later), so think of this process and the exercise as a value-added pursuit that you can offer for busy people to help them get control of their time.

2. Most “business” users spend a lot of time in meetings. In fact I wont be surprised if over 30% of folks tell you they go from meeting to meeting and only get work done late at night or early morning when “they have time for themselves”. Document the person(s) they meet with. It will help you with possibly “adjacent” markets later.

3. Documenting this helps your targeting and marketing efforts as well, so to ensure you can action it, document the “outside” the lines time-spent such as where they eat, when they take a break (to check FB, Twitter, etc.)

Who should you raise money for your #startup from if you had a choice?

I got a question from a friend Abhinav Sahai, as a follow up to my post “Does who you raise money from limit or grow the size of your ambition?”

What are the parameters that one should look at when choosing ‘who’ to raise money from? 

I am going to give you the easy answer first to the question. This is based on my observation that most entrepreneurs find it extremely hard to raise money for any number of reasons – positioning, not being in the network, not having sufficient traction, etc.

The answer is “Whoever is willing to give it to you”.

For over 80% of entrepreneurs that answer should be sufficient, unfortunately.

Lets assume though that you are in a position to receive interest from multiple investors and you have to make a choice. Or you are going about your fund raise in a strategic fashion and are looking to target specific investors who you’d like to bring on board at your startup.

The overarching theme to address this question is to bring folks who provide “Smart Capital“.

Most investors will give you money. That’s why they are an investor.

What you need in addition to the capital is what you should be looking to get from investors if you have the choice.

1. In some cases that might be connections and networks – to other investors, to potential customers, partners or future employees.

2. In other cases it might be expertise and insights – how to address questions that you will face while you scale and grow your startup.

3. In still other cases it  might be credibility and advice – being associated with top folks in your industry gives you a leg up over others.

4. In still other cases you might just want someone you can trust and sound ideas off. Knowing that your startup journey is going to be long and lonely means you need folks to help keep your morale up or to help you gain perspective.

They may be more things you might need in addition to capital, but most will fall into these 3-4 buckets.

Typically most folks will tell you that they can bring their expertise and connections. 

If you can be strategic about your fund raising (meaning you have good runway, or have great traction), then I’d highly recommend you look at your fundraising as a project that the CEO undertakes herself.

It will take about 3-6 months (elapsed time) from start to finish, so you should be willing to be patient, and consistently follow up as with any strategic project.

So the question then becomes how do you gauge if someone has expertise or connections?

The simple test is to ask them questions you face daily and look for depth of the answers, the breadth of their knowledge and the ability for them to customize their learning to your needs. That will give you a sense for their expertise.

The depth and breadth of their network is also easy to test – ask them to introduce you to 2-3 people you have been trying to meet to help validate your plan.

Above all I’d highly recommend you reference check. Talk to others in their network who they have invested with or other entrepreneurs they have invested in to get a sense for the investor.

The most critical question you can ask is how they respond to tough situations. 

100% of all startups go to hell and back before they are a success or a failure. When you have supportive investors to help you along the hard journey, it will be a lot less stressful.

The analogies and words people use in your startup meetings define your culture

As a founder, it is important to define and constantly manage / prune your company culture. Why? It defines your growth, who you hire and how you respond to situations.

Most founders don’t understand, though, what the company’s culture really is. When you have more than a few dozen people, things change dramatically if you are not constantly pruning and hiring the right folks. Even the best leaders have a little more than 50% batting average when it comes to hiring stars, so it is no surprise that culture changes at a startup quickly if it is not nurtured.

What is then the best way to understand what your company’s culture is and how it manifests itself in your interactions?

The best way I have found you can understand your company’s culture is attend a critical kickoff meeting for a key project for every team, every so often.

Not as a contributor or a participant, but as an observer.

Sometimes folks in the room will be cautious about having the founder attend their meetings and be likely guarded in that meeting, so I’d recommend you ask to be on the conference call, not in person. Most people tend to forget folks on the conference call, and tend to be their natural self.

Then look for key words that people use to describe actions, situations, responses and milestones.

For example, at Microsoft teams use the words rhythm, cadence, muscle memory and “landing things” a lot on the sales side of the house. On the engineering side it tends to be “shipping bits”, agile, “landing things” and cadence a lot.

It is very useful to understand where those words come from and what people believe in when they are confronted with situations. They also though, define the culture of the organization.

As instrumental as these words are in understanding what people value, it is also indicative of what gets ignored.

The best way to have an understanding of the culture is to ask questions about quality, deadlines and budget.

These items will give you the best response into the psyche of the organization.

Another thing to look for is the analogies that people use to describe situations.

Most sales teams will use sports analogies (for example you will hear at Microsoft about “hail Mary” effort to secure a difficult customer effort by end of the quarter). Engineering teams tend to (at Microsoft at least) use science analogies – (for example you will hear frequency and amplitude of releases, and the signal to noise ratio of feature requests).

Some of these analogies are truly regional and defined by background, but once in a while, when you have a new leader who wants to redefine the culture they start to use different and new analogies, which stay for much longer than their tenure.

As a founder the best way to have these “grapevine” stories stick is to use analogies that folks will adopt because it creates a sense of “insider knowledge” or “tribal power”. It is also the best way to ensure that your culture has a cult following.

Accelerators, more than seed funds have created the glut in early stage companies

There are 3 major trends that have driven startup formation over the last 7 years.

First the cost of infrastructure, thanks to AWS has dropped from hundreds of thousands of dollars to hundreds of dollars – 3 orders of magnitude.

Second, the number of seed investors has gone up 5 fold, from 35 to over 250 now.

Third the number of accelerator programs has gone from < 10 to over 635 in the US alone.

The number of startups in technology has remained though constant, at about 20K to 30K per year from the US alone. There has been a slight increase, but not by much. So what gives?

Some questions – has the failure rate increased? The anecdotal evidence is yes, but the real data is inconclusive.

Are startups talking more time to mature? I call maturity as time to get to series A from the time they were formed. If you look at 2007 data, the time to get to VC series A funding (crunchbase data) was 2.2 years.

If you look at 2014 data, the time to get to series A has dropped to 1.6 years.

The size of the rounds have gotten higher, as startups are taking in more money.

The number of side projects (indicated by participation in hackathon’s, which is a proxy but not an easy to measure metric, has increased dramatically by 400%.

So, AWS has allowed you to really reduce the cost of experimenting, more than building a startup alone.

If you look at 2007 data and see the number of seed funded companies that got VC funding as a percentage, the % has reduced by 2014 – largely because there are a lot more companies getting seed funding.

The real difference is the accelerators in the US – they have gone from bringing out 250 companies in 2007 to over 2000 in 2014.

That’s the big (4 times the number of early stage companies) change from 2007.

Accelerators are causing the glut in startups getting in front of institutional investors more than angel funds.

2014 is the year when India became #3 worldwide in tech #startup funding

I am finally going through all the reports from PwC MoneyTree, E&Y reports and Venturesource data to determine how the tech startup ecosystem did in terms of funding and growth of VC investments. Here is a snapshot from 2013, the report is available for download.

Worldwide Venture Capital Investments 2013
Worldwide Venture Capital Investments 2013

If you look at 2013, US dominated with ~3500 funded startups by VC’s and that represented ~70% of all tech startups funded. There were a total of 5700 companies that got funded by VC’s alone, worldwide.

In 2014, the number (have to get permission to post since it is behind a paid wall) of VC funded startups rose to ~6500. Depending on which number you seek some say it is 7200.

The US was number 1 with 65% of startups, Europe (primarily UK, Germany and France) #2 with 1500, China #3 with 451 and India #4 with 312.

If you treat UK, Germany and France as separate countries (which they really are and I am not sure why E&Y and PwC group them together as Europe for the purposes of the report), then none of them made it to the top 5.

Looking at countries alone: 1) US, 2) China, 3) India, 4) Canada, 5) Israel, then UK, Germany and finally France.

In terms of invested dollars as well, the numbers are the same:

1. US $38 B – $45 B

2. China $4.5 B – $5.2 B

3. India $2.4B – $2.9B

4. Canada $1.7 B – $1.8 B

5. Israel $1.65B – $1.75B

A data driven approach to dispelling the myth that planning for #entrepreneurs is “old” school

There is an ongoing meme that keeps popping up ever so often among tech entrepreneurs and gurus. That the “business plan” is dead and there is actually no sense in planning at all.

After all they say “Hands-on Entrepreneurial Action is all that is required to create a Business”.

I have enough curiosity to keep finding out which of these truisms are valid and which are not. Fortunately I also have a position that allows me to try these experiments given that I run an accelerator program.

TLDR: This is absolutely false. Poor or any planning is better than no plan at all for over 80% of startups. In fact, the earlier the stage of the startup, the more is the value of that planning.

Here is the data:

Over the last 3 years, I had the opportunity to identify, select, coach and help 87 entrepreneurs for over 4 months each. I spent about 1.3 hours per week with each entrepreneurial team. In the last 3 years, and in 6 cohorts, there have been a total of 4834 applications we have received and reviewed. Of these my team and I have talked to about 450+ (about 10%) and have met with (for atleast 15-30 min) about 250 of these entrepreneurial teams. A total of 87 of them made it into our accelerator and that’s the sample size. Of these, 89% were from India, and 11% from the US.

There are between 10-12 sprints we run at each of our 4 month acceleration programs. Customer development, technology, product management, design, go-to-market, sales, partnerships, and others. One of the sprints we also run is called the “Operating plan” sprint. I instituted this after the first cohort, when I learned that most investors did not care so much about the “demo day pitch” as much as what the company was going to do with their investment for the next 12-18 months.

So, I put together an operating plan template. Think of this as your blueprint for execution. It would spell out what you were going to do to hire, sell, develop, fund and grow your startup. I put together a template as well to help the companies think through the plan.

It stems from your top level goal first, which depending on your stage could be – get product shipped, get customers to use it, increase usage, drive sales, increase revenue, etc. The only constraint I put was to ensure that you had one goal only. Not 3 or 5, just one.

Then you want to tie in various parts of your company to achieve that one goal.

If you had to hire engineers to build product, then that needed to be spelled out. If that then requires funding, you need to spell that out as well and so on.

So each operating plan will end up having 7-9 sub “plans” for product, development, hiring, sales, marketing, funding, etc.

This planning cycle begins in the 3rd month of our program and lasts 2-3 weeks for the entrepreneurs. During this time, many entrepreneurs are busy trying to get funding and meet investors, which means they tend to have little time for “all this other planning stuff”.

Which makes for a perfect experiment with a control group and a treatment group.

In the last 5 cohorts, I have asked and then politely urged all the entrepreneurs to participate actively in the operating plan sprint. But 50% of the cohort would get another 30 min pep talk from me on its importance.

I’d urge them over a lunch or coffee the importance of doing the plan.

I would not discourage the others from doing it, but the other group I did not spend the 30 minutes with on taking the operating plan seriously. Some of them took it seriously without my urging and cajoling and most ignored it.

Now that I have the data for 3 years, I can confidently tell you that just the act of putting together an operating plan – however poor it is, increases your chances of funding and raises valuation.

I went back to the data to look for my own biases and see if the ones that I urged were “somehow better suited to raise funding and be successful regardless of my urging” anyway, and I think I have no way to really check that at all, but I am confident that the sampling error, if any, was minimal.

Of the companies that I did the extra selling to, 69% of them raised funding within 6 months of the accelerator, compared to 31% who did not.

Even the companies that took the operating plan seriously and put what I consider a poor plan, beat the ones that did not take the operating plan seriously at all by a margin of 20 basis points.

I totally understand that funding is a weak (and only one) measure of achievement (and not of success), but I also realize that it is the metric most entrepreneurs judge an accelerator by.

So, the bottom-line is this.

If you want to achieve any form of success, creating an operating (or business) plan, even if it is poor, is better than not having one at all.

Should you go for high quality or high quantity of users before your seed round?

I get this question fairly frequently from folks applying to the accelerator. Usually this comes from a team of 2-3 developers who have built an app and are looking to either a) raise a seed round or b) apply to an accelerator.

The question is a very difficult one to answer and requires a lot of context and specific knowledge about the problem the company is trying to solve.

Lets take an example. You have built a consumer mobile application, and have had the app out for about 1-3 months, and have “organically” grown your user base, with word-of-mouth or referrals. The question is what are “investors” looking for in terms of traction? Lots of users – meaning thousands of downloads and many active users? Or engagement – meaning a high rate of your “atomic unit” usage?

Or in other words should you spend your effort, trying to get more users or to get your current users to use the product more?

A similar example is one around many free users for a SaaS service vs. few paying users but relatively high usage.

The easiest answer is both. The best products and startups get many users and lots of usage.

The more nuanced answer is that it is dependent on what is tougher. Investors (Accelerators in this case, I assume, are investors as well), look for one very tough problem that has been solved by you as a metric for your future success.

That means, if they believe it will be harder for you to scale up the number of users (based on your app) then they would want empirical data to prove that you have cracked that problem. If, however, they believe that your solution has a harder “retention” rate, like a Twitter – (where signup is easy, but getting users to understand and use the product is harder), then they’d expect you to have solved that problem.

Either ways, they are looking for you to have a good answer and some initial experiments on how you will solve the other part of the problem you have not been able to crack.

So, leaves us with the question – What should you do about it? Lets say you have runway for about 3-6 months before you have to raise a round of funding. What should you prioritize between now and than time when you run out of funds?

How do you determine which problem is tougher? Getting lots of users or getting more usage?

This answer depends on your (eventual) monetization technique.

At steady state, you will make money from having lots of users doing the “atomic unit” action more often.

For the initial stage, though, investors (and you) should be looking for the easiest route to monetization and how you can scale that route faster.

So, if you will make more money from lots of users (e.g. social network) then that is tougher. If however, you will make more money by getting few users to use it more (e.g. in-app purchases), then that is tougher.

#Biotech park in Bangalore

Quick note. I was invited to the Biotech park launch in Bangalore yesterday. This is a 56 acre piece of land to help Biotech startups in Bangalore. There is significant money being spent by both the state and central governments (approx $8 Million) to help startups in Bangalore.

The talent pool from BioGen, NCBS, Instem and others in Bangalore is large enough to support 20-30 startups each year is the thinking in Bangalore.

The space walk through was a 3D video. It was really cool. Loved it. Photos coming soon.