Excess capacity

Each organization must have excess capacity to some extent. Examples are:

• if you are a store, you must have more items than a single item on the shelf per specific model
• If you are a manufacturer you need to be able to produce more than the steady flow of orders coming in
• If you are a consulting firm, you should have more consultants than the job at hand

The reasoning is straight forward - there are always some peaks in demand. Some due to market fluctuations, changes in taste, seasonality effects and some due to internal problems, shutdowns where recovery must be at faster speed than the normal one.

The picture below of the Twitter over capacity should not happen - this is bad for business

 

 

I am not delving into the question of how much excess capacity one needs. Let's use the rule of thumb of around 20%.

So far, all is logical. The question then becomes what to do with this excess capacity when it is not needed - this is the normal day to day life.

If the excess capacity is cheap then no one cares - it can sit idle. However, if this is expensive, then it better yield some results. I used to consult to a large steel manufacturer, and believe me the furnace does not stop its production for many good reasons.

A typical mistake is to keep all our resources simply busy since "idle is a waste." Without going into too many details, this is a grave mistake since it just builds inventory, wastes cash and consumes management attention.

The solution is to work on something that can

1. Bring in money
2. Resources can be available again on a very short notice or this cannot be called "excess capacity"
3. Does not tamper with the regular sales

One model I know of is Electric power. Power stations must have such excess capacity. They sell this capacity at a cheaper price and in order not to bring their regular price down it comes with a condition that they can disconnect this electricity immediately.

Today, I saw a very nice model at Amazon Elastic Compute Cloud . They definitely have excess capacity. The way they handle it is to sell what they call Spot Instances.


Spot Instance means that people bid on computation units. When amazon has spare capacity it brings the price down, when it starts running out of regular capacity, it brings the price up. As long as your bid is above the price you own the computation unit and when it is lower than the price your computation stops. Not only that, Amazon segments the price beautifully by letting people compete due to the bidding process.

This is brilliant and it serves real market needs. For example, suppose you are a researcher that just needs much computation, you care much about your cash and you could not care less when your computation happens, you can bid low and wait.

Think of your company, and think how to really utilize your excess capacity.

Amir

Futile actions - are they so futile?

Many times, we avoid taking an action because we think that the result has very little chance of success

If the success of the action brings very little benefit, I do understand and accept this reason. However, I do believe that even if the success of the action will bring huge benefits, still most of us will not take the action.

Why is that?

I think that we have a built-in protective mechanism. The former causes of not taking the action where lame excuses. The real reason is that we believe that our action will embarrass us if it does not succeed. Or in other words - people will consider us as IDIOTS.

The funny thing is that when other people do try such actions, we think these people are brave (even if they fail).

I want to tell you an anecdote I was involved lately:


I was trying to contact a company in my line of business. The company is located in South Carolina. I do not know anyone there and I wish not make a cold call. I was trying to think who I knew in SC and then I remembered. A friend and a former client of mine lives in there. His name is Tommy.

I sent Tommy a short mail in the following ironic spirit "Hi Tommy, I know SC is a very small village having only 20 people but is it possible you know company X?"

This was definitely against all odds. The population in SC is about 4.5 Million. I was not really expecting Tommy to know anyone and I was willing to "suffer" if Tommy shoots me an email back with "are you crazy?"

The answer came 15 minutes later. Tommy buzzed me back and said "I know their founder, we were in the fraternity together, do you want a warm introduction?"


I encourage you all to avoid the erroneous assumption of what will people think of you and try more actions even if their chance of success is slim.

And for the Star Trek fans - It is good that Jean-Luc Picard decided to resist the Borg even though it was clear that "resistance is futile"

Amir

Correlation or cause & effect

Many people confuse between effects and their causes

I read a great anecdote about it in a book called Freakonomics by Steven Levitt - the story was about a study that found a high correlation between the number of books a kid has at home and his performance level at school. In short, the more books the kids had the better he succeeded at school.

No wonder that the education system wanted to invest in a project where it provides every month a new book to all the kids at school. The reason was - if more books means higher success, then we should get the children more books.

It is obvious that people are confused between correlation and cause-effect.

The cause of the success in studies may or may not have anything with the amount of books. Maybe smarter kids tend to read more books? or maybe it has to do with the educational values of the parents at home? Do you really think that if you take a bad student and give him 100 new books he will suddenly become a good student? of course not!

The episode ends when the author explains that in this city someone got his senses back before investing several million of dollars for this misunderstandings.

As a business you must understand cause and effect. If you do not, it will be very difficult to understand why you succeed or why you fail.

When you get success a signal you should be able to understand its cause and enhance it and when you get a failure signal you need to avoid the same mistake again. It is easier said than done though and you must be very careful or next you will be the one with an anecdote like the book-success correlation.


Regards,
Amir

Rituals

About a month ago, I attended a lecture presented by one of my running colleagues. The lecture was not about running at all. It was about something called Rituals and it was very interesting so I decided to share me learning with you.

A ritual is defined as a “series of actions that transform from one emotional state to another.”  A ritual is different from both a habit and a routine (which do not change the emotional state of the person)

Researchers identified 5 main rituals for almost any person during the day

1. Preparing for battle - what we do in the morning before going to work, including cleaning, fueling with food, getting intel (reading papers), etc.
2. Sexing up - preparing for a date
3. Social gathering - typically lunch or dinner together. Each person brings something to the table, such as food, or conversation or news.
4. Returning to Camp - coming home after work, slipping to something more comfortable, relaxing
5. Locking down - closing the house, putting the alarm on, covering the kids.

You can see a nice video of how a New Zealand Rugby team war dance of preparing for game ritual at http://www.youtube.com/watch?v=JqnimvUMCAk

The interesting thing is that if you have a consumer product which fits into a ritual, it has a better chance to work. If it conflicts with a ritual, it stands a very little chance.

Example: When the provider of Aspirin found out that during closing down, people tend to take a glass of water near the bed it was easy to build a campaign of taking the pill with it. It was much more effective than convincing people to take it in the morning.

One of my business mistakes about my latest product, was to try and convince parents to invest time and writing a story with their kid after going back home. Naturally it conflicts with their need of returning to camp. However, we twisted our message and our product to fit this ritual. Now are tell  parents how to have fun with their kid while they are literally investing almost zero time, the kid is off their neck, and they get quality time - This fits the ritual much better.

Think about it,
Amir

Cursing and annoying users - Who wants them anyway?

Consider this situation - A user writes you a short email saying:

"you mother f....., your system has just crashed. What the hell are you thinking to yourselves? who is the idiot that built this product and where is your support when I need them? Are they out for lunch or something?"

Most people I know will be very annoyed by this users. Some will not even bother to answer. Who wants to have such users? It is clear that they hate us. Why invest time in them besides the minimum?

Now consider another email:

"Dear support,

I love your product very much. Unfortunately, today at 1:00PM your website crashed and I could not save my work which greatly affected my doings. I appreciate very much if you could tell me when you fix it, what was the problem and how you are going to prevent it in the future to allow me to continue my work.

Regards,

Danny"

You love this kind of response, don't you? This is clearly a user that needs you and your product. He reports pretty much accurately of the problem and wishes to continue using the product. You are very likely to answer him in length, apologize. Hey you will probably offer him a compensation.

Why do we tend to like so much the second user and be disgusted with the first one?

The only major difference between these two emails is the attitude of the users. Clearly the first user is very negative while the second user isn't. So, we react to a user's negativity with our own negativity. Is this the right way for a company? YOU KNOW BETTER THAN THAT

Try to think of it from a different angle and put your feelings aside -

• Is it possible that the first user is much more passionate about your product?
• Could it be that he was so immersed in his work that actually his suffer is a great one?
• If the user did not care at all, would he invest any time in sending you email and cursing your mother?

What we should understand is that we got a a great response.We have a user that cares enough to contact us. We should do our best to try understanding this user, his need, and keep him happy.

Do not let your feelings and people's negativity affect the way you are doing business and remember

Complaining users are good ones!

Another good moral from this is to understand that when you are a user of a system, and you wish to report a problem, you better do so in such a way that will not block mentally the other side. If you curse, you are much less likely to get a response - The other party is less likely to understand your emotional state. Therefore, breath, count to 10, and write positively, yet accurately to provoke the positive response you wish for.

Now, I shall finish, but I do not know whether to say a nice good bye or start cursing because I do value my readers :)

Have a great week
Amir

Google and Facebook - a new approach to market research

Everyone knows that market research is a necessary step before launching a new product. Otherwise you are simply guessing whether your market really needs your product or not

Today conducting a research is not that difficult nor very expensive; you do not have to be a professional in performing a survey to identify a go/no go signal. You simply have to follow some basic guidelines such as "do not try to bias the answers to where you want them to be", etc. You can see how much traction Survey Monkey receives to see how mainstream market research has become.

However, when you are building something new, something that your target consumer has never seen before, the questions you are asking are not likely to get the right answer. How can we expect someone to answer something h/she cannot visualize or experiment?

Alternatively, when you are coping with a need that has both physical barriers as well as  psychological ones. If you ask "suppose I take all the physical barriers, will you use my product?" You are likely to get a very positive response (if not, do not build the product!). But even if you do, the survey will not address the psychological barriers, only reality will reveal them.

So what can you do?

• Should you build a product without doing a research?
• Should you do a research with the artificial thinking you are safe?

I suggest a somewhat different approach. You use Google or Facebook. These are platforms that allow you to put an ad and target it to a very segmented target groups.

What you do is:

1. Mock up website that offers your product
2. Apologize in the end of the text for not being ready, or say "coming soon"
3. Put an ad to this product and choose your target market
4. Allocate a small budget that allows you to see in reality if people are clicking your ad. Since a cost per click is on average between 1-3 dollars and 50 people forms a nice sample, this is a very small budget
5. Monitor like a hawk the ad impressions to actual click conversion and time spent on your home page. Now you know if people wish at least to see what you offer. This is a real signal.

You might want that this mock-up website will be under a totally different name than the real one you will build, in order not to harm your brand when you build it

Bottom line,
Try to check reality as much as you can. Checking actual behavior is much better than asking hypothetical questions, and it does not cost that much.

This is probably not what Google and Facebook have in mind, but hey, this is a great use to their platform

Amir

Networking - being shy does not help

I attended the Garage Geeks this Thursday. I wanted to share the experience and some of my personal learning.

The guy on the top left is me

Mingling is not be core competency (this is a huge understatement). This is why I choose carefully the conferences and exhibitions I go to. When I attend an event, I typically listen or try to find only relevant persons to talk to, do my thing and vanish quickly.

Two things happened to me this week that changed it in the Garage Geeks

The first one is that I heard Yossi Vardi speaking with a tech-crunch interviewer about conferences. He said that he goes to many of them to meet people and this is not less important than the agenda of the conference. I thought to myself, "well, I will try to be less shy this time"

The second thing is pure luck. I had to buy a medicine for my kid at a specific pharmacy close to the place where the even took place. The event was scheduled to 8:30PM, but I was there before 7:00PM since  pharmacies are closing at 7:00PM.

The result was that I was the first person to arrive to the site. Since I had to make myself useful I offered my help in organizing the place and a nice conversation started to take place.

It was still early, and the stream of people arriving was thin, so it was easy to start discussions with new people that arrive. As a result I was really able to speak with tens of people. I spoke about my start-up, asked for new ideas, directions, connection, etc. AND, people really like to help.

I met people that I wanted to meet for a long time and had no idea how to connect with. With one of them I started to talk since he blocked my way to the pizza and he "had to" hand me one :)

Finally, the event was great and insightful. I've already started testing a social aspect to my product.

To those of you who have not been in Garage Geeks, you should really go.

The conclusion is simple. Don't close in a shell. Go out and meet people. You never know where the lead/direction/connection you need will come from. You can also provide a useful advice to another person that needs it.

Don't take yourself too seriously.

Amir

Dutch restaurants - very nice, very efficient, very ineffective

I have just came from from Amsterdam where I ran half a marathon.

What a beautiful city - canals, boats, old buildings, good food, very nice and friendly people, clean. What more can a person want?

However, being there made me aware once again on the on the difference between effective and efficient.

So much has been written on this point and I wish not to repeat it. I do wish to share with you some experiences I had, mainly in restaurants to demonstrate some of the funny points.

At a typical dining place such as small cafes the waiter also prepares the food, handles the register, arranges the inventory, etc. The waiters are very diligent. They are very hard working, so they also try to keep a small staff.

This comes at a great cost that no one seems to care or even notice: customers are waiting for a long time for their food. It is funny to see that when there is a chore, the waiter will do it first. They will clean the next table or place bottles on the bar, but won't bring a menu.

This means that

• Less customers are dining
• Frustrated customers (such as myself) are leaving. I left a very nice pancakes place after I sat for 15 minutes without even getting a menu

These are very efficient people and very in-effective ones

I did find effectiveness though. This was at the market. You should see the guy that serves herring in a bun or the guy who is making fresh Waffles (the best ones I had). They are super fast and customer oriented

In short, I enjoyed my time and came with nice anecdotes

Best,
Amir

Paradigm shifts and moats

In my last post I discussed the issue of competitive edge, taking one factor to an extreme point while keeping the rest at par with market needs. I also started to discuss how to relate to competitors copying your changes and the fact that creating a long term competitive edge for a technology firm is very difficult. In the end of my post, I started to explain that if you are doing something that relates to another dimension such as service or logistics and if the change you embark on will be considered by your competitors as pure madness, they will not rush so fast to try to imitate it.

In this post, I would like to continue discussing this issue and I think that instead of delving into abstract theory, I should use an example.

Take a company that offers outsource solutions such as software projects. It is known in the industry that a software project rarely is on time or on budget, it is difficult to control, the client wishes for late modifications, specifications change, and so on.

In many cases, being late has a severe consequences on the business such as losing potential income, or letting competitors be in the market before you.

Now, suppose this company will offer to be always on time, every time and inviting their clients to change specification as many times as they wish.

Suppose the company will offer this to the market and say that it is so confident that it will deliver on its promise and hence for any day it is late, it will pay 1% of the project's value. (a week delay is 7%, 2 weeks delay is 14%, etc.) Lets assume that a typical project is 9 months, and competitors are typically late by several months, this is a huge penalty.

Naturally, competitors will think this is a bluff. But it isn't. There is a way of managing projects in such a way and also be able to finish them much ahead of time. The method is called critical chain and I wish not to explain it in this post. I may do so in another post

The thing is that such a method changes drastically the way the company operates. It is a different philosophy of managing projects and much of it is not in line with what people are used to do. Competitors will not rush to take this route, it is not intuitive to them.

In addition, it is a different way of selling and marketing. This means that a competitor that wishes to copy this, needs to make several paradigm shifts. Now this is real barrier, I would dare to say this is a moat.

The bottom line is that we need to seek how to create an edge not just by having a unique product feature, but also in other aspects of the business such as supply chain management, managing projects, etc. These changes should be paradigm shifts that no one will dare to mimic until it is too late for them. By then, you have won the battle

Best,
Amir

When the tail is bigger than the dog - Creating a competitive edge

When building a start-up or good marketing plan even for a mature company it is important to ask "what separates you from the herd?" 

It is true, and I will be the first to admit it that when a company is a small fish in a big pond, this question does not really matter since the pool is big enough for many fish. However, if you want to become a big fish and you have no real advantage over your competitors, this task is almost impossible. This is why most venture capitals will insist on you having an edge.

There are many names to such an advantage. Warren Buffet calls it moat. Jack Welsh used to instruct GE to go out from all markets where they cannot be #1 or #2. Andy Grove called it the 10x factor.

But this is easier said than done. How can you create such a huge advantage that is not easy for a competitor to overcome and imitate quickly?

In a great book called "Blue Ocean Strategy" the authors suggest to categorize the product features and then take one or few of them to the extreme while keeping the other features more or less at par with the competition (or even decrease them if the market thinks that they are not no important). By taking one factor to the extreme they open a new market with zero competition, no sharks and no blood - a blue ocean.

There were many interesting examples such as gyms for women only, or a Golf club with an over sized club head where any amateur who never thought s/he can hit this small ball, is now able to.

The chart below shows how a wine company analyzed its product comparing to other wine makers. they decided that people are too confused about wine. Wines are focused on the winery brand, age, barrel, grapes, wide wine selection, etc. Yellow Tail surveyed many potential users (including ones who do not drink wine) and recognized that many people were looking for a simple wine for fun and adventure (kind of a red bull drink). Many people want an easy selection and they could not care less which winery makes it and how aged the wine is. They went for it full force. Read the book to see how they did.

When I come to think of it, the oldest famous example I know of, is how the Japanese car manufacturers took the market by offering simple family cars, but a supreme quality.

The problem with technology based companies is that it is difficult to create a long term barrier unless you are clearly developing something so complex and full of patents (say a rocket). Most companies do not have such a luxury and any feature they build into the product, their competitors can imitate within months. No wonder that Warren buffet said that he "does not understand how to invest in technology firms." It is obvious that he DOES understand it better than most of us. He means that there are no moats!

What companies can do is not to use the product but to provide a logistical service which is superior and which their competitors consider as total lunatic/impossible. If we take quality as an example, then if it comes with a 10 years guarantee as opposed to 1 year by the competitors, now we are talking. Competitors will not rush so fast to offer it. It is obvious that such an offer must be backed up and never (or very rarely) be paid, because if not, you will lose all your business due to: 1) you cannot afford to pay so much and 2) your users will grasp your guarantee as a fraud.

Other offers might be:

1. Offering an "always on time" service where the competitors are pretty much late. Suppose you are an outsource firm that does software projects. It is known that projects are never on time/budget. What if you commit to your promise and put a hefty late charge on each date you are late? What will be the market response? (how to do that is a different question)
2. Offering an ultra quick service where the market is slow to respond. See how fast DELL can send you a PC to your home based on your personal configuration. I think that no one except DELL can do that. This requires something ultra special of managing their supply chain.

Taking one factor which the market really needs to the extreme creates an edge, taking a factor that competitors think is impossible or idiotic to offer, creates a long term decisive competitive edge.

This like enlarging the tail of a dog until the tail is waving the dog instead of the dog waving his tail.

In my next post, I will discuss this issue further and speak of a paradigm shift, how frightening it is, and how to use it to your advantage in creating a decisive competitive edge.


Best,
Amir

Hypothesis - proove or refute

Most entrepreneurs (myself included) fall in love with their innovation. Yes, we are good at telling ourselves that we are objective, but be honest, we are "slightly" biased.

So, how can we know if we are on the right track, or the on the wrong one?

Well, the starting point is clear, we come with a hypothesis such as

• Our product does A, B, and C
• Our product is good for people that have pains X, Y, Z

Then we go to test our hypothesis


And then we fall

What do I mean by fall?
I mean that it takes us too long (months and sometimes even years) to understand that we are in the wrong direction, either we miss something in the product, or we are not answering a real pain. The lucky ones are able to do the necessary modification. The not-so-lucky-ones are doomed.

Have you ever thought "Why it takes us so long to see a mistake, which in retrospect seems so obvious?"

I found the answer in the book called "The black swan" (I think it is an excellent book). The author explains that as human beings, we are conditioned to seek for positive signs to prove our theories. Since, in most cases, it is easy to find some positive indications why our hypothesis still holds, we will not let it go so easily.

There is another way!
Instead (or in addition to) finding positive indications, we can look for an indication that if found, the hypothesis cannot be valid anymore. This is very difficult though, we are not used to think this way.

I know this is kind of blurry, so let me give you an example:
Suppose you assume you have a market X
Put a test where you invite your users and enhance artificially their incentive to use your product. Now if they still are not using it, then you know that this is not your market. The user does not want you

We have to learn the truth very early, we have to try and KILL our hypothesis and continue to modify it until it survives. Then we know we have something good

There is a scientific way of planning such predicted effects experiments. I might shed more light on this in another post, should you find this subject interesting

Check yourself and write me
Amir

Cash flow

Think of your natural response for the following question -
You need to have a new server to your start-up and you have two options:

1. Buy a server for $2400
2. Rent a server for $200 a month

Which option will you choose?

Most people I know will use the following calculation:
After one year the "rent" option will be more expensive than the "buy" option. Since a server typically can be of service for 3 years without any technical problems, it would be best to buy it. The alternative is clearly flushing money down the drain.

Makes sense, doesn't it?

My answer would be different though. I would also consider my budget and mainly my cash flow. The reason is simple: a start-up typically has a very modest budget. During it's very early stage, the budget might be only tens of thousands. For the sake of the discussion, let's assume it is $50,000.

Now, do you still think it is obvious to spend in one shot almost 5% of your budget for a server? Are you so confident you have more than one year to enjoy it's benefits and the money you think you will save? What about other needs you have which you need money for? What if during this year you will find out that you need a different server?

When a company has a negative cash flow and unless it has much money in the bank to compensate for it for a very long time, cash flow is the #1 consideration when you manage your budget. Savings for the long run is much less important.

I would like to give you more examples of typical mistakes

• Renting space - taking a long duration commitment (say 2 years) in order to save money per month.
• Choosing a wrong credit card processor to save 1% per transaction but having to deposit and secure money in bank as an insurance.
• Hiring a new employee when you can surely manage with an outsource solution (such as QA)

It is painful sometimes since you know you pay more than you should but this is exactly what you should do

Manage well,
Amir

The Venture Capital big Mistake - seek a huge exit

In one of my former posts I mentioned a mistake that in my opinion most of the venture capitals (VCs) are making and I promised to elaborate on it.

A big VC typically has much money to invest. The money is not correlated to the VC personnel. Suppose that a VC manages 100 million and has 5 partners. A much larger VC, that manages 500 million will not have 25 partners, but probably also 5 or slightly more.

A VC requires a seat or two in the board of the companies they invest in.

Now lets make some more assumptions and do some math

• VC has 5 partners
• A partner has an attention span for about 5 companies
• the VC requires only a single seat (A very conservative assumption)
• Therefore, the VC can support effectively 25 investments

For a small VC of 100 milllion it means an average investment of 4 million.
For a medium-large VC of 500 milllion it means an average investment of 20 million.

This is no wonder that a VC seeks for the next big thing. Even if they are fully aware that no one can identify upfront what the next big thing is. This is a high risk game.

Due to the high risk, the VC knows that most of their investments will fail.  In most cases, even the investments that succeed are not sufficient to cover for the ones that failed, unless the VC is very lucky. טes, luck is a huge factor here.

To cover for most loses and make money in this game, the VC must do at least 10 times on their money and they seek much much more since they want a high return. Lets assume that a typical investment provides the VC 25%-35% of the company and lets even assume that the VC share will not be diluted (yes, I know that this is rarely the case).

This means that if a VC makes a 4 million investment, gets 25% of the company and seeks a "modest" factor of 15 for their money, the exit should be about about 240 million. For a 20 million investment the exit should be almost 1 billion dollar.

There is another factor that serves as an expediter. Most VCs expect a return on their investment in 5-7 years. So, not only they seek the next big thing, they wish to have make it ultra quick.

During the crazy bubble years, when companies were sold for huge ridiculous sums and companies making a loss could have an IPO, this model worked just fine. However, when the economy does not allow it anymore, reality smashes back.

It is no wonder that we see that VCs are not surviving, and the ones that still exist raise very little new capital.

There are two extremes that will flourish though. The first one is the VC with a very specfific expertise in a specififc market and where their partners are very well connected. These VCs provide a real advantage to their portfolio. These VCs are rare, but they exist.

The other VCs are the new ones, called micro VCs. They avoid the problem by being small (say 5-20 million) and investing much smaller sums. They do not seek a huge return but a healthy one.

The wierd thing in my eyes is that a good model does exist and yet I have not heard on VCs that endorses it. To me an adequate model is:

1. Invest smaller amounts in healthier companies.
2. A healthy company chance of succeeding and providing a nice return on investment is not too bad
3. Since most companies now succeed, there is no need to ask for a huge return of investment to cover for loses
4. In addition, a healthier company requires much less VCs attention so the VC management can control many more investments and have an even broader portfolio
5. This create a very positive cycle of investments

It would be interesting to see what will happen in the next two years. I expect the VC world to be a different one.

Amir

Theory of Constraints (TOC) for start-ups

Today I wish to share an external post of my coach and mentor for the last 7 years: Dr. Eli Goldratt.

Recently, Eli has opened a TV channel called TOC.tv where he shares much of his knowledge with the world. Most of the webcasts are related to operations, distribution, strategy, sales & marketing of business that have "physical" products. However, one webcast is related to .... start-ups and moreover to technological ones.

I am not new to this and I still find great merit in hearing it again and again. I hope you will too.

The link to the webcast is:
https://www.toc-goldratt.com/TV/video.php?id=419&type=2

It might take some time to upload, so practice patience :)

Should you seek more knowledge about necessary but not sufficient, you can find the book in amazon and you can also write me questions and I will try to provide more information from what I have learned myself.

Happy New (Jewish) Year
Amir

A big company or a healthy one?

Many start-ups I know (including my first one), and mainly the ones who need to raise capital from VCs are saying something like:

• Our optimistic scenario - we are the next Google
• Our pessimistic scenario - the revenues are at least 100M USD
• Our realistic scenario - we make several hundreds of millions

The funny thing is that if they don't say it, they will never get the required capital. VCs are looking for the next big thing (one of their gravest mistake in my opinion but this is an issue for another post).

It is obvious that this message is a pure crap (pardon my language). No one know what the next big thing is. In most cases, it is more a matter of luck rather than anything else.

I attended a conference several months ago and I heard a lecture from Mr. Aaron Mankovski (chairman of the Israeli VCs) where he mentioned some interesting statistics. Aaron said that in the last couple of years, in order to have an IPO, a company needed to demonstrate revenues of about 150 million dollars. Aaron said that he checked how many Israeli companies succeeded reaching this goad during the last 30 years and the answer was merely 28 companies.

Once a company broadcasts such a message (internally and externally), it needs to try to deliver. This means that a company is likely to build a solution which is not geared for a specific vertical market (hey, the vertical is too narrow for us) or lie to itself and claim that it builds a generic platform that can serve many verticals, but it will start with only one. As logical as it sounds (I assume many know by heart the "crossing the chasm") it is very difficult to plan a platform rather than a specific solution.

I am not saying, that there are no big companies that had a huge goal to begin with and made it through. I simply claim that this is not the typical case. In most cases, start-up ideas are nice and cool. These ideas have a pretty nice market of few to tens of million of dollars. The team should not be so big, and the marketing budget can be modest. Therefore, the capital raised can be significantly smaller. The company will be focused on a single market and the company is much more likely to MAKE money and grows in an evolutionary natural manner.

This is a healthy company which is a good thing for the founders, the shareholders and the employees.

This also means that the odds to success are much higher. Sadly, many companies that had a potential aimed much higher and failed.

Don't optimize at first

There a tendency among technology oriented start-ups to do things the right way. How many of view hear the following:

• We must build infrastructure first.
• We cannot rely on existing products. They won't fit our needs.
• We cannot show clients half-baked products.

Such arguments are neither true nor false. They depend on the situation. If a company is a mature one.and knows its market and how the product serves its clients, then the claim is correct. For example: If the product needs to serve millions of users and there is no infrastructure ready on time, then the company will fail to provide an adequate service. However, if the company is young, it is very dangerous to build an infrastructure or tailor the product to an unknown need. It means losing precious time and gambling on technology.

When I founded my first company more than 10 years ago, my partner an I invented a way to handle an online event where a huge audience can attend. One example is a chat with million of people ( we had a discussion with CNN or having our platform during Larry King). Another example was a auditorium with a teacher and many students capable of asking questions during the lesson (not just a few question). The conceptual problem was how to allow any person to interact without generating so much noise that interferes with anyone. Think of a chat room with 25 people and you see how much noise reside there. Can you imaging what happens when numbers scale up? Well, we found a way.

We were thrilled, our team started build the large-group interaction platform and its GUI. We thought we can isolate the infrastructure and the GUI core components even if the market will change. We planned for the long horizon. Boy, we were so wrong.

• We spend so much time on the wrong things so we had no time to really invest it other features that were basic (i.e. all competitors have them).
• The market changed. Instead of education, we went to online presentations and then to market research. After seeing the real market, the product had to change and also the infrastructure had to adjust.
• The funny thing (or sad thing) was that we could not even reach our technology goals. We spent much precious time and energy realizing that. So instead millions we went in the end for less than a thousand. Turned out that this was OK. No one wanted millions of users.

The lesson is: In the beginning, you can cut corners, use third party solutions, use less than perfect GUI. Don't try to plan the perfect system. Rather, reach your potential users and clients and show them what you have. They love it when you talk to them. If you bring enough value they will also accept a half-baked product. After that, learn what they need and what your product really is. Only then plan carefully your long run.

I know it sounds obvious. Yet, look around and see how many fall into this trap.

Amir

Are quality and price in conflict?

Most people that I know truly believe that in order to get a high quality service, one must pay a lot of money. Think if the following arguments ring a bell:

• The lawyer rips my skin off
• The graphic studio is expensive
• I need to invest much in good infrastructure

I bet that you have many more points like the ones above.

My experience proves that there are many hidden erroneous assumptions behind these arguments. For example, it is true that for a merger deal one needs a top notch law firm which is expensive and it is worthy of the money. But is it true in all cases you have? Probably your needs as a start-up are somewhat easier.

I will give a personal example of a friend of mine. He needed to phrase a user agreement and privacy policy for his website that involves some copyright issues. The offer he received from a good law firm was several thousands USD. He decided to try finding an expert that works on-line and get another proposal.

He used Guru.com and elance.com to seek for a professional lawyer in this field. One who is rated high by others. It is obvious he found one and paid about 1/10 of the proposal of the law firm without compromising on the quality. This lawyer does not need an office in downtown where the rental fee is sky rocketing and he does not need apprentices, a secretary, a big decorated meeting room, and so on. Of course he charges much less and make a nice margin as well.

Another example for graphics. A different friend of mine needed some cool flash animation clips for his marketing campaign. Instead of going to an expensive graphic studio. He hired a student from one of the best art schools that majors in animations during his summer vacation and paid much less. The student was very happy and my friend was very happy as well.

Regarding software and hardware - check used products or models which are not the latest ones. In my former company we bought new routers in perfect conditions.

The morale is: think outside the box. It is very easy to spend a lot of money since it seems normal and sometimes it is indeed necessary. However, as a start-up you must control your budget and find creative ways to put a better use for your money

Feel free to write comments with more ideas and experiences you had.

Fueling along the way

My last post was about the analogy between long distance running and building a start-up company. I wanted to continue discussing this analogy. If you find the analogy boring, please write a comment or email me and I will switch to another subject.

During a run, the runner loses much water. Therefore in long runs the runner must at least drink water.

This is me 1.5 years ago after going below 50 minutes in a 10K run

Alas, Drinking water is not enough. The runner also uses lots of carbs. Without available carbs, it is more difficult to run and not less important, it is more difficult to recover after the run. Add to that that during hot days where one sweats a lot, the runner loses both water and minerals (salts). Therefore if the runner drinks only water, the percentage of minerals in the body continues to decline (This is why an IV contains both water and salts)

The rule of thumb is: if your run is above 70 minutes, drink water and eat something during the run. Some eat bananas, or baked potatoes. Some take energy bar or liquid gels or even isotonic drinks (I won't share with you how the last two  taste :) )


Why is this relevant?
Building a start-up company is a very long distance run (no one even knows how long). You might be lucky and reach the finish line with sufficient energy and you might not be so lucky. Therefore, you must get new energy once in a while.

An energy can be in several forms

1. Money - Bring more money in. Either as revenues (best way) or as additional investments.
2. People morale - don't only have a single far away milestone - your exit. Get concrete smaller milestones. Some of them monetary (e.g. getting the first dollar), some of them are softer (e.g. launching a product, getting the first user). Make sure to celebrate them.

It is obvious that it is important to be efficient in consuming your existing energy, but no matter how effective you are, you must fuel once in a while and you need to plan the route where the gas stations are

By the way, you can follow me on twitter @a_weisen

Pace yourself

This is the third and final episode in the long-distance running series.

As many of you may well know, there are two types of physical exercises : aerobic and anaerobic. When the runner conducts an aerobic exercise, the pace is moderate and the body can endure it for a long time. When the runner conducts an anaerobic exercise, s/he can run much faster, but there are side effects such as lactic acid in the blood stream. Without trying to go for a full metabolic explanation, if there is too much lactic acid above a certain threshold (called the lactate threshold), the body will be forced to a halt after a period of time.

This chart shows how my lactic acid changes while I increase my speed.
Note that in 12Km/h the trajectory starts to sharply incline. This is the threshold

In short runs such as 100 meters there is no problem, the runner sprints and finishes. However, in long distance runs, the runner must plan the run carefully. If the runner runs too slow, s/he loses precious time, and if the runner runs too fast, above the lactate threshold, then s/he will not be able to finish the run.

The tactic for most runners is to learn where their threshold is and run slightly below this threshold most of the run (everyone sprints in the end).

The relevancy for a start-up is pretty straight forward. I saw companies starting too fast with a lot of energy. If they get funding they burn it very fast  and then they may perish. The lucky ones get another round of funding or a bridge loan and ... they burn it again. Saying that, I also saw companies doing the complete opposite, advancing like snails in the grass and never get anywhere.

I admit it is difficult to judge in real-time whether you are slightly slow or slightly fast then the optimal pace. An  athlete can go to a lab and test his lactate threshold. The entrepreneur cannot really measure the optimal pace. However, the entrepreneur can identify the extremes and make sure not to be in either one of them. S/he can make comparisons versus the speed of competitors. S/he can compare product time lines against to other projects, etc.

The company should use its budget wisely and make sure it is advancing. I suggest setting milestones which are not trivial ones (or even better, challenging ones), plan the budget for the long run and not spend it all on the first several milestones since the path is long and bumpy.

If you like more running episodes, do tell.

Feel free to twit me @a_weisen

Long distance running and start-ups

I've just finished a run of 18K as part of my training for half marathons. This made me recall the analogy between long runs and start-ups and I wanted to share with you my point of view.

Let me describe the run first - It is very hot and humid in Israel during the summer. Even though I started the run  when the sun rose, the average temperature is almost 30 degrees Celsius (86 Fahrenheit) and humidity is about 70 percent. I also ran on rolling hills. Once can say that these are not the perfect conditions.

Since I need to keep my heart rate on a certain level and since conditions are not too good, my running speed was slowed down. Mentally it is tougher since you tend to believe that your physical fitness is deteriorating. It is like "Hey, I used to run faster in the past and I ran longer distances, what is going on?" I know that it is the affects of the conditions, but still there is a mental barrier there.

Another "mental crisis" in the past was after two consecutive illnesses each of 2 weeks each in the winter. I did a half marathon and shortly after I got sick. After I recovered, I started again running 5K runs and then gradually increasing distances until several weeks after I was in shape again, I was happy for 2 days, and then I got sick again. This was a bummer.

It took much time and practice to understand that indeed, the physical fitness is improving, my body does get stronger, and I am able to recover faster comparing to former illnesses. However, I needed a yardstick and perspective of a really long time (years) to comprehend it while I had to be patient and continue to practice.

I think that the analogy to a start-up is pretty clear. Building a company is not a 100 meter race. The money you will be making is far far away. There are many ups and downs. However, if you keep on fighting, it will improve. It might take years, but you can get there.

Fight one battle at a time

It is late. It reminds me of the times I used to spend with Dr. Eli Goldratt at his home office while he tried to figure out ways to teach me how to build strategies for the companies he consulted to.

For those of you who do not who Eli Goldratt is - Eli is the founder of a theory called Theory of Constraints (TOC). Eli basically changed the manufacturing industry in the 80s. Then he moved into other fields such as distribution, project management, strategy, HR, holistic solutions and more (Google Goldratt for yourself to get more info). I was very fortunate to have him as a mentor and a close friend for many years.

One of the things he used to shove me in the head is that most of the times we are used to fight many fires, we get so busy doing so, and we think this is the normal way of doing business. Instead, Eli suggested to find the key issues that block the business and concentrate only on them one while subordinating the ENTIRE organization for the tasks at hand.

Why is this relevant to us?
Typically, in a start-up there are many challenges ahead, you need to make a product, you need to finance it, recruit people, mange them, market your product, find business partners, etc. I think you will all agree that the list is long and just grows. However, if you stop for a second and think of what really blocks you, you are likely to see that only very few items in the list are blocking you now. So, focus on these items and forget the rest. This will stop the crazy multi-tasking, prevent headaches of non relevant issues for the present, keeps everyone in sync on a clear and meaningful target.

I know you think – this is a triviality. Is it?
Make a list of what you are currently doing, I bet I am right in most of the cases. You can try checking these question to start with:

• Are your sales not picking up but you still continue to focus on your R&D?
• Are you going to be late again on your next product milestone, but you still have zillion of features which are not really necessary?
• How many projects are you running in parallel while not even trying to understand what bottom line value they carry for your business?

Overcoming an obstacle

Several months ago we launched our service. It took us more time than we wished for. Some of our competitors even emerged before we did, and when we launched the product in its beta version, you can imagine it was still in ... Beta :)

This was frustrating. We thought (or at least hoped) to be the first out there with our new and cool idea, and after so much investment, we were not the first and not even the second. Our product in the beginning was not good enough (difficult to admit it, but it is true). Sounds familiar?

The question then became, "what are we going to do next?"  will we fight or will we simply give up?

The methodical way to examine this question is not looking at the investment done, but to see if there is a potential future. We believed there was and we saluted to all our competitors since together we can increase the market awareness to our product and services. There is plenty of room to all of us.

We are now several months after and it starts to pay off. The product is becoming better and better. Users start to visit our website and write nice books and we get very excited reading these books. Feel free to check them at batalugu.com

Do not give up easily, this is the easy way. Nevertheless, if you think your future is totally blocked it would be stupid to bang your head against the wall.

Never say or think "I know"

Today I met a good friend of mine from my early days at my first start-up. I wanted his advice regarding how to conduct effective marketing using a modest budget.

He gave me a lot of good feedback (I will probably add on this in another post). The main point I wish to share is that while speaking to him, many mistakes that I have made (ones which I should have known) simply appeared on the table and in retrospect they were obvious. Luckily enough everything is easy to fix.

My main point is this:
Always check your doing with another person outside of your company. We all live in some kind of a box and we are all trapped in what we think we know. Many times we do know the answer, but it is always worthy to check and outsider opinion, even if s/he is not considered to be an expert