The New Deal

I've been out fundraising for my new company, Roundpegg for about five weeks now. I've met with a multitude of venture capitalists, angels, advisors, prospects, customers, and just about anyone with a pulse. A monster meeting schedule is par for the course at this point in the company's life. You constantly walk the line of meeting schedules vs. sufficient productivity to get the product built, demonstrable, deployable. Also par for the course has been VC response. We've done one west coast swing with Roundpegg and although we had a lot of interest, with comments like, "huge market", "it's unique; I haven't seen any other deals come through that are like it", "perfect timing for the market with this kind of company", the week after the VC partner meeting we've gotten the litany of soft no's typical of this stage.

• "You're too early stage. Keep us up to date."
• "If you were in the Bay Area we'd be interested. Have you thought about moving?"
• "Do you have a lead investor in Colorado? Is Foundry investing in you?"

These are radar meetings. Radar meetings are intended to get you onto the radar of the VC community, making them aware of you, and often resulting in a number of offshoot meetings with potential angel investors, partners, prospects, etc. It's always good to have the meetings early and not ask for the money. Ask for advice, ask for contacts, ask what the VC partner thinks about the market you're going into and whether they've seen deal flow recently in this space.

Something has changed in the process though. You can feel it at these meetings and in the attitudes of other entrepreneurs. With the majority of venture funds' portfolio companies still feeling the effects of the recession, venture funds have moved to the right--that is, to later stage investments. Any venture funds still in the early-stage game seem to be speculating on the hyped areas of social media infrastructure and applications, or on clean technology.

There seems to be an increasing gap between the very early friend and family stage of funding, and doing a professional seed round of funding. The Mint.com story illustrated this point further in a post by Christine.net after they were acquired recently by Intuit.

The straight shot: Why should you raise money, and how much?

• Step 1: When you're ready with an Idea: Raise $100K from friends and family, and use it to build a prototype.
• Step 2: Once the prototype is done: Raise < $1M in seed capital, and get into market with an alpha launch.
• Step 3: After that initial launch has traction: Raise $5-10M, and use it to prove/scale the model.

So while the venture fund community has continued to move to the right (from a business stage perspective) the entrepreneur community has moved to the left from a cost perspective. It now takes less than for forever ago to get a software startup off the ground. In roundpegg.com we've spent less than $10K in total over six months to incorporate, build the first fully functioning version of the technology, host the site, and design and build a website for the company. While this is not sustainable and now with customers going live we need a couple of more people the overall cost of getting the company between these early milestones is incredibly low.

So where does this leave us on the investment side? Close to heaven. The groups stepping into the gaping void are angels. Angels typically invest in these early rounds and may even participate in the friends and family stage of the investment. In this environment they are also capable (given two or more with deep pockets) of taking a SaaS (software as a service) oriented company all the way to profitability and skip the venture funding process entirely. There is a huge opportunity for super angels, angel consortiums, or seed stage venture funds to claim this middle ground of professional seed stage investment.

Remember that in a time of disruption opportunities abound.

Signs you are no longer in a startup

You wake up one day and the company you started is no longer in it's infancy. This didn't really happen overnight but somehow it feels like it. I sat down with another local entrepreneur for a cup of coffee the other day and created this list of signs that you're no longer in startup mode. That doesn't mean you don't still have a sense of urgency or passion, just that you've passed into another phase of company building and all that comes with it.

• You have meetings about meetings
• You have revenues and are less worried about eyeballs or page views than revenue growth
  
• There are people working at the company you haven't yet met
  
• The whiteboards are better than the mylar sheet you can buy at home depot for $20
• More than one conference room
• The board is made up of more investors than entrepreneurs
  
• Sales people
• A second office somewhere else on the planet
• COO
• A formalized vacation policy
• Not sure what other people at the company are doing over the weekend
• Rotten food in the fridge. (also a sign that people are beginning to think that others will take care of things)
  
• Printer is almost always out of paper when I go to print something (see previous point)
  
• Someone you randomly meet at a conference has heard of your company
• Other companies are calling your company seeking partnership
• Expense checks are doled out on schedule
• More than one floor in your office space
• Company events have become more generalized to meet the interests of the larger group
• You've become self conscious of saying "fuck" in the office

I'm certain there are at least 100 others I've left off...

CTO Series - Out of the Goo

At the outset a company needs a huge amount of energy from a very small set of people to have any sort of chance of making it through the first year. My companies have been fairly complicated software affairs and so much of the energy input has been in the initial product buildout to sufficiently demonstrate the idea. So, in those early heady days of whiteboard brainstorming, myth making, protean moneyless, nothing-else-exists, insomniac haze, everything draws your attention. Servers need to be built. There is no data center so the servers sit half tilted on the desk next to you humming away. Source control needs to be set up. The beginnings of an architecture need to be laid down. You set up the company's email and website. There is no marketing, no sales department, no one booking your flights. You beg and borrow from friend's time to help with various aspects. You push friends and family to the limits of their patience. And you code like crazy, pulling all nighters when you're on a roll and some thorny problem is nearly within your grasp. You're in every aspect of the product, pushing each just far enough along to get that primal system to crawl up out of the digital goo limping into reality.

Key take-aways:

• The early days of startups can get you distracted in a thousand directions so build a plan
• The plan should be optimized to get you into discussions with *real* customers as soon as possible to validate the value
• Don't fall in love with your plan, it will change, perhaps daily some weeks
  
• Build top 10 lists. There's a hell of a lot to accomplish. Figure out what matters most to the plan and create a top 10 list.
  
• In the list take on the hard problems yourself, delegate the easy ones
• Lead by example. Push people but don't expect them to work harder than you do.
• Have someone tend to the business. Incorporation, setting up health insurance, getting office space, chairs, and printers, and a checking account are not where you add value
• Communicate. Constantly elaborate on the vision to any one who will listen and primarily anyone in your startup. This will help you in the evangelism phase later. Things that seem like really great ideas in your head sometimes fail the test when you have to communicate them out loud. This forces you to think through the problem in greater detail.
  
• Don't get distracted. Don't look at your email when you're focusing on the product. If someone has a question that doesn't need to be addressed right away tell them you'll get back to them. Let people know when it's ok or not ok to come ask you questions. Wear a set of headphones when you don't want to be interrupted even if you're not listening to anything. Most people won't bother you if you have headphones on (same as on a flight).
  

Once this is accomplished the road show begins and you spend a lot more time talking to people than writing code. In order for your company to survive you must raise money, either by selling some form of the product, or taking in venture capital. This slows you down to a crawl but gives a lot of perspective on the value of your creation and gives you time to digest the market and what might be important. It also preps you for the next stage in the company's development, R&D growth. Rest here on the bank for a just a moment. There's a lot more evolution coming.

The Idea

I wanted to start writing a little bit about the role of a CTO in a startup company. There's a wide range of behaviors in that role from the more execution oriented engineering manager to inventing a fair amount of the technology to a visionary steward who directs the company towards the optimum market value. I have played many roles in multiple companies across this continuum and wanted to get a few thoughts down that may be of help to others out there trying to make sense of this elusive function.

A CTO is the Chief Technology Officer in the company. In more well established companies this is a contributing role that would typically report up through the Chief Information Officer (CIO). In a technology startup, the CTO role is critical for the successful launch of the company. It all starts with the idea, and in many cases the CTO is not only the founder but the individual who had the idea and the knowledge to determine whether implementing the idea is likely. For the moment though I would like to set aside the notion of solution probability.

Ideas often start with personal pain. Engineers, or rather inventors are inherently lazy. When confronted with a problem, an inventor will ironically go to great lengths, often expending much more energy than giving in to the brute force approach, to try to find a short cut solution. The brainstorming that follows traverses a series of what if's with numerous cerebral dead ends. The beauty of this stage is in the search for the possible and you may have no f*cking clue how likely a solution is but are making probability guesses based upon incomplete knowledge. For instance, in my last company, Dante Software, I had just finished reading the O'Reilly book on Perl for Bionformatics. I was currently the CTO of a Web 1.5 services company where we built Commerce, Content, and Community sites. I'm going to give myself a smallish bit of credit here for incorporating community directly in the site, although I didn't recognize the importance it was going to play in the future. Anyway, we would continually have issues with system performance and outages that impacted the business. The aha moment came after reading the bioinformatics book and realizing that the web business and it's integration to traditional parts of the business had become specialized and the interactions complicated enough that a similar model in bioinformatics to track protein-protein interactions for disease detection was not all that far off from what I was trying to solve. That is, I wanted to detect problem conditions that could impact the business before they became problems for my customers without having to know what alert thresholds to place on every possible metric in the underlaying IT stack.

Now I have a big hairy problem. There's nothing out there solving it (as far as we know). And there's a solution model in a completely different space that looks like it might be adaptable or at least used as a guide for my problem. Aha, idea born. This could work! The next step is to reverse engineer the problem and map to the proposed solution to come up with a reasonable guess as to how it might work. Then researching whether something already exists that may be close enough or could get there faster than you. And SWAG (silly wild ass guess) how long it would take you to prototype. But these are market and time to market questions. I'll address those later. It's a great feeling just to sit with your idea for a bit and relish the brilliance of it before taking that next scary step of analysis. This will be a long road. Right now you need to build up your confidence to herculean levels :)

I remember once telling a VC at this stage about an idea and they said how about company X, haven't they been working on something similar for the last few months. Knowing the people in the other company and having an inflated sense of confidence in my ability to get this idea off the ground, I looked him straight in the eye and said "We'll crush them". ;)

Consultant Redundancy

One of the principal concerns in startup land is maintaining the cash/resource balance. You have a certain amount of money. You try to make this money last for a specified period of time in which you anticipate having more money, in which case your cash spend can be raised in order to take advantage of some presumable market condition. In software companies most of these capital needs are around personnel (i.e. How do we get from here to there with the set of people we have?). Some positions that don't require fulltime personnel can and should be filled with outside consultants. Outside consultants will get paid somewhere between 50% to 100% more than you would typically pay the person if they were a fulltime employee, but presumably you're using them far less, so it ends up preserving capital for use elsewhere in the company.

Now, a bind that you can get into with consultants is their availability. They are trying to make ends meet and grow their businesses just the same as you are. They will likely have competing demands on their time as their customer list grows. There are a couple of ways to solve this bind. One is to put the consulting group on a retainer. This means that they will set aside a certain amount of time for you each month and you will pay them whether you end up needing them or not. The second is to have redundant consultants up to speed on your business and able to deliver identical types of work. I tend to use the latter solution. The advantages of having redundant consultants is that you will get more ideas into the process, you can have them work in parallel on projects with other consultants, they will still likely have someone open in a pinch, and gives you more flexibility on the cash spend.

The Twin Future of Search

Search is the most widely used application on the internet and while it has come a long way from the yahoo index or alta vista search there is still vast room for improvement in the search field. One area that at least needs to be distinguished is subscriptive search. I know, you're saying subscriptive isn't really a word, but it sounds so much better to me than "persistent search". You see, I think there are really two primary search use cases.

There is the one we are all familiar with and use Google for daily. That is ad hoc search. Ad hoc search is used when we need to find something. It may be something we used to know but have since forgotten, it may be what the weather is going to be like somewhere we're going to, it may be figuring out what the GDP of Austria was in 2006. These are tasks that we don't repeat day in and day out. We perform the search when it is warranted, often looking through only the first page of search results, plucking out the desired information, and are on our way. We don't spend a lot of time with the data, we find it, consume it, and move on.

The second form of search is subscriptive. There's that word again. Ok, we can call it topical subscription but that is so long and unwieldy. Subscriptive search is used when we need to know what's going on around a topic that we're highly interested in, and please keep us up to date. I don't want to go and re-search, I want you to tell me when there's something important and why I should care. A number of weather services have popped up to provide this in the specific information vertical of weather forecasting. I always want to know what the weather is going to be like where I live. Don't make me go search for it every day, just deliver it to my desktop or email me and definitely be proactive about letting me know when some dire weather pattern is about to descend on me. The same is true for a number of common areas of interest: sports scores, movie times, top news stories, and most of the things that you can customize your My Yahoo! page today.

The thing that is missing is in the Long Tail. If I have a passionate interest in antique lawn mowers I can find a couple of blogs or I can continuously search, or I can use something like Google Alerts. None of these get me what I would really like though, which is a page that I can go to that pulls any new posts from blogs or news (with rankings that are personalized to my specific interests), shows me about-to-expire auctions on ebay for those mowers, and whether there are any upcoming shows around the country. It would also allow me to tag the content I wanted to save so I could review it later. I could also expose my page out so that others could find it and use the knowledge I gained in building my page and just read that page, or use it to build out their own page with mine as a template.

This would essentially allow anyone to publish their own zine on the areas that interest them most including multiple content sources, and would be perhaps the 2nd stage (after blogs) in really creating an n-to-n publishing model that will fill a key role in next generation content distribution and discovery. Hey, what a great idea for a startup!

Supernova startup shakedown

These are my notes from a startup pitch session paneled by Michael Arrington of Tech Crunch and Paul Kedrosky, Josh Kopelman, Julie Hanna Farris. All of the companies at least had early stage funding and were given about 5 minutes to present each, sort of startup speed dating :)


Companies
Adap.tv
trying to match online video to advertisers. over 1M ads currently Contextually analyzes video, audio, and metadata. Monitors users interaction with the ads and adapts to their prefs.
Pretty cool. continuously analyzes stream and finds most relevant ad in their ad database.

Adaptive Blue
Semantic web company. People + shortcuts = getting to info faster, also personalized web. Browser add-on -> blue organizer = Personalized Smart Browser. "i'd like to" menu shows contextual intent related actions. Can highlight text, tell the organizer that it is a book, then shows shortcuts to buy the book or see a book review. Has a trademarked piece called "Smart Links" that shows these contextually related links.

Aggregate Knowledge
Six months ago launched at demo conference. Powering discovery for 50M users per month. Discovery happens in offline world all the time. how do you discover online. finding serendipitous piece of content. creating better navigation metaphor for answers.com. Implicit affinity matching on a massive scale. worlds largest implicit social network.

Cast.tv
Video search. Matching users with content they would be interested in. Compared directly to Google. Searches across the web, unbiased compared to Google (why is google biased?) Has generated fan landing pages for all major shows (thousands and thousands of shows).
- crawling and indexing - prop technology to build a better index. gemstar is a customer uses to automatically generate a tv guide
- relevancy - something better than google. blah blah blah.
Tried to get on their site but it said was undergoing some improvements. Pretty lame.
funded by DFJ

Critical Metrics
Music discovery recommendation and search field. lots of competitors. why would they come into this field at this late stage. no matter how much you use the services, they won't keep you up to date with NEW music. Why? because it's pretty much impossible. There's too much music that comes out. Each day there are about 1000 songs. Is a recommendation engine that ploughs through all the music.

Jangl
phone talking company. communications through your social network. Phone is not currently attached. Phone is not part of the profile because of privacy issues. They handle privacy issues. Sends email with voice message to user. Can put a widget up on your page that allows readers to call you. You then permission people as to whether those calls go through.

pando networks
peer assisted media delivery. Cuts cost of deliver a 1G media file from $200,000 to $5000. Currently serving 8.5 million clients delivering 70TB per day.

SodaHead
Just came out 2 months ago. Old school polling with web2.0 social. Can do a lot more now, share poll with friends, comment on poll, answer with video, pictures, etc. Capture aggregate data with individual commentary

Spock
people search engine. Looks pretty cool. Put in blogger, returned Michael Arrington, clicked on related term "Tech Blogger" and Tim O'Reilly came up first. Will need to check it out more. Uses user tagging to build relationships between people and concepts. Good presentation.


Wize
Online product research is still too hard. Hard to help father buy computer. normalizes rating systems across all the prod research sites. Created product sentiment database from user reviews, bloggers, expert opinions, market buzz, and manufacturers sites. WizeRank - consumer report for the future. Aim is to create a true product satisfaction score. Starting syndication relationships now. Should talk to this guy.

ZapMeals
The shortest distance between great food and your tummy. online meal order and delivery service. ebay for takeout.

ZenZui
Cosumer centric services, + power of sync + focus on design. MS research background. "Adaptive and scalable UI" 16 tile customizable views of what's important to you on your mobile device. Updates by polling with any new info, basically a 2 dimensional widget space on your phone. can nav and then zoom in on tiles. viral spread of widgets by monitoring widget heat.

Zing
Untether online services (such as last.fm) so you can access and use from your phone.


13 companies presented, 1 was fake. got to vote via Soda which one was fake. Definitely ZapMeals. I must have missed a couple there. oh well.


Panel Feedback
Kedrosky - interesting that there were no wiki mentions, no ajax this year. Lot's of competitors to google but loathe to mention google name (awaken the monster). nature of demographics on web have changed so much in the last 5 years. Much has moved to entertainment sites and bloggers. Which companies appeal to innate laziness. Likes Cast.tv. Big unsolved problems attract big buyers. Monetizing video traffic is such a big problem, esp. with creating live overlays. Consumer related search technologies must painfully avoid Google or will just become another tab in google (without consent or payout).

Arrington - new phone apps are exciting, perhaps driven by iphone functionality and screen real estate. touch screens are fascinating. not easy to impress with just a web application. Likes Cast.tv. Adap.tv just acquired by AOL. he thinks Cast.tv is better. Better video search is hot.

Julie Hanna - Bias against companies wanting to be destinations sites. Jangl brings two common forms of communication and blends them together.

Overall
Doesn't feel like a bubble. Not enough froth out there. Need more people out the other side getting rich to create a bubble. Lot of companies in tweener stage. Easy to get early stage money, not so easy to get to the next round. Seed stage is used to validate or improve hypothesis. iPhone may be the catalyst for the next rich ecosystem for startups out there.

appeal to innate laziness in human beings

Was listening to a panel on startups yesterday (I'll highlight these in another post) at Supernova2007. One of the panelists was Paul Kedrosky. When asked what he looked for in a company his answer was "companies with ideas that appeal to my innate laziness"

I think it's an excellent point and I would add to it. If there's a task that occurs everyday in your life, people will always seek ways to either shorten the task or make it more pleasurable. If you can provide a product that does either of these two things you have a shot at success. If you do both well (and have good marketing) you will have great success.

camping under the super nova

I'm heading to two conferences this weekend in the San Francisco area.  The first is @ Supernova2007.   SuperNova is advertised as:

Business, technology, and social interactions are decentralizing, tearing apart industries with the force of a supernova. Intelligence is moving to the edges, through networked computers, empowered users, fluid digital content, distributed work teams, and powerful communications devices. Business models are under pressure as end-users gain greater control, computing becomes a commodity, and companies collaborate across geographic boundaries. At the same time, new opportunities are emerging through social software, pervasive wireless networking, massively multi-player virtual worlds, and distributed e-commerce, among other trends.

Sounds like fairly heady stuff right? I certainly hope so and will be looking to connect with a few of the thought leaders out there including Paul Kedrosky, Lada Adamic (an advisor for CI), Julie Hanna Farris, Udi Manber, and others.

The second is Foo Camp 2007 sponsored by O'reilly. This is an invite only event sent out to thought leaders on the web. One of my heros, Paul Graham, who turned me on to Ruby in his book "hackers and painters" will be there and am greatly looking forward to the dialog. The agenda is worked out by the attendees on Friday evening and everyone literally camps out on the O'Reilly campus at night. Should be very interesting times.

Media Activity Monitoring

My last company was coined as Business Activity Monitoring or BAM by Gartner, the sages of Information Technology almost a year after we started. The current business that I founded in 2005 could use some naming standards as well. There are a lot of companies out there touching various aspects of this market that label themselves as Buzz Monitoring or WOM (word of mouth) monitoring or Vertical Search or Competitive Intelligence or Media Tracking or Brand Monitoring or Knowledge Management 2.0 or blah blah blah. Driving a standard naming convention removes the veil of market confusion driven by fragmented marketing messages. So, Gartner, Forrester, IDC and others if you are listening let's not wedge this area into one of the existing boxes. Also, this is much bigger than just calling it Buzz Monitoring. Instead, let's call it Media Activity Monitoring (tada, trumpets and such).

Media Activity Monitoring covers:

• buzz monitoring - tracks the buzz about topics you care about
• persistent search - finding new content on topics you care about when it happens
• professional search - gives more weight to the rank of content your professional network cares about
• personalized search - gives more weight to the rank of new content that you've cared about historically
• meme identification - discovers concepts that are waxing and waning among conversations
• maven monitoring - who are the key influencers (mavens) among the people talking about talking about topics you care about
• pushes real time alerts to you when these things occur