Inputs & Outputs (Troy Davis, Seattle)

Notes on "What Makes Startups Succeed" discussion

4 VCs, a moderator, and a roomful of people. Here's the gist.

Now that we've publicly launched Cloudvox, and anyone can use it (and buy it!), I finally get to see the outdoors again. I went to this panel on 10/14/2009 and took as many notes as I could. I missed some things, and tried not to take any comments out of context.

Who

• Andy Sack, Founder's Co-Op
• Mark Ashida, OVP Venture Partners
• Mike Mathieu, Front Seat
• Pete Higgins, Second Avenue Partners

Moderated by Dave McShea of Perkins Coie in Seattle. Notes are chronological over 1 hour. Bold is mine.

How do you evaluate a company as an investor?

Sack:

"Accelerating on the downhill" (recession) as much more more important than speeding uphill

Higgins:

With right customers, recession means prospects are reevaluating costs, chance to stand out. Cheaper inputs (staff).

What mistakes do you see often?

Higgins:

1) Business plans hard to understand. Entrepreneur unwilling to synthesize down to the real bet they're making -- might mean they don't know it.

2) "We don't have any" competition. Generally that's "meeting over." Too narrow def of competition.

3) Under-rating domain expertise when they have it/have been the customer

4) Not realizing VCs treat a meeting like an interview or date. Can you work with together deeply? Listen! Don't pitch/sell. Testing reactions, pushing buttons.

Mathieu:

Describe investment as series of risks - then help investors calculate market price for your risks.

Not getting 2nd meeting probably means risk higher than you think.

80% * 80% * 80% (series of risks) is worse odds than a coin flip. How can you extract the risks?

Ashida:

Team reduces risk - have these people worked together? Experience is risk mitigation

What constitutes differentiation?

Ashida:

"In the eye of the beholder."

At Housevalues there wasn't a patentable one.

Likes technical barriers. Stuff that's hard to do. Doesn't have to be patentable.

Marketing barrier "not as confident that it's sustainable especially on a national basis."

Barriers are truly lower with SaaS: domain/customer expertise must be strong differentiator "because it's just software"

Audience: At Amazon, Bezos ranked 25 things to sell before choosing books. How do you sell?

Higgins:

Book market incredibly fragmented, easy purchase.

Contrast with selling infrastructure to mobile where 5 guys decide your success. Consider: Do customers tend to buy new stuff?

Who are adjacent players?

Often best to find industry with lots of established players who just haven't picked up on changes. Like unmanned airplanes (Insitu).

Had tailwinds: Gov't wanted it, incumbents culturally unable to do small cheap product. But run when big player decides it's strategic. Elephants will step on you.

Mathieu:

With BetterBills, Seattle City Light finance group loved new bill format, but 6 months of customer delay.

Competitor emerged who realized that motivated customer was conservation group, not accounting.

Ask who's truly motivated to buy

Cash is king. How do you evaluate capital requirements and manage cash?

Mathieu:

Cash matters first, then changes to cashflow (they merge).

You hear all this advice: banks will only give you money when you need it, raise more than you need.

All Star started with $200k. Got profitable in 3 months, went into 2nd market.

From cashflow positive to losing $50k/mo. Wife caught on.

2 changes fixed: 1) marketing must break even on performance 2) tie customer price to your performance.

Cashflow doesn't go away 5 years in, profitable, new controller made many millions worth of payments on same day. Balance -$200k.

Use prepay and annual subscriptions. Biggest customer prepaid quarterly and cut need for outside capital

Sack:

Yeah cash management matters, but so does time: wasting a year of founding team!

No bank balance to measure this. Certain period to see evidence that dream can be reality (~3 years).

"Like cash, time is a resource that goes away"

One company: had epiphany 8 months in, changed directions, 18 months in.

Not exactly where they wanted to be. Should we change again?

No! Won't have made any progress before losing confidence.

What VC trends do you see?

Ashida:

Critical how you get money. VCs running out of money - so much budgeted for existing investments.

A year behind and all need 1 more round. Not all portfolio cos are covered.

Non-participating VCs will get crushed. Reduced to common, 10:1 reverse not uncommon

Also 1 person stuck writing $5mm check is way higher bar than 3 sharing.

Finding new outside VC is hard when tainted by non-participating existing VC

I'm probably going to be here long after you're gone (longer than founders).

No escape for us: 7-8 years

What habits should entrepreneurs use or avoid?

Sack:

Recurring rituals. Write out and book on calendar.

Daily: blog, tweet, the 1 thing that must get done today.

Weekly: Sun night look at week ahead and pick 1 priority for week.

Quarterly: take time off. Have a weekend.

Mathieu:

Know yourself.

What types of stuff do you just have to grind through? Know what's missing in you and patch holes

Had demo of alpha-stage niche site. Missing: had no idea of was whether anyone would pay - a must fix.

Told entrepreneur "When you leave you're going to go home and say 'I should talk with customers to see whether they'll pay, but first I have to fix this bug and add these features...'".

Not bad thing as long as you know and fill.

Higgins:

After 3 people, entrepreneurs under-manage.

Board emails: at least 1 a week.

Ashida:

1 page "plan of record" so when staff overhears stuff, have reference that plan is not changing. A little formal.

What's the 1 big mistake that comes to mind?

Ashida:

"I'm good at this" when it's clear you're not.

Either mis-representing, or poor self-awareness.

Also not asking what customers actually think. Too much trust where a technology appears to fit w/o asking

Sack:

It's not a pitch, it's a conversation.

Engage. What is investor truly interested in? Ask them stuff!

If I leave without having talked, I'm not engaged.

Revenue forecasts are a shot in the dark. What should I do?

Higgins:

Agree. Somebody told entrepreneurs that 3rd year should be profitable.

How much does it cost to learn/get to the point where you have some confidence?

Sack:

Forecast is to get comfortable playing with model and levers.

See/tweak unit economics.

Higgins:

Most businesses have an analog.

Sniff test, ie if you're a distribution company and are 10x more profitable than other distributors.

What are VCs looking for an in exit strategy?

Higgins:

Least successful slide - phrase "IPO or M&A" useless.

Generally look elsewhere when VCs gets particular about exit strategy.

Ashida:

Might disagree a bit. Security industry has many exits but small - $10-20mm, bought out in year 2.

Should inform your raise, plans. We look at P/E and P/S. Ethanol P/S <1, learn from it.

What's the weakest point of a recent deal you actually did? How did you address it?

Ashida:

2 guys from Microsoft. Missing marketing. That was big risk - need to find someone who works well with them.

Solved with a (one!) person.

Higgins:

Not sure it's working yet, but: invested in "3 guys and dog at UW."

Research risk. New ideas every day but maybe not towards product.

"Boring engineering management" stuff - runs an eng mtg every week. Dates, task list.

Really early seed-stage capital seems broken. What's the new model?

Ashida:

Disagree that there's not seed money for good ideas. I'm willing.

Symform was 2 guys. Met 7 months before.

More peer review from ideas in Silicon Valley: 95% of bad ideas there get killed by peers.

Sack:

Seed has gotten harder compared to 18 months ago.

"Deal that doesn't get done" is often the best deal: No (or much less) VC relaxes the pressure on revenue.

Towards BPM-based "Exercise Radio" Stations

Someone, somewhere has the metadata and music chops to deliver BPM-based radio streams. DJs and gym rats will follow. A couple ideas.

The closest are Echo Nest's API (get_tempo) and Last.fm's API (Track.getInfo). Echo Nest's requires uploading the song audio data (which I don't have). Last.fm's can be queried with metadata (artist+song name) yet doesn't provide BPM. This NYTimes Gadgetwise blog post has local file (MP3) and podcast options.

I posted this to the Last.fm Web Services discussion group, and asked on Twitter. I'll update this post if something comes of it.

I prefer to exercise to music, and it's much nicer when the beats per minute matches what I'm physically doing. I think this could happen 3 ways: 1) Faster/slower tempo adjustment of any station. This could be a really awesome subscriber feature. 2) Adding BPM as a new radio station "station type" (from http://www.last.fm/api/radio) and exposing it in the UI as a Tempo dropdown. For example: lastfm://bpm/140 3) A third party app which creates/queues a playlist based on BPM. This would be almost entirely doable with the existing API (get similar artists, add to playlist) if track.getInfo included BPM. There's lots of docs for estimating BPM for a bitstream, but short of someone with a huge music collection, Last.fm would need to pregenerate them and expose it in the API. This API is particularly well thought out: http://developer.echonest.com/docs/method/get_tempo/ (but it too needs the bits; it's not an existing database). Mass BPM calculations would be a killer use for Map/Reduce...

Anatomy of a Malware Ad on NYTimes com

On Saturday evening, Avast displayed a malware warning as I loaded a nytimes.com article.  After some digging, here's the malware I found.

Ad Delivery

nytimes.com article pages include an ad placement with the HTML DOM ID adxBigAd.  From loading a few articles, they seems to rotate between a banner and an iframe. On this article, a 300x250 iframe was inlining this URL: tradenton.com slash ?id=21610438 (note: I don't recommend visiting it, and have URLs are not linked where possible) A comment gave the campaign ID asVonage01_1163613_nyt12, though it was obviously unrelated to Vonage.  tradenton.com was registered Sept. 2, 2009, so it may have had a previous owner.

Injection

tradenton.com serves a 15-line HTML snipped containing this JavaScript: As anyone who has looked at phishing links knows, this is nasty on a couple levels. It's eval()'ing escaped code, which is almost never needed to serve an ad. Note that the variable action_URL is defined but never used. After unescaping the code, this is what's being run: What's served by harlingens.com slash includes02.js? Aha! The eval'ed JavaScript is requesting a second Javascript, which hits action_URL:

Malware

Now we're talking. Requesting that action_URL on sex-and-the-city.cn actually serves a HTTP 302 Redirect to protection-check07.com slash 1/?sess=%3DGQx3jzwMi02MyZpcD0yMDguNzUuNTcuMTIxJnRpbWU9MTI1NjgwMI0MaQ%3DN. And we hit pay dirt. It's a fake page for a non-existent antivirus app, which is actually malware. Titled "My computer Online Scan", this page displays this JS alert:

Popup from malware advertised on nytimes.com

Then resizes the browser window into a full-screen application-style, as if it had become a virus scanner. Some highlights from the static content and JS on this page:

Dont close this window, if your want you PC to be protected.

353 trojans

You need to remove this threat as soon as possible!

Scan procedures finished.

431 Probably harmfull items was found!

Here's a screen shot:

Here's full HTML source in a gist viewer. As usual, these phishers haven't sprung for spelling or grammar checkers.

The page also uses IP-based geocoding by inlining its own iframe called geoip.php, which has city-level granularity (though it was off by 1,000 miles for me). The "Full System Cleanup" link goes to /download.php?id=2006-63 on the same server, which serves a file called Scanner-b4ba2_2006-63.exe.

That redirects to /download/Scanner-b4ba2_2006-63.exe, a static file with the checksum 6c5b5669151337ca51ec45b1f5785d02. Running strings on this 167 KB program - too small for any virus scanner - has it requesting administrator privileges, though I haven't done detailed forensics.

Notes

As of Sept. 12, 2009, tradenton.com and harlingens.com resolved to 212.117.166.69. sex-and-the-city.cn resolved to 94.102.48.29. protection-check07.com had 3 A records: 91.212.107.5, 94.102.51.26, 88.198.107.25. Also, I changed indentation and spacing for readability, so checksums on gist may not match source files.

Auction Lifecycle for Data Geeks

I collected stats from my first sell-side eBay transaction: number of watchers, number of bids, and current item price.  Here's what I found:
Auction Watchers, Bids, and Price Over Time
Larger chart

Specifics: eBay, 7 day duration, start $0.01, no reserve, $167.50 sale, digital camera, July 2009

30-second Summary

• 30-50% of prospects are trolling for a bargain that probably doesn't exist
• May be an untapped strategy in bidding at 70% of sale price to "stake a claim"
• Last-minute emotions didn't affect the price much
• 7 days may not be long enough for all prospects to discover

What's noteworthy?

• Ratio of watchers:bids (casual interest:purchase intent).  For most buyers, this auction was a 2-stage process: find & watch, wait a couple days, then monitor & bid.  Visible interest accumulates for 2.5 days, peaking at 11 watchers per 1 bid, then steadily drops to 1.5:1 at sale.

As the end approaches, there are far fewer lookie-loos relative to participants - most have either bid or left (un-watched) - and the ratio sinks. Nobody bids upfront, probably from past experience: each person knows nobody else will bid, so they just watch too.

Ratio of Auction Watchers, Bids, and Price
Larger chart

• Ratio of price:bids (strength & frequency of purchase intent).  Because bidding is idle in days 2 and 3, this ratio starts and stays high ($17 of item price per 1 bid).  Then bids trend smaller for 2 days, dropping to an average of $7 per bid.  Just like a regular auction, the price increase per new bid is smaller later in the auction, though the absolute price increase is large thanks to lots of bids.

Only in the last hour does the dollars per bid spike again, and only in relative terms - small change that happens very quickly.  That's the sniper, who must overshoot because there's only one chance to snipe.  A larger spike here would indicate a desperate sniper.

• Ratio of price:watchers (strength & frequency of casual interest).  This stays pretty constant throughout the auction until it rises in the last 2 days  I interpret that as bargain hunters bailing (un-watching) while bidding heats up.

Analysis

• Watchers is linear for the first part of the auction, then bargain hunters start to realize they're not going to get a steal.  They adapt: they un-watch the item before it ends.   Watchers started dropping about 12 hours before the auction ended, when the price was at about 60% of final sale price.   This shows that some buyers still think it's a good use of time to hunt for undervalued items.  That's a challenge with sub-$200 commodity gadgets.

• Assuming our sample size of 1 was representative, one could fit a line to the price ramp and estimate the ending price of a halfway complete auction.  This actually might not be far off, at least for auctions matching the same specifics (duration, reserve, category, etc.)

• 3 bids arrived in the last 40 seconds, yet those were the only bids in the last few hours.  I checked the history of automatic bids (where eBay rebids up to your max allowed amount) vs. user-entered ones: only 2 people (winner and 1 other bidder) were online at 11 AM when the auction ended.  Only one of them bid until the last 10 seconds.  Unlike live auctions, last-minute emotions didn't affect the price much.

This reinforces that online auctions aren't impulse-driven, at least for smaller items that can't draw enough live users to start a bidding war.  Someone may get caught up in their own re-bidding midway through the auction, and there's an adrenaline rush for those few who actively bid when it ends, but in this auction there wasn't any going-once gavel pounding.

Conclusions

• Although the winner asked me a question 2-3 days in, their first and only bid was 7 seconds before the end.  This was destined to be sniped from the very start.

• No one jumps in and makes a semi-serious bid (say, over 60% of final price) before they need to.  The serious prospects believe that by placing a real bid, they'll increase the baseline and consequently the sale price.  In a sense, we're telling ourselves that we might get a steal by not bidding, and that other people's bid increases are based on the current price more than their willingness to pay.

That may be true when many buyers are already watching an item.  However, I could see making a bid on day 1 that's 70% of final value, and thereby decreasing the number of people who bother to watch it.  Basically, you'd claim the item for yourself, like bluffing in poker.  Assuming the higher first bid translated into fewer watchers, I could see that keeping the final price lower.

• Prospective bidders may have still been discovering the item 7 days in.  The number of watchers never really flatlined.  While the total number of watchers dropped at the very end, we can't tell whether those folks un-watching were partially offset by new watchers.  Based on how quickly the watchers dropped in the final 12 hours, I'm guessing the short flat-lining was driven by the auction ending.

Would more people watch an 8 or 9 day auction?  Probably.   Whether one of those watchers would be willing to pay more is a much harder question.

Ideas

• Because eBay doesn't provide an in-depth event history, we don't know when the 2 ending bidders watched the item, nor how they found it (search? what keywords? browse? which category?).  A deep "event log" with timestamps, referral reason, and username could let sellers write custom auction strategy management tools - innovate on selling strategy rather than logistics or sourcing.

I could see charging for that post-transaction visibility, since pro sellers are the only ones likely to refine listing strategy, and presumably they're receiving higher sale prices.  Bigger challenge: Prospective buyers would need to acknowledge a warning that their watch interest would be made available to the seller, whether or not they actually bid.

• About 1 in 3 watchers explicitly un-watched this item in the few days after it ended, rather than letting eBay roll it off their watch list.  This may mean that eBay can to do a better job of post-auction cleanup or item segmentation, or that 1 in 3 people are really pedantic.

• There's still room for an auction format which ends 10 minutes after the final bid.  Such a hybrid of "buy it now" and traditional auctions that might actually speed the auction up - nobody will be motivated by end time, and that could front-load the bidding.  Wouldn't take much to be more front-loaded than this auction was.

Note: Bid amount is public-facing current bid, and includes automatic bid. By default, eBay post-auction bid history does not include automatic bids.

Unique conference venues in Seattle

I've been asked for unique venues around Seattle for conferences, hack fests, user group meetings, and the like.  Here's venues and types to check out. Feel free to add others. Startup standards & smaller:

• Capitol Hill Arts Center (CHAC)
• Columbia City Theater
• Coffee shops, especially large ones (Zeitgeist, Top Pot) and those that close early
• Pubs (less than 75, some less than 25): F.X. McRory's, Collins Pub, Tap House
• Market Theater at Pike Place Market

Larger:

• Seattle Asian Art Musuem (SAAM).  A gorgeous venue and and the novelty of the venue is a draw.  Killer place for a post-event party.  Some parking.
• Seattle Center "Northwest Rooms."  This is the land that the Space Needle is on.  I've seen events over 250.
• Large theaters: Egyptian Theater (has movie screen), Moore Theater, Paramount Theater, King Cat Theater (mostly concert venues)
• Town Hall Seattle
• Union Station "The Great Hall." The now-renovated giant Seattle train station in Pioneer Square.
• Community Center at Mercer View on Mercer Island.  Seats hundreds, and surprisingly decent bus service.  No atmosphere and nothing nearby.
• Other museums: Henry Art Gallery, Museum of History and Industry (MOHAI), Burke Musuem

GMail Wishlist

GMail's already-marvelous interface need not deter our constructive "backseat engineering." Here's my wishlist.

1. Endless popup warnings when replying to Trashed threads. Compose a reply to a deleted (not archived) thread. A warning dialog box pops up and steals focus every 30-60 seconds to say "This thread is in the trash." Yep, just like it was a minute ago. I'm usually typing when dialog box grabs focus, and with keyboard shortcuts enabled, my next few compose keystrokes teleport me halfway through the UI.

Wish: Show the dialog box once when I create the reply, or show a simple message in the compose window instead of taking focus. Then let me type.

2. Awkward handling of seldomly-used labels. I have a few labels that are only attached to 10-20 thread, and many old labels that won't ever get attached to another thread. The labeled threads would be hard to reconstitute through search.

While I can now hide them in the inbox view (yay) and IMAP, and can search for labels when attaching one to a message, it still feels awkward to see "50 more" labels. Some of my label names were chosen to influence sort order ("lists/blah").

Wish: A place to stash archived labels. I'd be happy with an Archive flag on labels, which would display them in the folder list under a single expandable link, or onl "Show Archived" radio button. Existing Manage Labels options (show/hide, Show in IMAP) seem like client app-specific workarounds for not having Archive; show/hide is really "Show in Web." Real hierarchical labels (nested "groups of labels") is more than I need.

3. Compose and Contact links behave differently than labels. Since the Compose and Contacts links are to Javascript targets, I can't Ctrl+click to Compose in a new tab, or right-click and "Open in New Window" on Contacts. I leave the main GMail inbox tab open all the time, and I'm usually already looking at a thread when I want Compose or Contacts. I end up using the Inbox link to open a new tab and navigate from there.

Wish: I think I'd accept a bit more latency for being able to use Compose and Contacts links like I do label links.

4. Can't auto-merge contacts (and until recently, not even a "Merge these 2 contacts"). Also, after manually merging contacts, I'm sent back to the top of the contact list (rather than the previous scroll position), so it's painful to do with lots of contacts.

Wish: "Auto-Merge All," then show me a long list of affected contacts to skim/correct. Show 50 or 100 merged contacts per page, not 1. Stopgap: scroll to merged contact after a manual merge.

5. "All Contacts" has a better memory than I do. GMail adds anyone I email to my "All Contacts" set, yet when composing, I sometimes remember the name of a company/domain name but not an individual.

Wish: In the To field, search contacts' email addresses (domain names, specifically). This already happens when no first or last names are defined. When find-as-you-type doesn't match any contacts, consider waiting a couple seconds then showing "Search Contacts for 'blah'." That way I don't have to delete my partial address, click "To" for the contact picker, and re-type my query.

A Handful of Mac OS X Tips

Some things I've learned over the past few weeks:

• I love one-finger tap to click. In the week I went without it, I never got used to the extra trackpad resistance at the edges. Also turned tracking speed way up.
• Avoid carpal tunnel: Alias Cmd+# to switch to a specific Space. If you used WindowMaker or Fluxbox, it's similar. I also have a hot corner (lower left) show all Spaces.
• There's a big enough difference between free and paid apps to justify paying for software again, and bundle sales happen all the time. See MacUpdate Promo and MacHeist.
• Get Safari AdBlock, which is based on the superb AdBlock Plus.
• Change Cmd+Space alias to call Quicksilver instead of Spotlight (and never use Spotlight again). Everyone's first piece of advice is to install QS, and Apple should integrate it into default installation.
• Gmail Notifier is awesome. Mailplane might be better; the icons, new mail count, and easy Calendar access in Gmail Notifier solve my problem.
• Campfire+Propane.app is worth its weight in gold.
• GarageBand was made for cross-country flights
• Required: NeoOffice, Adium, Fluid.app (and Fluid apps for a handful of sites you care about), Skitch, cdto (open Terminal in current directory from Finder), Dropbox, Transmission

Short, fast micro-whois

90% of my whois queries are to check whether a domain name is registered, where I don't need any details. Here's a Bash function to check domain availability; type one character, get one character.

Problem: I want a responsive checker that I can start in an instant, with almost no typing. It should be omnipresent: accessible from as many desktop windows as possible, without task switching. Rather than showing details, output should be short so I can see my query history evolve. And since most domains are registered (and I want to get past them), response time matters for registered domains more than available ones.

Solution: I have this bash function in my .bashrc (update: two versions by request -- shell script and Ruby). You can download micro-whois here.

and voila, zero-effort domain name availability:

$ d yort.com

1

$ d ihopethisonedomainisnotregistered.com

0

Registered

$ time d yort.com

1 real 0m0.260s

$ time whois -n yort.com

.. [ 60 lines ]

real 0m0.782s

Unregistered

$ time d ihopethisonedomainisnotregistered.com

real 0m0.649s

$ time whois -n ihopethisonedomainisnotregistered.com

real 0m0.657s

Temporary code never is

Somewhere it's the Third Rule of Software Product Development: never implement a feature poorly because you expect it to be thrown away. Sure, rewriting is expensive, and seeing a permutation of "spend time with no product gain" is thoroughly demotivating. But there's 3 better reasons:

1. You'll never actually get back to doing it. It will take up permanent residence in the back of your head.
2. By necessity, other features immediately start hanging off of it. When you do find a free day to blow on rewriting something (among the 5 things you meant to circle back to), it's too late to redo the (a) right way: that 4-hour task is now a 3-day refactor.
3. Humans can't switch from "write disposable crap" to "write well-thought-out, maintainable, valuable code." The work process is different. Having replaced planning time with dive-in-and-code-code-code, Dumpster-ready features become the norm.

Oh, and it doesn't take that much more time.

The anti-NDA

I recently had someone ask me to sign an NDA so they could share three sentences about their business.  It occurred that while many people have asked for that, I can't think of one who has started and run a business - as President/CEO for a few years or product cycles - or sold one for substantial shareholder gain.  Correlation at least, causality perhaps.

These days I want the anti-NDA: a disclosure agreement.

A promise that, in return for my explanation and effort, the recipient commits to share it with three people who they think will care.  Sign a Creative Commons Attribution Share Alike license with a minimum commitment.  Prospective customer, scrappy tinkerer, competitor, beta tester, skeptic, journalist, someone.

Partner?  A mutual disclosure agreement, where we both commit to make ourselves useful by opening doors. The risk to me is not that a stranger will drop everything they're doing, direct meaningful resources toward the goal, know the market well enough to turn a paragraph into a business, make up for starting later, and execute and commercialize it better than me.  The risk is simply that it's a dead end: a bad use of time.

Merlin Mann says it well in Ideas, Execution, and the Rare Auteur:

An idea is no more useful than a coupon for a bag of sugar; show me the finished cake, then we’ll talk. The bottom line is that if you don’t have an amazing, passionate idea and the means to make it superb, you’re probably just a douchebag with an expensive phone. And a stack of NDAs.