No VC Required

I’m completely slammed and as much as it saddens me to say this, I’m putting novcrequired on hold for a week or 2 until this hurricane of work blows over. Be back soon!!

I don’t like posting negative comments about anything - particularly Angel Investors because I’m very fond of them and the concept as a whole. I had the privilege of meeting several experienced angels recently who added value to my business prior to any investment commitment.

However… I feel compelled to write about a story an entrepreneur told me recently about his circumstances. I’m not going to go into too much detail to protect the innocent.

The company is an early stage startup and the angel was one of the first offers the entrepreneur received. He accepted even though, as it turns out, the terms were horrendous. The angel is not very experienced in investing and the entrepreneur isn’t experienced at attracting investment.

The angel and entrepreneur meet once a week and the angel takes a very active interest in the company. The Angel doesn’t understand the industry and the entrepreneur and angel have very different views on the direction the company needs to take.

The conflict reaches a crescendo and the angel pushes the entrepreneur aside (I’m not sure how because I don’t have the investment details) and puts a new CEO in places who is also a friend of the Angel. One of the senior people in the small team decides they want the entrepreneurs new job and the company is swiftly moving into the hands of everyone except the founder.

There are always two sides to a story - especially when it comes to relationships. Bear in mind I only have the one side of the story. But here are some things I took away from this:

• Choose your angel investor wisely. The best angels demonstrate they will add value before they invest. You find yourself trying to figure out how you can get more of their time rather than how you can make them stay out of your cooking.
• Have a clear understanding of who runs the company. If the angel wants to participate in the day-to-day operations of your business, then you should have a conversation about them joining as a full-time executive. If they are uncomfortable with you running the company, then you should resolve that issue before the investment.
• Read the terms of your investment very carefully and understand how much control you’re giving away over and above the equity you’re selling. Can your investors fire you? Can they block an acquisition or force one?
• Be wary of angel investments that take a large amount of equity or provide an angel with levers to control your business. They may be a precursor to you getting shoved out the door.

Startups are a volatile business. Some days you have massive success, other days you encounter setbacks, and sometimes you find you plateau for weeks or more without any progress. Your investment partners need to have the experience to understand this and you need to structure a deal that is durable enough to last through the highs and lows.

Wired Mag has outed (with his permission) the founder of TheFunded.com. The site is an anonymous knowledge base compiled by CEO’s who have raised funding. I also love the design.

A decline in Internet ad revenue’s is the one thing that scares the hell out of me. Which is why this news from PwC is very very good for us all.

If you’re a consumer web startup and you’re hoping to build a destination that has millions of eyeballs visiting every day, then you can’t buy traffic. So you have three options:

PR

You do something press-worthy. Then you email all the high profile bloggers and press that you know. You also post your story on Digg, Reddit, StumbleUpon, etc.  You get picked up by a few bloggers and get Dugg. You get a ‘nice spike in traffic’ and get all excited and do it again a few weeks later. Here’s the result:

With each spike you had to buy more servers and now you’re stuck paying a hosting bill with zero traffic hoping you can keep replicating those spikes ad-infinitum and somehow make them slightly higher each time.

SEO

You discover that if you structure the 100,000 pages of content that you have correctly and somehow encourage people to deep-link into your website, you can get Google to send you around 10,000 unique visitors every day. Here’s the result:

Very little of the SEO traffic you’re getting is return traffic. You’ve also hit a ceiling in the traffic Google’s going to send you because you only have 100,000 pages. If only you could get another 100,000 and another 100,000 and get up the next next plateau. Maybe you can persuade a few of your users to create some content for you.

VIRAL

You create a product that people market through it’s use. Here’s the result:

“My SEO strategy and my PR efforts have made me plenty successful and I’m growing” you say.  Sure, but you’re not in a vacuum and your competitor is going to go viral any day now.

If you want the last graph, don’t call a meeting and figure out how to add a ‘viral strategy’ to your existing product. Instead, start with a blank white-board and figure out how to create a product that people market for you simply by using it. Think of Hotmail, where every email sig was an ad for Hotmail. Think of YouTube where people embed their videos in their own websites.

Just to be clear, a viral product is not one that is so darn cool people want to tell their friends about it. A truly viral product tells a user’s friends about itself through its use.

I became an Ali G disciple back when Sasha had 5 minutes on the 11 O Clock show on Channel 4 in the UK. The guy is a genius. Here he is pitching hoverboards to VC’s. The naked chick on a horse marketing idea has some irony to it. Sandy Lerner, the co-founder of Cisco appeared on the cover of Forbes magazine naked on horseback in 1997.

Originally from Naval Ravikant’s Venture Hacks.

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You’re a geek. But don’t feel bad. I’m a geek too. We geeks suck at some things. These days we do a little better with the opposite sex - geeks are more appreciated now that some of us are billionaires. But we’re still bad at some things.

As a geek entrepreneur, you can give away a chunk of equity for each skill that you lack, or you can get good at that thing and do it yourself. Don’t bullshit yourself that you don’t have time. Writing code really isn’t that time consuming. In fact, laziness in software development is an asset - in the Perl and Ruby world anyway. I know the Java guys like to crank out millions of lines of code - but that’s their problem.

Out of the non-geek skills you can get good at, learning to negotiate will give you possibly the largest return on investment of all. You may not even realize that you’ve already been up against a master negotiator and cut yourself a much worse deal than you could have.

Many of the developer-founders I’ve chatted to are frustrated by the deal they’ve cut with their Angel or VC a few months after they signed. These investors negotiate deals like yours every week. They are much better negotiators than you are.

But you can fix that. Here are a few tricks you can use. They are taken from the bible of negotiating, Roger Dawson’s “Secrets of Power Negotiating”. I’ve had some of these used on me when I was still a dumb geek.

Henry Kissinger said “Effectiveness at the conference table depends on overstating one’s demands.” Ask for more than you expect to get.

And Never say yes to the first offer. If you do, the person you’re negotiating with will a) Think they could have cut themselves a better deal and b) think that something must be wrong.

Another tactic is to flinch at proposals, but I’m not a fan of that one because it’s a sleazy car salesman trick. But now you know about it in case it gets used on you.

One of my favorites, and something I got very wrong a while back was “Avoid confrontational negotiation.“. A while back I was negotiating a lawsuit. I called up opposing council directly and told them their suit had no merit. Way to set the tone for expensive litigation! A better approach is to never disagree directly with the person you’re negotiating with. Dawson suggests a “Feel, Felt, Found” formula. It sounds porno, but it goes like this: If someone takes a position with which you totally disagree, respond with “I know exactly how you feel about that. Many others have felt the same way as you do right now. But you know what we found in our research? We found that….”.

A great tactic used by many is the higher authority. When you’re negotiating, having a higher authority you need to get an OK from is very helpful. A business partner, a board of directors, a mentor, your dog - if you don’t have one, make one up that sounds plausible. This tactic buys you time to think. It also avoids confrontation by teaming you up with the person you’re negotiating with and now it’s you and them versus this nasty higher authority that just won’t budge.

There are many other ‘gambits’ in this book that require some finesse and a complete understanding of the tactic, so I’m not mentioning them here.

I’d also like to add 2 rules of my own: 1) Always conduct your negotiations honorably. When I was selling my last business, I had 2 offers on the table. I made sure I treated both suitors equally and respected their confidentiality. Once I’d shaken hands on a deal and agreed verbally, I stuck to that agreement. 2) Don’t be an asshole. When you’re in a position of power, it may be tempting to take advantage of folks less experienced than you. Remember the trust they’ve put in you and that they may have invested themselves in you and your company on faith alone.

You have a handful of opportunities to redefine your station in life. Buying property, getting a new job, negotiating your share of equity, raising funding for your company, selling your business. In many of these situations, it comes down to a critical 5 minutes of negotiation. Learn the basics and you wont regret it.

On the Seattle tech startup mailing list today there was an interesting thread started by someone putting together a budget for bootstrapping their startup. The total budget was $26k, much of which went to legal and administrative fees.

The main reason founders incorporate is to either protect themselves legally, or to make it clear, legally, how much equity in the business each founder owns.

Most consumer web startups don’t run the risk of getting sued in the first few months of operation. I’ve been sued over trademark infringement, but it was after several years of operation and only when our company was very high profile (we appeared in the NY Times among others). So incorporating to protect yourself legally shouldn’t be your first thought when starting out. Consider that you’re not going to be worth enough to make your startup worth suing.

If you and your co-founders have a dispute over who is going to own which share of the company before you start, then you should probably find other co-founders to work with. The Google founders only incorporated after they raised their first angel round of $100k. They needed to cash a check made out to Google Inc. so they had to incorporate.  Just make sure you agree verbally on how much of the business each founder is going to own before you start.

A few weeks after your new website has launched and started to grow beyond your control, then start thinking about putting a formal legal structure in place and protecting yourself behind a corporate veil. Now that you’re not racing to get your product to market, you have a few spare hours to take care of the boring administrative issues.

Note: I’m not a lawyer and this is not legal advice.

Marcelo Calbucci has posted a list of the top Seattle startups that he’s compiled using an average of Compete and Alexa rankings.

I think UrbanSpoon is still my favorite and the site I use most out of all the startups. Ethan and Adam, the two founders (and my former co-workers), started the site to see if they could launch and grow without VC funding. They’ve launched in 14 cities now and the site gets better every time I visit.

You’re looking at a screenshot of an internal Google app. According to Matt Cutts from the quality/webspam team, “It is a tool used by members of our AdWords sales team to help prioritize new customer acquisition.”. Originally from Google Blogscoped.

No one seems to know exactly what the abbreviations mean, but PVs is almost certainly PageViews. I’m curious if the PVs  number is taken from the amount of traffic Google sends each website, or if it’s taken from Google Analytics. (cue Twilight Zone music).