Up & Right

I just did something quite ordinary…checked some football scores on my ESPN app on my iPhone. Just a normal day here in 2011. Then briefly my mind flashed back to 2006 and ESPN MVP, which if you don’t remember was ESPN’s failed MVNO (Mobile Virtual Network Operator - business that leases network access from someone such as Sprint who owns it). 

Laptop Magazine called ESPN MVP on the Sanyo MVP “a touchdown, a game-winning shot, and any other victory-celebrating sports cliche you can conjure…its innovative interface will surely be imitated by many handset makers.” 

Surely.

Think of how far the world has come in just five years? Want to develop an app in 2006? Phones were so heterogenous and data plans were so rare, ESPN had to launch their own cell phone network to get their app to actually work reliably on customers mobile phones. Talk about boiling the ocean! Wow. Not only were phones totally non-standard and nearly impossible to develop across (unless you were JAMDAT whose entire business was basically SKU’ing up a game for every phone) but also the carriers restricted innovation via their “walled gardens” which Verizon treated like an iron curtain. 

But no, today, I didn’t need to ditch AT&T just to see some scores. I simply tapped on the shiny ESPN logo on my iPhone.

What’s the lesson in all this and how does this tie back to startups and VC? Timing and platforms. It’s important to get them right and understand the climate and ecosystem that need to exist for your startup to thrive. MVNOs such as ESPN MVP spent hundreds of millions of dollars trying to do what today would be trivial. There is such thing as being too far ahead of the curve. 

Be conscientious. Are you developing a platform or developing on a platform and is that platform ready for primetime? Don’t get caught in the middle.

I was at the “Raise Cache” fashion show to benefit HackNY last night at the armory on Lexington. A few things occurred to me:

1. This event could not have happened or even been contemplated five years ago in NYC
2. The crowd was almost exclusively 21-35 year olds
3. There were very few if any poseurs there. Much of the crowd were legitimate entrepreneurs running and/or managing established startups from Thrillist to BaubleBar to Birchbox to Sailthru
4. The place was packed!

That’s when it really hit me. No, not that “New York has made it.” That already happened at least in the eyes of most industry and media observers twelve months ago. What really struck me is that New York has its own scene now.

For background, I’ve worked in startups and VC in New York, Silicon Valley and Chicago. I’ve gotten a pretty good sense over the past decade what each is like, but up until a couple months ago I hadn’t lived in NYC in a while. For the past four years I took a little sojourn and spent a couple years at a startup in the Valley and a couple getting an MBA and working in VC in Chicago. 

Unlike five or so years ago, New York now feels both extraordinarily vibrant and authentic. The event itself was a fashion show. It was young and full of 21-35 year old urbanites. The companies in attendance were authentically New York representing many of the industries headquartered in New York including fashion (Birchbox, BaubleBar, Bonobos, RentTheRunway, Gilt, etc.), advertising (SailThru, OnSwipe, etc.) and media (Thrillist, Business Insider, Tumblr, TurnTable.fm, etc.). On top of that, New York now has its own set of homegrown heros to look up to. The folks coming down the catwalk and seated around it in the VIP chairs, from Fred Wilson of USV to David Tisch of TechStars NYC to Carter Cleveland of Art.sy, create a sense of community and shared identity that really brings people together in our already dense urban jungle and makes things tick. 

My point is not that last night’s event couldn’t have physically happened in the Bay Area. Of course you could find hundreds of folks in SF to get together to celebrate tech, but it would have been different. Different is neither good nor bad. Different is New York not trying to be “a mini-Silicon Valley” (something we are often accused of) which we would surely fail at. New York now has its own tech thing going on. I think this means NY will evolve on a completely different and new trajectory from the Valley. The rules and specific ingredients required for the Valley’s growth and the characteristics those produced do not need to be replicated in NY. Just like Facebook did not follow HP’s path from garage to IPO, New York doesn’t need to follow the Valley’s path from fruit orchards to tech Mecca.

The New York Tech Scene has not only arrived, but it is different and it is defining its own trajectory. It is characteristically and unabashedly New York.

When I see a startup’s logo I size it up. It often makes the first impression. Hokey? Terrible? Awesome? Do these guys get it? Do they understand how important design and customer-centric thinking has become today? Are they the sort of entrepreneurs I will get along with, that I will want to sit across the table from? 

I spend more of my time meeting with enterprise, SMB and financial services startups than pure-play consumer, but these sensibilities are still important in my mind at least. 

The problem is that they are not important 100% of the time. In some businesses you can over-think UI and UX. But I still analyze the logo. These days I do it consciously and try to handicap how much weight I put on the logo by the type of business I am looking at. I try to always account for stage too. If a team is in alpha or beta, they obviously get more slack.

But then there’s the question of what to do with, what to think of Twitter’s original logo. Even for an early stage company that thing was bad. (Note: If the first words that pop into someone’s head upon seeing your logo are “sinus infection” this is not good.)

In the end here’s where I come out, logos are first impressions; it is just better to get them right. Get them wrong and you just have to dig yourself out of a hole whether you like or not. It’s a small hole but a hole nonetheless. 

TAM or Total Addressable Market is something VCs care a lot about. Too small and VCs get scared off. Too big and you might be trying to boil the ocean and haven’t picked out a specific customer. 

But what I want to talk about is what TAM actually means. I see a lot of presentations that conflate TAM with TM and unfortunately that “A” in there is really critical. For instance, you’re an e-commerce company that plans on selling infant diapers online, InfantDiapersDirect.com. You could say, “Consumer Packaged Goods are a $2 trillion Industry!!!” But that’s not fair and you’ll only come off looking like you either tried to BS or didn’t understand what you were talking about. Unfortunately, we see this a lot…

Sure, you may eventually plan on selling more than infant diapers, but you have to define TAM for the foreseeable future. In our example, VCs are interested in knowing how big the US diaper market is (as measured by annual retailer revenues since you are a re/etailer). What % of that and $ value are infant diapers? What is the year to year growth rate? What is the average gross margin for retailers and etailers? Let’s suppose it turns out diapers are a $27 billion US market and Infants (and you always want to explicitly say how you define your market, in this case take 0-12 Months) are a $5 billion market. HOWEVER, only some customers will buy online for various reasons, so your addressable market will be smaller, let’s say 50% for the sake of argument. It is obviously your job as the entrepreneur in this example to figure out precisely what percent will be willing to shop online and justify that estimate with great research (ideally, both first-party and secondary). This is especially hard and important for new to the world / new to your customer segment products & services (ie if no one had ever bought a diaper online or online through a subscription service.)

We have arrived at a reasonable TAM, which happens to be $2.5 billion. This is what the VC was looking for. He or she will likely also want to know the gross margins and growth rates associated with the TAM as well as what percent of the TAM you think you can capture (ie market share) as obviously any incumbents or other startups may take share as well. You don’t have to bake in your assumption about market share into TAM because that would simply yield / approximate your revenue and not the TAM!

Now let’s suppose that TAM turns out to be $100mm instead of $2.5bn. This will be “too small” for most VCs (though maybe not all angels). What should you do? Well, potentially nothing. If you really want to build an awesome niche business, don’t let any VC steer you wrong. There are plenty of businesses that make tons of cash and make their founders very rich off of niche applications (thermometers for milk storage containers and trucks anyone?). But be prepared to be turned down by a lot VCs quickly and don’t let it damage your psyche. Another possibility is broaden your idea. Are you thinking too narrowly? Going back to our previous example, is there any reason to only sell infant diapers? Won’t the same customers who buy infant diapers buy other sizes as well? Perhaps you broaden the idea / TAM and become Diapers.com. But whatever you do, whether the market is tiny or huge, please don’t misquote the TAM.

The topic of pricing, or underpricing more specifically, has come up a number of times in the past week in my conversations with both portfolio companies and perspective investments. This has made me realize that many entrepreneurs start with the assumption that all startup products should be priced lower than the competition. But this thinking is flat out wrong. The conversations typically go something like this this (dummy numbers used):

“Our product is awesome. It’s the best on the market and it is disruptive. We’re pricing it at $1,000 while most of our competitors are $2,000 and our closest competitor is $1,500.”

My response to this is that you’re either underpricing or your product is NOT always better to all customers. I’ll take each one of these two possibilities in turn. First, you are underpricing. Startups often assume that they should price lower than the established competition to gain market share. My problem with this is that in reality businesses and consumers often (unlike they teach you in school) infer quality from price among other factors. This problem is particularly pronounced in opaque products that are new or complex—and startups tend to launch new to the world and opaque products pretty damed frequently! Once you underprice your buyers will this lump your product into comparisons with whatever is in the same price band. This can be damaging to your brand if you’re trying to build a premium brand. It can also be damaging to your brand because your product is making awesome product claims—“It can do X and Y!” but is underpriced, which makes the buyers doubt it can actually do X and Y. Buyers have been trained to be skeptical! This makes your branding inconsistent. Thus, if your product is better, price it accordingly. As counterintuitive as this may sound, my experience shows that this will actually help your sales and marketing efforts. 

The second reason you might be underpricing is that your product is not really as good as the competition. Sounds crummy right? Hard to stomach that thought? It shouldn’t be! Truly disruptive technologies start out cheaper AND “worse.” Think Salesforce.com. At first it was cheaper than traditional CRM solutions, but it was also much less functional. Sure it had certain advantages we can all see now, but it has come a long way since then. Over time these disruptive technologies improve and take price too as their products go upstream. So sometimes when it comes to pricing the most important thing to do is to be honest with yourself and your team. Is your product really all around better than the competition or is it “worse” (ie less functional in certain ways) but potentially disruptive for one reason or another? Network effects and externalities are another subtlety to consider in pricing, particularly for consumer products. Network effects are why Facebook and Foursquare are free for consumers. However, while almost every entrepreneur I’ve met assumes their product has “incredibly powerful network effects,” in reality I think they are more rare than we lead ourselves to believe. Be honest with yourself, does your product really have hugely powerful network effects that justify underpricing the product to gain market share? Once you have market share how then will you monetize it?

If your product is better and you’re building a premium brand, price at a premium. If your product has limited functionality but the potential to improve over time and disrupt incumbents, consider under-cutting the competition—but don’t assume this is always the way to go!

Key takeaway: Startup pricing is not one size fits all and I think startups are more prone to underprice their products than overprice. And if you need a good visual to remind you that putting things on sale is not always great for your brand, I’ll leave you with this: 

http://www.youtube.com/watch?v=YtespeLin2c

As a cancer survivor and former startup guy, it occurred to me today there are a few similarities in surviving the two. They’re both emotional roller coaster rides with unparalleled highs and lows. Believe me, when you’re diagnosed and being treated for cancer those can be some of the hardest days of your life. But when you get positive news on your health, especially right after the tough days, those times are unbelievably good.

Startups are the same way. When you’re just starting out nothing can stop you. Until something does. And then that’s one of the worst days of your professional career. Everything seems meaningless and you wonder if you’ve been wasting your time. 

And so goes the emotional roller coaster until ideally you can smooth out the oscillations and find some level of peace.

Surviving cancer and surviving life at a startup therefore require some of the very same emotional skills. They require the ability to simultaneously 1) Keep an honest and realistic perspective/assessment of the overall situation, yet 2) Believe you will win (even irrationally and against all odds) and compartmentalize all the possible downside scenarios and risks. If you were to dwell on the downside possibilities, you would be paralyzed from acting. Tricking your mind into maintaining these two conflicting points of view is difficult and takes some time. There will be days when only one point of view will win, but you must try your best to let them balance each other out into an even homeostasis.

Have you started a company or worked at a startup and/or survived cancer and been on this roller coast? Have you done both simultaneously?