Monday, January 31, 2011

Getting Started with a Two-Sided Market Business

As I discussed in Matching Algorithm, I end up talking to a lot of startups who want to become the eHarmony of careers, eHarmony of clothes, eHarmony of jobs, eHarmony of tutoring, eHarmony of services, eHarmony of investments, etc.  This comes up a lot and if you are thinking about one of these kinds of startups, definitely take a look at Matching Algorithm.

When I talk to the founders of one of these “eHarmony of” companies, one of the hardest problems is how to predict and test the concept in the early days – before you have scale.  Sean Ellis in Bringing a Network Effect Business to Market positions this via the following two pictures:


In the case of a normal startup, you can launch an MVP and keep optimizing from there to achieve scale.  In a Network Effect Startup, you need to drive growth to some degree in order to be able to even begin to test it.  And to get growth you need some level of efficient conversion.  So, it makes it much harder to predict, test and scale a network effect startup.

Let’s take a particular example: eHarmony of jobs. 

In this case, the system will be made up of a classic two-sided market:

  • Job Seekers
  • Jobs / Employers

And like most two-sided markets, the value to either side is most often proportional to the number of users on the network’s other side.  I.e., a job seeker would get more value if there are lots of jobs / employers.  An employer gets value if there are lots of job seekers.

The problem for an early stage startup is that without critical mass, the system doesn’t provide much value.  Coming back with no matches is not a very satisfying result and you generally will lose customers that you may have even paid to acquire.

Before you determine your specific strategy a few questions to think through:

A. Do you need real-time response?  Do you have time to manually find matches?  Who would be willing to wait?  How long?

B. How hard is it to find matches on either side?  What can be done using information that already exists?  How is it done today?  What’s the cost of doing it?

C. What are the economics?  Who pays?  How hard is it to acquire each side?  Can you effectively subsidize one or both sides initially?

D. What do you really need to prove?  Is it sufficient to show some level of matching and that there are willing buyers?

E. What kinds of tests can I run to simulate and prove aspects of this?

From there, you might consider some specific strategies.

Limit the Scope

Trying to launch the eHarmony of jobs all in one shot would be very challenging.  Instead, you should think about how you can effectively limit the scope.   Let’s only go after this particular type of worker and this type of job/employer.  Let’s limit ourselves to this geography.  By doing so, you definitely constrain the problem, but it doesn’t strictly go away.  It’s just that you now need to prove whether you can achieve critical mass in a limited scope.

Jason Cohen has a great line about this in Solving the “marketplace” business model:

If you’re bootstrapping and your value proposition includes the words “anything” or “anyone,” you’re probably reaching too far.

Make sure your value proposition works when it’s a limit inventory – ideally on both sides.  So, if the job seeker expects to find “every” available job, you likely have a problem.  Or if the employer expects to have every possible employee – that’s a problem.  What you really want are well matched on either side, not necessarily the absolute best from the universe of all possibilities.

Quick Growth

Let’s say you’ve limited it to a particular type of job in a specific geography.  Well chances are there are some partners or sites where you can get information on jobs today.  There likely are partner lists that you could hit up to quickly achieve growth.

Go Manual Behind the Scenes

Do you really need to be real-time in your response?  In the case of jobs, you can probably get away without being real-time on either side.  In other words, someone puts in their information and two days later you come back with a list of potential matches. 

What this allows is one of the more common early approaches for startups.  Basically you do things manually at the start.  Likely there is lots of job information already available.  Maybe you are simply doing smart searches on behalf of job seekers and coming back with those job suggestions.  Or for each job that you get from an employer, you comb through social networks, LinkedIn, etc. to source potential candidates.  Or both.

In fact, if you do both, it’s called a Zig-Zag strategy.

A really great example of this is described by Steve Rentoid in Inventing Demand.  He wanted to build a business that rented electronics.  So, he would determine what people might want.  He would put up ads.  And then:

When people rented the items, I went out and bought them, first hunting for the lowest price on line. Then rented it to the new rentoid member in good faith and gave them an exceptional user experience.  After the rental I sold the item on eBay for around about 80% of the retail price. I pretty much re-couped my costs doing this.

Jason Cohen also recommends this in Solving the “marketplace” business model:

But just because automation is the goal doesn’t mean it’s the way to start. The good thing about automation is it’s efficient; the bad thing is you cannot learn because you’re not involved in the process. And at the start, learning is where you should be spending most of your time!

Create Network Independent Value

Provide a job seeker some kind of profile that would be of value to them independent of finding a job.  Provide an employer a low-cost, free way for them to manage their recruiting efforts.  I.e., they get an SAS recruiting solution that allows them to post jobs and manage the recruiting process.

Additional Reading

Some additional resources.  I’d love to hear about others:

I definitely plan to blog more about this topic as it comes up quite often.

Tuesday, January 18, 2011

CTO Equity - Negotiation After Funding

I received an inquiry from a reader of my blog and thought I would provide some thoughts, but would definitely welcome input:

I am an unpaid CTO of a small startup. I have been working full time with two founders for about 10 months on full time basis. I have been through many months with them but because of lack of funds, I spent lot of time doing non-technical work for first 4-5 months, spending time with them on putting pitches for investors, cash flows,  budgets, writing business plans, product prototype setups etc. There was an informal verbal agreement that I would work for a certain hourly rate for my time. During that time one of the founders had mentioned that for the initial agreed time (3 months, equivalent dollars could be translated to 2% of equity but no agreement was reached at that time).

Now, they were able to raise enough money in the last 3 months to launch a product along with all the necessary software development to launch a pilot program for validating the idea. During all this time, valuation pitched to the investors was in the $1M – $3M range. I was also responsible to get a top-notch technical architect to build the necessary back-end at very affordable hourly rate to be able to launch the product in a very short time.

Because we were so busy in the last 3 months, I did not had a chance to talk to the founders about my compensation for the time spent and future salary etc. When finally, I sat down and started talking, they basically tallied up the hours I spent and gave a choice to get equity at current $3 mil valuation or get full cash for my time or blend of both cash/equity. I tried to argue that the equity should be what it was at the time I joined and discussed but there was no formal agreement at that time. Now I feel like I was part of the team to build the company but equity valuation offered to me is not fair.  I am thinking of taking full cash and slowly easing myself out.  I would appreciate if you could provide your guidance on this one.

Obviously, in hindsight it would have been a really good idea to get an agreement that spelled out your equity position and how you would be treated cash+equity prior to and after funding.  Please let this be a lesson to everyone – founders and CTOs.  Don’t put yourself in this situation.  Of course, that doesn’t help here.  So …

I have probably more questions than answers.  The reality of your situation is that you are now in a different negotiation.  The situation is what it is at this point and it’s a question of where there’s leverage. 

Actually, I should start by saying – I’m not a lawyer and you might want to get someone who can help you understand your position here.  Find a lawyer and someone who does CTO searches for VC backed companies in your area.  They both would have lots of thoughts and ideas.  The lawyer will charge you for more than the initial conversation.  The search person likely won’t charge you if you have a strong enough background, i.e., later would provide value to them.

Some things to consider about the negotiation:

  • Do you want to remain with the company?  Likely this greatly affects cash vs. equity.  Most founders and investors won’t want you with a chunk of equity if you are no longer there.  But they also don’t want to part with cash.  Still, likely everyone would be happier with a cash settlement.  But I’m assuming you want to remain at the company.
  • Do the founders recognize that they had verbally agreed to 2% for 3 months work?  Do they recognize that you’ve spent 10 months not 3 months on it?  Do they feel responsible to honor that?  Realistically, you took a lot of risk here and should be rewarded.  That said, they likely also are a bit under pressure because of the loss of the reality of funding and investors to keep your equity component down.  But, you should probably start with understanding where they believe that prior verbal agreement stands.  You likely to get the best result based on this equation.
  • What are the specifics of the 2%?  Was it pre or post?  What type of shares?  Vesting?  Or was it options?
  • What are the terms the founders got in the deal?
  • My guess from the way you’ve worded the question is that you’ve done a really good job as the CTO.  You’ve put the right team in place to essentially make yourself less valuable to the founders because they feel they can move forward effectively without you.  A cornerstone of your negotiating position is how valuable you are to the company going forward.  Think Tom Cruise – “With me, without me.”  Do the founders and investors believe that your are essential to their success?  Do they have a good relationship with the architect?  Do they recognize any Startup Founder Developer Gap?  You might use some of the key questions in Startup Software Development – Do Your Homework Before You Develop Anything and Startup CTO or Developer to help you point to issues where you have particular input and value.
  • What’s your relationship with the investors?  Do they believe you are important?  Do you have a direct line of communication?  I don’t think you pull the trigger on this anytime soon, but it’s negotiating leverage.
  • What’s the rate for your time that would be used in a discussion?  Is it market rate or some reduced rate that you’ve discussed at some point?   What would the cash equivalent for your time at market rates be for the amount of time you’ve invested to date?  Somewhat for the cash settlement or the worst case equity discussion, this would be the basis for the discussion.
  • What will your involvement be going forward?  Are you full-time, part-time, advisory (take a look at Part-Time CTO, Technology AdvisorActing CTO for other models)?  What is your cash+equity compensation for that period?  What happens when this round of funding begins to dry up?  (Don’t make the same mistake.)

For me – I would definitely start by soul-searching – do I want to still be involved?  Do I trust the founders?  Do I want to work with them?  Having a successful negotiation where you get a reasonable equity position with vesting over four years and a salary going forward only to find yourself working at a place you don’t want to be is probably not a great result?

I would then also consider closely what your real contribution has been to date and what they owe you for that and then what they should compensate you for your contribution going forward. 

Some other possible sources:

  1. Splitting Startup Equity for Your Piece of the Pie
  2. How much should you pay an executive in a startup company?
  3. How Much Stock to Ask For When Joining a Startup
  4. Reincubate: Blog: Chief Technology Officer job description (for web, start-up or corporate
  5. Doing It Right the First Time: The 15 Most Common, but Avoidable, Mistakes Made by High Growth Start-ups

Again – I would love to hear input on this and other sources of information.

Friday, January 7, 2011

Wednesday, January 5, 2011

Top 120 Startup Posts for 2010

Some really great stuff in 2010 that aims to help startups around product, technology, business models, etc. You can find some of the monthly ones in the following:

Without further lead in, here are the top 120 posts for 2010:

  1. Visual Guide to NoSQL Systems- Nathan Hurst, March 15, 2010
  2. If I Launched a Startup- The Startup Lawyer, March 17, 2010
  3. Why Free Plans Don't Work- Software By Rob, August 18, 2010
  4. Subscriptions are the New BLACK. (+ why Facebook, Google, & Apple.- 500 Hats, February 1, 2010
  5. When to Use Facebook Connect – Twitter Oauth – Google Friend Connect for Authentication?- SoCal CTO, January 13, 2010
  6. 5 Lessons from 150 startup pitches- A Smart Bear: Startups and Marketing for Geeks, July 11, 2010
  7. 9 Reasons Why Many Smart People Go Nowhere- Life Beyond Code, March 29, 2010
  8. No Accounting For Startups- Steve Blank, February 22, 2010
  9. Startup Advice In Exactly Three Words - #StartupTriplets- OnStartups, January 8, 2010
  10. How to Minimize Politics in Your Company- Ben's Blog, August 24, 2010
  11. New York Times 50 Most Challenging Words (defined and used)- Currently Obsessed, June 15, 2010
  12. Startup CTO or Developer- SoCal CTO, January 26, 2010
  13. 8 Questions to Ask When Interviewing at a Startup- Instigator Blog, June 18, 2010
  14. Quantum of Deployment- Code as Craft, May 20, 2010
  15. 10 Ways To Be Your Own Boss- A VC : Venture Capital and Technology, June 18, 2010
  16. MoneyBall for Startups: Invest BEFORE Product/Market Fit, Double-Down AFTER.- 500 Hats, July 30, 2010
  17. Kathy Sierra at Business of Software 2009- Business of Software Blog, May 4, 2010
  18. Customer Development Checklist for My Web Startup – Part 1- Ash Maurya, February 16, 2010
  19. How-to learn about angel/vc term sheets- Gabriel Weinberg, June 28, 2010
  20. Why Every Entrepreneur Should Write and 9 Tips To Get Started- OnStartups, September 27, 2010
  21. Taking the Mystery out of Scaling a Company- Ben's Blog, August 2, 2010
  22. Your Market is Smaller Than You Think- Software By Rob, September 30, 2010
  23. Web Services as Governments - Union Square Ventures: A New York.- Union Square Ventures, June 10, 2010
  24. No Plan Survives First Contact With Customers – Business Plans versus Business Models- Steve Blank, April 8, 2010
  25. Pricing models, the freemium myth and why you may not be charging enough for your product- Seth Levine's VC Adventure, August 12, 2010
  26. Case Study: Continuous deployment makes releases non-events- Startup Lessons Learned, January 18, 2010
  27. Don Norman at Business of Software 2009- Business of Software Blog, June 21, 2010
  28. My experiments in lean pricing- Venture Hacks, February 16, 2010
  29. Guide to Evaluating Startup Ideas- Tony Wright dot com, May 27, 2010
  30. Cash Connections: Who Invested In Social Media [infographic]- OnStartups, November 22, 2010
  31. How Andreessen Horowitz Evaluates CEOs- Ben's Blog, May 30, 2010
  32. The Twitter Platform's Inflection Point- A VC : Venture Capital and Technology, April 7, 2010
  33. Startup Development- SoCal CTO, April 23, 2010
  34. If I Launched a Startup- The Startup Lawyer, March 17, 2010
  35. What’s A Startup? First Principles.- Steve Blank, January 25, 2010
  36. 10 Tips for Adding Game Mechanics to a Non-Gaming Service- ReadWriteStart, September 21, 2010
  37. Startups & VCs: Learn How to Design, Market, & Eat Your Own.- 500 Hats, January 10, 2010
  38. Developing new startup ideas- Chris Dixon, March 14, 2010
  39. Batch Processing Millions and Millions of Images- Code as Craft, July 9, 2010
  40. jQuery Plugin: Give Your Characters a NobleCount- The Product Guy, March 23, 2010
  41. How do the sample Series Seed financing documents differ from typical Series A financing documents?- Startup Company Lawyer, March 14, 2010
  42. Four Minutes In The Morning- Feld Thoughts, September 1, 2010
  43. Ten Crowdsourcing Trends for 2011- crowdSPRING Blog, December 8, 2010
  44. How New Ideas Almost Killed Our Startup- Vinicius Vacanti, August 3, 2010
  45. Evidence that Facebook Works as Marketing Tool- The Entrepreneurial Mind, March 2, 2010
  46. 10 Blogging Tips. My 1,000th Post on This Blog- Tim Berry's Blog - Planning Startups Stories, July 21, 2010
  47. HTML5 video markup, compatibility and playback- Niall Kennedy's Weblog, February 8, 2010
  48. Your Product Needs a Soul- ArcticStartup, February 12, 2010
  49. Product Friday: Monetizing Content is a Product Problem- This is going to be BIG., August 20, 2010
  50. How To Land a Job at Google (or elsewhere)- FairSoftware's Blog, November 9, 2010
  51. Figuring Out Your Way to Startup Success- Startup Marketing Blog, June 8, 2010
  52. The 30 Steps to Mastery- Ben Casnocha: The Blog, November 29, 2010
  53. Four Square Fatigue and the Evolution of Privacy- VentureBlog, February 5, 2010
  54. Ten rules for better founding teams- High Contrast, March 22, 2010
  55. 8 Simple Ways You Can Earn a Passive Income- Feint, March 14, 2010
  56. Stop hitting your Invisible Wall.- 47 Hats, March 9, 2010
  57. Seed funding best practices- StartupCFO, February 11, 2010
  58. PowerPoint Is Evil, Redux- David Silverman, April 28, 2010
  59. I'm Tired of Creating Your Content- Babbling VC, November 12, 2010
  60. The Scene Will Kill You- Brad Hargreaves, November 7, 2010
  61. The Magic Word in Customer Development Emails- Kevin Dewalt, January 12, 2010
  62. Updated Customer Development Image- Market by Numbers, January 13, 2010
  63. LIFT10: Workshop on Hacking Venture Capital- Fred Destin, May 7, 2010
  64. Mark Zuckerberg on What Hollywood Doesn't Get About Silicon Valley- Founders at Work - Blog, October 27, 2010
  65. What Does a CEO Do, Anyway?- OnlyOnce, September 6, 2010
  66. Ten Slides Make a Killer Investor Presentation- Startup Professionals Musings, May 19, 2010
  67. We’re Living In The Dark Ages Of Social Media-, August 9, 2010
  68. How to Enchant Your Customer- How to Change the World, November 23, 2010
  69. Don’t Let Your Ignorance Stop You- by Yaro Starak, February 17, 2010
  70. Gartners IT Debt Scare- deal architect, September 26, 2010
  71. Change is coming to online shopping- Redeye VC, March 2, 2010
  72. Consumer RSS: 1999-2010- Venture Chronicles, September 11, 2010
  73. Bessemer's Top 10 Laws of eCommerce: Introduction- Adventurista, September 7, 2010
  74. You Shouldn’t Have to Pay to Talk To Your Own Customers- Austin Startup, July 12, 2010
  75. Eight Suggestions For Great Brainstorming/Ideation- Gregg Fraley, Author of Jack's Notebook, July 23, 2010
  76. 8 Really Cool Web-Based Tools for Bloggers- Blogtrepreneur | Entrepreneur Blog, June 1, 2010
  77. Drunks, Wall, Entrepreneurs and Jobs- Growthology, April 9, 2010
  78. Top Startup Mistake 8: Misunderstanding Equity- Up and Running, February 5, 2010
  79. When to ramp sales- BeyondVC, January 14, 2010
  80. Anatomy of a Term Sheet: Index- VC Ready Blog, August 24, 2010
  81. 4 Steps to a successful Performance Management implementation- Active Garage, May 24, 2010
  82. Who Owns the IP Rights to Custom Software?- IP Law for Startups, June 23, 2010
  83. Groupon’s Growth Made Possible by Facebook- Leveraging Ideas, May 5, 2010
  84. Automating Themed Logo Changes by Season- An Internet Entrepreneur's Journey, October 18, 2010
  85. Selling a Business - A Guide for Investors and Entrepreneurs- Angel Blog, February 28, 2010
  86. Minimum Viable Product in practice- Guy Nirpaz, October 17, 2010
  87. Want to Know How VC’s Calculate Valuation Differently from Founders?- Both Sides of the Table, July 22, 2010
  88. An updated Digital Trends presentation- Jeff Hilimire, June 2, 2010
  89. I do what I hate- Jessica Mah, January 7, 2010
  90. Startup Equity Allocation-, January 11, 2010
  91. When good investment decisions end up backing more women CEOs: Conversation with Cameron Lester at Azure Capital.- Grade A Entrepreneurs, September 5, 2010
  92. Why Krispy Kreme failed in Australia- Start Up Blog, November 3, 2010
  93. Mellow Johnny’s: Retail Stores as Community Hubs- IDDICTIVE.COM, July 14, 2010
  94. Is crowdfunding an option for my business?- Growthink blogs, October 29, 2010
  95. Have a Look Inside an Angel’s Brain- Ask the Angels, December 1, 2010
  96. Mark Suster Lays It Down At Columbia- Get Venture: Venture Made Transparent, November 13, 2010
  97. SMALL BUSINESS IDEAS: GROW SLOW- The Freestyle Entrepreneur, May 1, 2010
  98. The Five Domains of High Performance- Seeing Both Sides, January 18, 2010
  99. How to Do a Business Model – Part 1- NFIB Young Entrepreneur Foundation Blog, July 10, 2010
  100. A reason why people quit - lack of network- Sophia Perl of Wisdom, September 20, 2010
  101. From Personas to Functional Specifications- Startup Musings, January 25, 2010
  102. Small Business Jobs Act Includes Short-Term Full Exclusion from Gross Income of Gain from QSBS- Recent Buzzes - VC Experts, Inc., November 23, 2010
  103. Entrepreneurs, Using Outsourcing to Obtain Capital Efficiency Needs to be Thought Through to be Effective- Robert Ochtel, June 7, 2010
  104. Teen Entrepreneur, Brian Wong, Youngest Founder to Receive Angel Funding-, October 28, 2010
  105. Build Your Own Silicon Valley? | Vivek Wadwha- Campus Entrepreneurship, November 19, 2010
  106. Best Practices for Introduction Emails- Israel Venture Capital 2.0, March 25, 2010
  107. Weekend Reading- The Mogul Mom, October 1, 2010
  108. Make informal advisors part of the team.- Berkonomics, November 29, 2010
  109. Rice Alliance IT/Web 2.0 Forum December 9th Lineup- Startup Houston, November 27, 2010
  110. When to step on the gas and go for it?- Will Price, October 11, 2010
  111. Georgians Should Vote No- Force of Good: a blog by Lance Weatherby, October 28, 2010
  112. Free Software for Managing a Lean Startup- Platforms and Networks , January 17, 2010
  113. Purpose Driven Life- Journey of a Serial Entrepreneur, July 26, 2010
  114. Two Decade-Defining Acquisitions? Then (Google) & Now (Apple)- Genuine VC, January 7, 2010
  115. Marketing Your Startup with Neil Patel- More Caffeine, Please, March 30, 2010
  116. The Concept of Co-working- The StartUp Blog at PartnerUp, April 21, 2010
  117. A Cool Communication Concept- Entrepreneur Success Blog, January 26, 2010
  118. Weighing In On The Debate Over Standardized Financing Documents- VC Deal Lawyer, October 11, 2010
  119. Twilio ideas brainstorm: SMS, Voice, API- Steve Poland, February 10, 2010
  120. Part 1: Guide to Creating Products Linked to Social Entrepreneurship- College Mogul, January 30, 2010

Did I miss any? If you think so, please let me know what they are.