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This is a continuation from my previous post about fast followers.

Several times a week, I hear a pitch from for a company that is fairly similar to existing players in the market.  When I ask the entrepreneur how they expect to win vs. the various competitors, I’ll often hear something like:

“Well, they don’t have feature x, y, and z which has been built into our product from the beginning.”

These same folks usually include some sort of Harvey Ball chart to show how differentiated they are from their competitors.

My advice: if you need a Harvey Ball chart to show how you are different, you aren’t different enough.

In my view, winning as a startup doesn’t have that much to do with individual features.  Features do drive success, but great teams and great product development processes drive features.

I saw a talk a while ago by Mike Maples.  In it, he encourages entrepreneurs to “be different, not better”.  I completely agree.

Being different means being WORSE than competitors in some dimensions.  It’s a very intentional decision to forgo some areas of potential strength and choose the 1 or 2 dimensions that no one else is thinking about and absolutely destroy the competition in those areas.

Some examples?  Tumblr, Zappos, Milo, Polyvore, etc.

Be different.

I previously wrote a To-Do list for new entrepreneurs arriving in Boston.  It included a bunch of folks to follow on twitter and on their blogs, events to go to, and companies to get familiar with.

I’d like to add a new to-do on the list, especially if you are a younger entrepreneur.  Check out Dart Boston - a community of entrepreneurs 30 and under helping one another start their businesses.  These guys have sprung up out of nowhere in recent months, and I’ve been really impressed by their level of activity and creativity.  For example:

Pokin’ Holes: A weekly meetup and video show where one local entrepreneur presents their company and gets grilled by their peers.  The show moves around Boston in an effort to engage the entrepreneur community in different areas.  Tonight’s event is at Tufts.

Capitalize: A monthly show where one company pitches to a VC or angel investor.  You get to see the pitch and feedback streamed live.  This month, it was at Kepha Partners with Eric Hjerpe.  In May, I’ll be on the show at Spark Capital.

Rule 53: A podcast that features a series of interviews about startup life, business, and tech.

I don’t know how these guys and gals have time for all this, but I’ve been very impressed and think it’s an excellent addition to the local tech scene.

Charlie O’Donnel and Jon Steinberg recently wrote two excellent posts about the value of business school and advice to graduates looking to join a startup.  Their feedback is quite challenging and a little negative on MBA programs.  I’ve said myself that most MBA’s are unable to really build something or sell something, which are basically the only two jobs that matter at an early stage company.

I do fear that the sentiment around MBA’s is swinging a little too negative these days.  I’d like to offer a slightly more positive view, and some suggestions to MBA programs to better prepare their candidates.

Unlike some graduate programs, an MBA is not a trade.  You don’t walk away with the ability to do something unique like you would coming out of dental school or law school.  In fact, most people who go into business school are actively leaving their “trade”, whether that’s banking, consulting, product management, sales, or something else.

So what’s the point of Business School?  In my view, the point of an MBA at a top tier B school is to provide students with the perspectives and pattern recognition to be a really great C-level executive.  It allows a person to feel like they have “seen this movie before” in more situations and respond more decisively.  There is a TON of value in this, but the further you are from making meaningful decisions in an organization, the less useful this learning becomes.

In my view, MBA entrepreneurs shouldn’t be looking to join great startups.  They should be looking to start great companies.  If they feel poorly equipped to do that, that’s a signal that they went to Business School too early.  I love the example of guys like Brian Shin and Dharmesh Shah who had started companies in the past, went to B-school relatively late, and used the resources there to cultivate their next company.

Unfortunately, I can’t change the way Business Schools operate overall.  The talent market is such that students are applying to Business School earlier and top tier schools are trying to admit younger students as well.

So here is what I would do differently at business schools to make students more effective in the startup ecosytem.

1. I’d make sure there is a class on early stage product creation.  This would include the nuts and bolts of forming a founding team, best practices in early stage product marketing and product management, and best practices in early stage customer acquisition. I think this class should also require students to produce something and find users.  It could even be as simple as starting a blog and attracting readers - it doesn’t matter.

2. I’d push more students to take classes in sales.  I would make most of this learning occur outside of the classroom.  Imagine if you could create a program where a bunch of top tier MBA’s are working for different companies and actually helping them sell product.  That would be tough to coordinate, but make a big difference.

3. I’d rethink the case method.  The case method is great at creating a lively, analytical discussion.  You can generally guarantee that a class of 50-90 students will pick apart the main issues of a decision, and discuss all the costs and benefits of all the options.  The problem is that business isn’t about analysis.  It’s about decisions.  And decisions are as much about the gut and conviction to trust your judgement as it is about analysis.  During my two years in Business School, I don’t think I ever felt the the discomfort in my stomach that comes with making an important decision with incomplete information.  But that’s what has to happen all day long at a startup (or in any management role).

4. I’d push students to get out of the campus.  B-schools are great a bringing in great speakers and executives.  It’s easy to get complacent.  But entrepreneurship tends to be a local endeavor in the early days.  You have to recruit locally, fund-raise locally (usually), find your first customers and partners locally (usually), etc.  Cities like Boston, New York, and SF have a lot of resources for early stage entrepreneurs and have thriving startup-ecosystems.  But I rarely see a B-school student at WebInno, OpenCoffee, PopSignal, or other local events.  Maybe the situation is better with the NY Tech Meetup, but I’m not sure.

Those are my thoughts - and I’d love to to whatever I can to help MBA programs better equip students for roles at early stage companies.

I’ve been thinking about this post for a while.  Basically since the great NYT Piece came out on Shane Battier. I think Shane’s story is a remarkable one, and there are a lot of lessons that can be applied to startups and to careers in general.  It’s also interesting to juxtapose his experience with a lesser known Blue Devil - Chris Burgess.

Shane Battier and Chris Burgess were both in my class at Duke.  Both were very highly touted new recruits on an amazing freshman class that also included Elton Brand. Both were McDonald’s High School All Americans.  But they had very different careers in college:

Battier: (Year: PPG/RPG)

1998: 7.6/6.4, 1999: 9.1/4.9, 2000: 17.4/5.6, 2001: 19.9/7.3, 2002: NBA

Burgess: (Year: PPG/RPG)

1998: 4.3/3.4, 1999: 5.4/3.9, 2000: Transferred, 2001: 7.8/5.9, 2002: 13.2/7.2

Today, Shane is with the Houston Rockets and one of the most well regarded role players in the NBA.  Chris has bounced around the European league and is currently playing with a team in Dubai.

I think there are a couple generalizable lessons from these two careers.

1. Find product/market fit early, and be realistic when it isn’t there.

In this case, the player is the product and the team and the NCAA broadly is the market.  Unfortunately Burgess didn’t fit into the Duke system.  It was painfully obvious fairly early on.  Coach K typically has one dominant big man, and a bunch of wing players who shoot threes.  Brand emerged early as that dominant center, and Burgess was left without a role.  Unfortunately, he had to battle through it for two years before he transferred, and unfortunately, he also battled a string of injuries once he started playing for Utah.

Startup entrepreneurs search for product market fit from the very beginning.  I think the challenge in the early stages of a company is to find that fit as quickly and as painlessly as possible.  Until you get there, you want to avoid spending a lot of money on a team, marketing, or infrastructure.  The problem comes when a founder is too attached to his product concept, that he keeps plowing forward even when users are only lukewarm about the product.

Sean Ellis has a very simple way to measure whether PMF is achieved.  The basic idea is to get to a point where 40% of users say they would be very dissappointed if they could no longer use your product.  I think this is something all early stage companies should be measuring and trying to achieve.

In Burgess’ case, he did not achieve PM fit at Duke.  Unlike a web startup, basketball players can’t experiment anywhere near as nimbly with their product. So he had to make the painful decision to leave after two years, redshirt for one year, before continuing his career in Utah.

2. Do A Few Things So Well It Becomes a Thing of Beauty

Shane Battier fit well within the Duke system.  He was very versatile and was a great defender and rebounder.  But he started at Duke as an all-around smart player.  I think it was pretty clear early on that he wouldn’t be a dominant superstar.

What Shane did do was focus on a few things that he did very well, and perfected them.  Specifically, he became the best defender in the NCAA.  He also made an art out of taking charges (a stat that most people don’t pay any attention to). When players faced Shane 1-on-1 when driving the basket, you could actually see fear in their eyes as he got into position to take a charge.

It’s also interesting to see what Shane didn’t become.  He didn’t handle the ball very much, and actually looked quite awkward doing so.  His rebounding numbers didn’t go through the roof, and he didn’t really create scoring opportunities for himself.

A lot of startups have big aspirations of how the product will evolve.  Entrepreneurs are excited about solving huge problems and there are a lot of them out there to tackle.  But most game changing companies start out doing one thing extremely well.  In fact, they do that one thing so well that they uncover unique opportunities that weren’t obvious before.  As an early stage company, it’s important to figure out what it is you will do far better than anyone else.  The most dangerous startups are probably the one that do everything ok, because it’s not immediately obvious that things aren’t going to work out.

3. Know Where You Hope to Get To and What You Need to Get There

Great startups can’t be single product companies that do only one thing well forever.  They eventually have to mature and become real, meaningful businesses. In the same way, great college basketball players often struggle to make the leap into the NBA because their areas of strength are insufficient in a much more competitive league.

I don’t know how intentional this was, but Battier seemed to have a plan for what an NBA version of him would look like, and evolved him game to fit that vision.  During his junior year, he added a three point shot that made him a viable offensive threat.  In the NBA, he improved his quickness and evolved his defensive abilities to be able to handle quicker guards and forwards as opposed to the post players he had defended during most of his college career. His evolution was amazing to watch.  It seemed almost perfectly calculated, fit his god given talents, and matched the needs of the NBA perfectly.

Often, I meet with entrepreneurs who don’t have a great core product that I think could achieve PMF.  But even the ones that do need to have a clear idea of where they are going and the steps necessary to achieve those goals.  Things obviously change over time, but it’s comforting for an investor to know that the entrepreneur has a reasonable roadmap to becoming a big successful company.  Good entrepreneurs know this is more than just imprecise jargon.  It usually involves deep appreciation for the market they compete in, intimate understanding of competitors, and knowledge of the 2 or 3 things that need to go right for their company to win big.

Shane and Chris are both pretty young guys so it’s still early in their careers.  I was a huge Burgess fan, and do hope that he can make it into the NBA one day and have a few solid seasons.  For Battier, it will be interesting to see if he is able to squeeze out even more output from his talents and become a real All-Star.  I wouldn’t bet against him - he’s done a phenomenal job so far.

One of my favorite quotations about innovation is attributed to Henry Ford:

“If I had asked customers what they wanted, they would have said ‘Faster Horses’”

It’s a great reminder to me how unpredictable the product creation process is, especially in brand new markets.  Often, marketers are fooled into thinking that they can research their way into great products and solutions.  That may work sometimes, but for capital efficient internet companies, I think this is rarely the right way to go.

I think the better route is to build something, find users, understand what works and what doesn’t work, and then iterate.  Up front research has a place, but it’s less useful for figuring out what product to build and more useful for testing specific hypothesis about what your users are already doing.  There’s a ton more written about this by guys like Steve Blank so I’ll save my ink.

That’s why I’m a big fan of programs like YCombinator and TechStars (by the way, the TechStars Boston deadline is approaching fast). There is an emphasis on getting products out the door and quickly iterating to find product-market fit.  The goal isn’t to build the most bulletproof product in a short amount of time, but to build a product that gets users engaged and maximizes learning.  A lot of folks don’t understand this - that’s why these products are often considered “toys” in their early days.

So, for those of you who’ve been thinking about starting something for a while - make it your new year’s resolution to build something.  Get something out the door cheaply, test it with users, and see where things go.  I have an idea or two of my own that I’m going to try to execute on, so this is a resolution for me as well.

Here’s to a great 2010.  Let’s build some great products to solve some big problems.

VC’s often ask entrepreneurs of early stage companies questions that they can’t realistically answer.  For example:

1. What’s the cost of customer acquisition? (most entrepreneurs have no clue.  Plus, even with early data, this answer can change radically with scale)

2. What will the product look like in 5 years? (Who knows?  Product evolution is rarely linear.  You may be going after a completely different problem in 2 years)

3. What’s the competitive landscape? (who knows what players will emerge?  Who knows what Google/MSFT/Apple will do to suck the air out of your industry?)

4. How will this business scale to millions of users?

As I type this, I’m almost laughing at myself. I think entrepreneurs are understandably annoyed when they get peppered with questions they can’t possibly have the answer for.

My advice is this: Answer the questions beneath the question. What I think VC’s are really trying to answer are the following:

1. Is this an attractive industry and how do you win? Hopefully, you’ve targeted a VC that has a clue about your industry, but our knowledge is usually not nearly as deep as it could be.  Help us understand the trends, customer challenges, and business levers that matter.

2. Is this a good entrepreneur? The entire fundraising process is an evaluation of the entrepreneur.  We want to know how resourceful you are, how self aware you are, whether great people will work for you, and whether you can withstand the challenges of a startup.  A lot of the questions I ask are meant to understand how an entrepreneur thinks and will respond to the challenges of the entrepreneurial process.  In a way, I’m also asking myself “if I were interviewing for a job with this person, would these answers give me confidence to work for them?”  Also, I’m trying to figure out whether this entrepreneur is trustworthy and listens to feedback.  It’s great when entrepreneurs realize that I’m hung up on a particular problem about their business and comes back later with a potential solution and plan to test it.  It’s not great when an entrepreneur tells me about a customer they are about to sign and the diligence shows that they’ve only spoken to the company once.

3. Does this entrepreneur understand the business she is getting into? Even if startups have a lot of uncertainty, there is a big difference between entrepreneurs who understand their business and those that don’t.  Experienced consumer internet executives rarely say: “we will acquire customers through word of mouth and Web 2.0 techniques.”  Instead, they have very specific thoughts about distribution partners, specific social media outlets they can tap, how to market effectively through SEM and SEO, etc.  I want to back an entrepreneur who demonstrates intimate knowledge of the industry she is focused on, even if she has never worked in that industry before.  History is littered with previously successful entrepreneurs who failed because they went after a market they did not understand.

4. Will this entrepreneur spend my money wisely? This isn’t just about being cheap.  It’s about investing in the right areas at the right time in the right amounts.  I want every dollar spent to reduce as much risk as possible or increase as much upside as possible (or both).  This usually comes back to #2 and #3.  Good entrepreneurs may say something like this:

“I know I can’t get scale in this business by selling directly.  I need channel partners.  But I DON’T know what customer segments I should be targeting first. So, I will spend a little money to test my product with a bunch of customers before spending a lot of time and money marketing the product and securing a big channel partner.”

Bad entrepreneurs will spend millions of dollars building a product and millions more marketing a product before realizing that no one really wants it.  Shockingly, this happens a lot more than people think.

5. Do I believe in the proposed product? This is very hard to figure out.  Usually, this is answered by a combination of a) customer feedback or b) gut.  Customer feedback means lots of people are using the product (aka traction), or we have called a bunch of potential customers and done technical due diligence and the feedback is positive. Gut means that we have a strong point of view of how the market will evolve and what solutions will be important, and your product meets that vision.

The threshold for this question isn’t as high as the others if I’m satisfied by the answers to questions 1-4.  If that’s the case, then it’s in the bucket of “this is a good entrepreneur going after a big opportunity, and I believe he will use my funding wisely to figure it out”.  For true early stage companies, I think this is the most an investor can realistically ask for.

VC’s pass on new investment opportunities more than 99% of the time.  My guess is that the clear #1 reason why we pass is because of the team.  This could mean a bunch of different things (eg. no confidence the team can execute well, personality clash, etc).  But I don’t think there will be much dispute that this is the main driver behind a “no” decision.

The #2 reason is NOT as obvious.  “Bad Product” or “Unattractive Market” are definitely up there.  But I will contend that the second most popular reason VC’s pass is because the company “can’t get big enough”.

This is something I hear all the time among VC’s and I know it must drive entrepreneurs crazy, because no one thinks that they are giving their time and energy into an idea that is not “big enough”.

What does big enough mean?

There has been a lot written about this so I won’t rehash the math.  But the basic idea is that startups have a high mortality rate.  And so the relatively small % of winners need to be significant enough to drive an impactful return for the fund.

Although a lot of posts speculate that VC’s block good outcomes because of this, I doubt that it’s as prevalent as it seems.  What is prevalent is that VC’s think very hard about whether the potential of the business is big enough relative to the time and capital investment required.  We also think very hard about whether the founder is interested in shooting for a big outcome.  If not, it’s a tough fit for a venture capital investment.

Why many entrepreneurs should accept this reality (and why some investors should take advantage of it)

The reality is that most businesses probably can’t get to the kind of scale that VC’s require.  Moreover, it’s damaging to the business to do unnatural things to try to get to that scale.  You may grow your team too quickly, forgo revenue for reach, hire expensive executives, etc.

These aren’t bad things, but they aren’t right for all businesses.  I think there are a lot of very rational businesses out there that can probably get to profitability and modest revenue and create a lot of personal wealth for those involved.  Building these businesses can look quite different from building a venture funded company, and the funding strategy ought to be different as well.  Funding may not come from the highest profile VC’s (at any round in the company’s life) but from wealthy individuals with deep domain knowledge in your sector, professional investors with a different set of economics and strategy, or good old fashioned cash flow.

I would say that I think there is a dearth of investors for this sort of company, and I think there is probably an opportunity in this sector of the market. I also don’t think such an investor is necessarily dooming themselves to mediocre returns in small companies.  If they invest in the right markets, I think 1 or 2 out of 10 companies might surprise them and actually yield traditional venture returns.

Why entrepreneurs shouldn’t lose hope in VC’s

Despite the reality that most businesses can’t get to venture scale, an entrepreneur may be absolutely convinced that their company is an exception.  If this is the case, don’t lose faith in VC’s!  If you think about a lot of very successful companies, many of them probably looked “too small for venture” in their very early days:

“Pez dispensers and collectables online?  Tiny market!”

“Free calls online?  How will Skype ever make money?  Too small!”

“A coffee shop with a goofy name and a mermaid logo?  Too competitive, can’t scale.”

The goal then, is to find an investor that shares your vision for how you can get big (and is willing to endure criticism from others who don’t see the same opportunity).  Sometimes, these investors just have a conviction about where markets will go.  Or they just have a love for what you do and unique ideas about how to win through better execution.  This takes some time to figure out, but it is getting easier as VC’s are becoming more transparent about their investments, themes, and thoughts on market evolution.

I also think that these are the VC’s who tend to be the leaders in the industry rather than the followers.  The first investors in category creating companies tend to look like idiots for a while before the company goes from “not big enough” to the clear leader in an emerging new sector.  Then the lemmings follow.

Fall is upon us (although it feels like winter) and for Boston, that means a new wave of folks who are arriving here for studies or new career opportunities.

When I moved to Boston from Silicon Valley in 2005, I had a pretty sparse network of friends in the tech and entrepreneurship scene.   I also found the tech community here a little disorganized and opaque, although I think that has been changing quite a bit in recent years.

Four years later, I think I have a much better idea of what’s going on, and I’m excited about it.  But it took a while to figure out.  So I thought I’d post a little to-do list for folks who want to get integrated into the local tech community and benefit from all it has to offer.

1. Follow this list of entrepreneurs, VC’s, and academics

• David Cancel (blog , @Dcancel)
• Dharmesh Shah (blog, @dharmesh)
• Brian Shin (blog, @brianshin)
• Don Dodge (blog, @dondodge)
• Nabeel Hyatt (blog, @nabeel)
• Furqan Nazeeri (blog, @altgate)
• Andy Payne (blog, @payne92)
• Bijan Sabet (blog, @bijan)
• Jeff Bussgang (blog, @bussgang)
• Lee Hower (blog, @leehower)
• Larry Cheng (blog, @larryvc)
• Tom Eisenmann (@teisenmann)
• Andrew Mcafee (blog, @amcafee)
• Me :) (blog, @robgo)

2. Follow a few journalists and news aggregators

• Scott Kirsner
• XConomy
• VentureFizz
• MarksGuide

3. Go to the follow meetups at least once

• WebInno
• Mobile Monday
• OpenCoffee Meetup
• Dart Boston

4. Hang out where you are likely to have chance encounters (ok, this isn’t really that practical, but it’s interesting to know where VC’s and entrepreneurs tend to go)

• Deisel Cafe in Davis Square
• Andala Cafe in Central Square
• Paramount Restaurant in Beacon Hill
• Henrietta’s Table in Harvard Square
• Naked Fish in Waltham
• The Marriott in Newton
• The Westin in Waltham
• Preschool OpenHouses in Wellesley, Weston, Cambridge, Lexington,  BeaconHill, etc.  (I’m obviously joking here, but this just happened to me, so I couldn’t resist.  We went to an open house at the Cambridge Ellis School, and among the group of parents, I saw 2 VC’s, an entrepreneur friend, and an HBS professor before deciding the school was way out of my price range)

5. Try to meet folks affiliated with the following organizations and companies (the reasoning being that people at interesting companies and organizations tend to congregate)

• PopSignal
• HubSpot
• Betahouse
• DogPatchLabs
• TechStars Boston
• Cambridge Innovation Center

Hopefully this is a helpful start.  Should take a few months to work through all of these.  I know I’m missing a few (I think I’m obviously missing out events and people affiliated with MIT, among others).  Feel free to add additional thoughts in a comment.