Anatomy Of A Bubble

Right now, we don’t understand why people get caught up in self-reinforcing expectations of rising prices. The first time you’re in this experiment, you may have bought early and you may have sold before the break. Bring those same people back in another two or three days, put them in the same environment, and we get a lower-volume bubble. Typically, it booms earlier and crashes earlier; they are expecting a bubble. Bring them back a third time, and they tend to trade fairly close to fundamental value.

How does this type of experiment map onto, say, the last five years in America?

If you think about the housing bubble, buyers, sellers, borrowers, lenders, real estate agents, government regulators—everybody believed that prices would rise and continue to rise. And that is the essence of a bubble. Suppose a regulator in 2003 or 2004 said, “Hey, this thing is not sustainable. We’ve got to do something to stop it.” I think he’d have been fired. If the bubble had been stopped in 2003 or 2004, it probably would have been a lot less damaging. But who’s going to know that?

Andrew Mason Fired At Groupon (GRPN), His Exit Letter

(This is for Groupon employees, but I'm posting it publicly since it will leak anyway)

People of Groupon,

After four and a half intense and wonderful years as CEO of Groupon, I've decided that I'd like to spend more time with my family. Just kidding - I was fired today. If you're wondering why... you haven't been paying attention. From controversial metrics in our S1 to our material weakness to two quarters of missing our own expectations and a stock price that's hovering around one quarter of our listing price, the events of the last year and a half speak for themselves. As CEO, I am accountable.

You are doing amazing things at Groupon, and you deserve the outside world to give you a second chance. I'm getting in the way of that. A fresh CEO earns you that chance. The board is aligned behind the strategy we've shared over the last few months, and I've never seen you working together more effectively as a global company - it's time to give Groupon a relief valve from the public noise.

For those who are concerned about me, please don't be - I love Groupon, and I'm terribly proud of what we've created. I'm OK with having failed at this part of the journey. If Groupon was Battletoads, it would be like I made it all the way to the Terra Tubes without dying on my first ever play through. I am so lucky to have had the opportunity to take the company this far with all of you. I'll now take some time to decompress (FYI I'm looking for a good fat camp to lose my Groupon 40, if anyone has a suggestion), and then maybe I'll figure out how to channel this experience into something productive.

If there's one piece of wisdom that this simple pilgrim would like to impart upon you: have the courage to start with the customer. My biggest regrets are the moments that I let a lack of data override my intuition on what's best for our customers. This leadership change gives you some breathing room to break bad habits and deliver sustainable customer happiness - don't waste the opportunity!

I will miss you terribly.

Love,

Andrew

How to Size a Market?

I like an entrepreneur who tries to define the market as tightly as possible. This is mainly driven by a loosely defined industry. “I’m addressing the $300 billion US energy market.  We want to have people 10% on energy.  Therefore our market size is $30 billion” or “I’m addressing the $2.3 trillion US services market.  It is a huge market.”  That is a sure way to lose the interest of a potential investor. Define your market sizing as tightly as you can.  Nobody will fault you for estimates, just make sure they are reasonable. 

Angels: Questions for Entrepreneurs (part I)

After putting together some thoughts on questions entrepreneurs should have for angels, I got a number of questions and comments from angels about some counter questions they should ask entrepreneurs in an effort to better analyze the model and company.

In simple,

a business model is an integrated array of distinctive choices specifying a startup’s unique customer value proposition and how it will configure activities—including those of its partners—to deliver that value and earn sustainable profits.

These choices startups make can be grouped into FOUR BROAD categories pertaining to a startup’s customer value proposition, technology and operations plan, go-to-market approach, and profit formula.

Since these posts can be long I will break it into four parts, the first:

Customer Value Proposition

• What unmet needs will the business/venture address?  

• Will the business emphasize differentiation? Increasing customer willingness to pay relative to rivals' offerings, OR by low cost, reducing expenses that customers incur - again, relative to rivals' offerings - for a comparable bundle of benefits? If it emphasizes differentiation, will the venture’s edge principally be vertical (i.e., outperforming rivals’ products on dimensions for which most customers would agree that “more is better,” for example, a car’s gas mileage) or horizontal (i.e., distinguishing itself on dimensions of taste that cannot be intrinsically rank ordered, for example, an Audi’s styling compared to a Saab’s)

• Which customer segments will the venture serve upon launch? How will targeted segments change over time? With respect to the customer segments, will the venture serve 1) a fundamentally new market, offering a radically innovative product, 2) an existing market, offering a product that offers superior relative performance against well-established benefit and/or cost metrics, or 3) a re-segmented market, offering a product that offers superior performance on familiar attributes strongly valued by a subset of the existing market’s customers

• How large is the total addressable market (more to come on market sizing) for the venture’s product, and how fast is the market likely to grow

• What will be the venture’s minimum viable product for launch, that is, the smallest set of features needed to validate key business model assumptions? What is the plan for adding features over time, that is, the product road-map?

• To access a whole product solution, will customers need to acquire any complements or ancillary services from third parties? If so, who will provide them, and under what terms?

• Will pricing be structured per transaction, per period (as with a subscription), or through some hybrid approach? Will prices/fees be: 1) fixed per transaction/period (e.g., a $20 book; a flat fee for a consulting assignment; a $10 monthly subscription to Netflix), 2) variable, based on a fixed fee per unit of activity (e.g., hourly billing for a legal case; a per unit royalty to a patent holder; a per minute charge for long distance calls), 3) tiered based on feature/service level (e.g., “freemium” pricing that is free for a basic product or $10/month for a “pro” version) or 4) linked to some outcome (e.g., “pay-per-click” advertising; a broker’s fee on a home sale)?

• If the venture’s product is a physical good, will it be sold outright—transferring title—or will it be rented/leased?

• Will the venture pursue a skimming strategy that is, charging a premium to early adopters with high willingness to pay for the product? Alternatively, will the venture engage in penetration pricing to exploit strong scale economies or other first mover advantages?

• Does the venture have opportunities to capture value through price discrimination, for example, through negotiated pricing, auctions, or discounts for early booking? Through bundling, for example, by including after-sale service with the product’s purchase?

• What switching costs will confront customers, and what will be the expected average life of a customer relationship?  Can the venture improve customer retention through incentives, for example, a penalty for early contract termination or a rewards program for heavy users?

• Relative to offerings from likely rivals, how will customers’ willingness to pay (WTP) for the venture’s product compare to their expected total cost of ownership (TCO)?

More to come on tech and operations, go-to-market and profits.

Entrepreneurs: Questions for Angel Investors

When thinking about taking money from angel investors, entrepreneurs are often drilled with a number of questions, but there are a questions that you the entrepreneur should be asking of your angels.

One of the most basic questions, and sometimes you don't have to ask this to find out the answer. What is your criteria for investing in a startup? This includes finding out what stage (i.e. concept, product launched, customers acquired, etc.) of the business they like to invest at and the type of businesses they invest in. This should be an initial screening question to narrow down the investor pool. 

Do you have to pay them to present your pitch? Some 60% of angel investors tend to charge fees for listening to pitches. Never pay to pitch your company. The best angels are the hardest to get access to, but they don't charge you to pitch. 

Have they invested in other companies? How many and over what time frame (i.e. 6 months, 6 years, etc.)? Ideally, the angel investor you're considering will have invested in at least one company. If they have not made any or only a limited number of investments, make sure they can secure viable funding. Beyond taking money from the investor and giving them equity or a combination of debt and equity, they might be a number of contingencies that investors will try to stipulate. We can get into preferences and terms if there is enough interest (feel free to shoot me an email beingunordinary@gmail.c). 

How involved do they wish to be in the business?  Set guidelines from the get go and manage expectations. This can range from passive, with the call every now and then, from the over the top, wants to be involved in every day to day operations. Usually you want something in-between, but it's more important to ensure investors don't hinder progress. 

Can they fund additional rounds? A number of investors will only be focused on the short-term and seek to exit within a few years. Given that, they don’t always consider funding beyond the angel round. But if you company is everything you hope and begins to take off then additional funding will be needed. 

What is their exit strategy? As Some angels have unrealistic expectations of when an exit will take place, which makes them put unnecessary pressure on companies. Be sure to ask what their exit strategy is and exit time frame is, and make sure that it lines up with your expectations or that you are comfortable with it. The broad exit expectations range is usually from 1-3 years, 5-7 years or 10 plus years. But it's not all about when these investors are looking to exit, but how...are they looking to sell their shares back to the company, another investor or pushing for an outright acquisition by another company. 

As always, whether it be with investors, partners, potential employees, make sure they are serious and never reveal too much about your business. Also, generally avoid friends, family and fools as investors whenever possible. 

SecondMarket v. AngelList

Most people have never heard of either, and those that have heard of at least one it is generally AngelList. But does anyone know what either one does and their usefulness? I get asked a lot of times about using one or both of the sites, where most companies don't have a clue what either does. I am a supporter of using either site assuming you can and know what to use it for. 

Second Market is primarily for reserved for companies that need to provide liquidity to previous investors or to employees.  Thus, these companies have already raised capital and instead of going public, they can remain private and still provide their prior investors an exit strategy and liquidity.   

SecondMarket is not for a company raising capital, but for people who own the company's stock to sell it or for accredited investors to buy stock from other owners.  The stock is not sold by the company. For example, BigTimeTech Company is a startup and could not sell stock on Second Market to raise money, but if Founder John Doe wanted to sell some of his shares he could do so on Second Market if the company was approved to participate on the Second Market site. SecondMarket would be a viable option for BigTimeTech Company once it has raised capital and needs to provide investors with an exit.

The counterpart to SecondMarket is AngelList. AngelList is for startup companies raising capital. AngelList allows companies to be listed on their site and be viewed, or contact, potential investors. So which is more important? They both play a key role, but undoubtably SecondMarket has the most staying power. The company operates in a niche market, where AngelList competes with various other capital raising sites and Angel investors - not to mention the potential entry of crowdfunding.  

Related links:  SecondMarket v. AngelList

Employee Engagement

Effectively Developing and Engaging Employees

This post comes as a edit and clean up of an email that was sent to an entrepreneur who was just getting his feet wet...we can go into much more detail for those that are interested. 

Developing and engaging.  The biggest underlying theme for engaging employees is not tracking their every move, or even their happiness, but to inspire them to do their job to the fullest extent and to do it well, and then enjoyment with their work will come.  Employees that are properly engaged tend to be more effective and productive.

Transparency.  For many years transparency has had a different meaning.  Now employees consider insight into business performance and operations as a necessity to fully rally behind a company.  Private companies are not required to publish financial information, however, those that choose to share this information internally with its employees have had better luck with either encouraging their employees or inspiring their employees to do better.  This helps employees understand their contribution to the company better.  Additionally, what is sometimes better insight than financial numbers is performance and operating metrics.  

Communication.  Employees need to be informed and feel involved.  As a result, being transparent is fundamental. This can include periodic meetings or updates on the company's status and goals, these should be broken out both broadly and specifically, as to allow for celebrating milestones along the way.

Start early.  Part of the continued employee engagement process begins with the hiring process and ensuring solid fits with respect to company setting and culture.  This includes actively conveying the company values in the beginning and before hiring.  Also, convey expectations and goals of the position.  This will go a long way in making sure the overall engagement strategy is effective.

Team.  Part of developing employees is to ensure they are not overworked.  Ensure the proper team is in place, and that employees have the right support and are not understaffed.  This includes recognizing when an employee does not fit with the team and being able to quickly and delicately remove that person.  

Continuous feedback.  Assess your employees and company constantly.  Monthly, semi-annually or annually is not enough; if you wait that long to address issues your employees will lose encouragement and leave managers frustrated.  Continuous feedback is difficult if only in-person meetings are used, many tools offer social based feedback and the easy exchange of feedback from managers.  It is hard for employees to be able to make necessary changes and develop their skills if feedback is only periodic.  

Objectives.  Set expectations, reasonable and obtainable ones. This will allow employees to know what you expect, but also allow them to gauge their progress.  Objectives should include development goals that come from feedback reviews.  

Personal engagement.  Have planned company outings, either dinners or team building activities.  Also, do company lunches, even if catered into the office.  These are great ways to build rapport with employees and help the company grow as a team.  Being able to interact informally plays great to being able to provide useful continuous feedback.  

Support.  Employees should have access to managers when needed, and one-on-one meetings regularly.  As well, companies should have company wide or department wide meetings. The CEO should also make appearances to inspire employees and reaffirm the company goals.

Promote from within the company.  To properly engage and inspire employees, they must be inspired and feel they have something to work toward.  Promoting from within gives employees incentive.  Give your employees the opportunity to create a career path within your company whenever possible.

Give raises and bonuses.  Obvious? Maybe. One of the best way to inspire employees is through bonuses and raises. Almost everyone is motivated financially to some degree, although this is only one part of the puzzle.  Incentive bonuses can be useful if they are properly aligned, namely if they are based on company objectives.  

Ownership.  Employee engagement is only one of the key retention tools companies should use.  Furthermore, use ownership incentives to inspire companies to become truly vested in the company.  This includes stock and option grants, and if you have given someone equity based compensation in the past, but be sure to look at retention grants to offer them additional grants (either stock or options) after their initial grants vest.

Employee engagement tools.  Yammer is an enterprise social network allowing employees to collaborate and share within their own tailored social network.  This helps keep employees engaged by being able to see activity feeds of other employees, easily ideas and thoughts, offering encouragement and help where possible.

Rhypple is a performance management tool that helps companies engage with employees through social goals and continuous feedback.  This tool provides the one-on-one coaching, as well as public recognition and feedback, that makes for positive employee engagement.  

WorkSimple is another performance management tool focused on being social.  Combing the ability to share social goals, rally around achievements, offer feedback and assess performance.   

Leave any tools you use in the comments and I'll add them.