Words of wisdom to take your business two levels above your competition

The Seinfeld fans out there will clearly recognize the reference to “the
opposite” episode.  Basically, George tries to change his life by going against
his natural instincts and doing the exact opposite.  [For the fanatics out
there, I think this is Episode #86, aired May
19, 1994.

Here are a couple of clips from the episode:

George : Why did it all turn out like this for me? I had so
much promise. I was personable, I was bright. Oh, maybe not academically
speaking, but … I was perceptive. I always know when someone’s uncomfortable
at a party. It became very clear to me sitting out there today, that every
decision I’ve ever made, in my entire life, has been wrong. My life is the
opposite of everything I want it to be. Every instinct I have, in every of life,
be it something to wear, something to eat … It’s all been wrong.

Jerry : If every instinct you have is wrong, then the
opposite would have to be right.

George : Yes, I will do the opposite. I used to sit here and
do nothing, and regret it for the rest of the day, so now I will do the
opposite, and I will do…something.
—

As it turns out, this “do the opposite” strategy works out for George. 
Things start working out for him.  By going against his natural instincts, he
ends up doing things “right”.  He’s noticed.  He comes off as being
different. 

So, what does this all mean for startups?  Well, I’ve found that often “doing
the opposite” (zigging when others are zagging) can actually work.  Conversely,
if you take the tried and true path of others (like your competitors), in your
best case scenario, you kind of wind up where most startups wind up — in an
unhappy place.  Why not try to be different?

A few examples to mull over:

A Startup Doing The Opposite

VC funding negotiation:  Tell the VC:  “We don’t know what
the pre-money valuation should be.  You have a better sense than we do about
this.  We’re not looking for the highest “price”.  We just want a fair deal and
a board member that is not a jerk.  You seem like you’re smart and not a
jerk..”

Recruiting early employees:  If you’re just looking to make
a lot of money, this is probably not the place.  Sure, we’re going to give you
some options but nobody knows what those are going to be worth (including the
founders and the investors).  We all work our butts-off and make less money than
we could likely do otherwise.  We all must have some sort of genetic flaw that
makes us do this.  If you have that genetic flaw too, you’d probably enjoy it
here. 

Early customer conversation:  Yeah, the software kind of
sucks but we use it ourselves and it does do useful things.  Why am I charging
you to be a beta tester?  Although your input is priceless, we think it just
distorts the relationship for you to get it for free.  If you’re a paying
customer, we’re going to kill ourselves to make you happy. 

The idea is to be honest, direct and surprise people by taking an approach
that they’re not used to seeing.  A lot of times this may fall flat — but lots
of things fall flat anyways.  Why not try it? 

By the way, each of the examples above are based on reality from my own startup adventure. 

So, next time you’re in a situation go against your instincts to “spin”
things and be super-sophisticated.  Just do the opposite!

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The following is a guest post.

I have had the misfortune of personally making every one of these mistakes
during my years as a software entrepreneur.  I am currently reviewing a startup
that seems to be trying really, really hard to make all of them in one go.  As a
result, I decided to put this list together in the hopes of saving as many
startups as possible from crashing in to the rocks of false hope and misguided
thinking.

20 Ways To Put A Monkey-Wrench In Your Machinery

1.       You think that your product must be awesome because your
buddies are telling you it is the greatest thing since sliced
bread.  Unless they are willing to hand over cold cash to use your
product, they are just being nice.

2.        You are finding that your product is so versatile it could
solve just about any problem.  This is a clear sign you don’t have
anything worthwhile.  

Dharmesh:  This is one of the most insidious problems in software
startups.  As developers, we tend to like dealing in higher abstractions. 
Writing a simple business application is boring.  But, writing a framework that
lets others auto-generate a business application (or any application!) is fun
and challenging.  For startups, it is usually unwise to try and build a
framework or platform as your flagship offering.  Most people use apps not
platforms. 

3.       You have found a client, but in your euphoria you have forgotten to
ask yourself if this client is an anomaly.  You need to make
sure that the client represents a real market, otherwise you are just building a
custom solution.

Dharmesh:  This is what I would call the “you can’t build a software
company one custom implementation at a time”.  It’s fine to find big clients
that have big problems they’re willing to spend some money for.  This is an easy
to way to get started and some cash in the door.  However, it’s imperative to
look for the patterns in the customer’s needs and be thinking about future
customers.  If you have multiple sets of code running for multiple customers,
you’re going to be in trouble.

4.       You keep coming up with ideas for all the many different ways you
can make money with your product.  You can sell it to Google, ISV’s can include
it in their products, Adobe for sure will be interested.  If you are not
focused on something specific, you are dead.

5.       You choose to work with verticals that don’t have a lot of
money.  Sure they like your product, but they can’t afford to pay you
enough for it, so why focus on them?

6.        You choose to work with a small client first instead of one that
will be able to help you get more clients later on.  Just because Joe’s Fish
& Chips is using your product doesn’t mean Motorola will be impressed enough
to try it.

Dharmesh:  Closing on some smaller clients early isn’t particularly a bad
thing (in fact, you might be targeting the small business market).  As long as
you can find some repeatable pattern so you can build software for many people
(and sell it to many people), you’re probably ok.

7.        You think you can’t work with a “real” client early on because it’s
too risky.  But you aren’t selling them the product - you are selling them the
idea of the product.   If you can’t sell them the idea, you are
never going to be able to sell them the product.

8.       You start building the product before you have a (real) client
identified.  Again, if you can’t sell the idea, you are definitely not going to
be able to sell the product.

9.        You think you can’t sell the idea until you have a
product.  This is a major killer - you think that as soon as you have
feature X or Y, you can start showing people your idea. One more time - if you
can’t sell the idea, you can’t sell the product.

Dharmesh:  I agree.  Reminds me of  “Stealth
Mode, Schmealth Mode” posted earlier.

10.    You don’t want to stop or throttle development when you aren’t really
sure you are on the right track.  You just want to keep on going, because you
just know that soon the product will be so awesome that it will dazzle everyone
with its brilliance.   If people aren’t buying the idea, you
better stop wasting money now until you have figured things out.

11.   You think that just because your product can solve a generic problem
like “collaboration”, you have a sure-fire winner.  You have to ask yourself how
your product really stacks up against the competition that is already out there
and why people would buy yours, and if they would, for how much.  Often, the
current solution being used is simply good enough, and even if
yours is significantly better, no one is going to buy it.

12.   You underestimate the power of a penny over free.  If
something is free and barely does what you need, you will stick with it versus
something that’s much better but requires you to pull out your credit card.

13.    You think that just because someone says they would definitely use
your product that they actually would use it - or that they would pay to use
it.  Talk is cheap.

14.    You think that just because people say they would pay for your product
(and actually mean it), they would pay enough to keep you off food stamps.

15.   You think that just because there is a company making money in your
field, there must be a lucrative market that you too can take advantage of.  But
there may not be room for more than one successful product in
this particular area.  And the incumbent has a much better chance than you do of
succeeding.

16.   You think it’s not a big deal for a user to create yet another login to
use your product.  But it is.  This is like the penny versus free.  They have to
have a really good reason.

17.   You think because your product integrates nicely with a bigger product,
you’re golden.  But you forget that there is inside-out and outside-in
integration.  If I am in Google and there is a tool (like a gadget) that I can
easily access (i.e. I don’t need another login and password), I am much more
willing to try it than if I have to go to another site, sign up, sign in, and
then get to my Google application from there.  So if you are going to integrate
with an application your target market is already using, it must be inside-out
integration, not outside-in.  Facebook applications are a good example of
inside-out integration.

18.    You think you can get users to pay a reasonable monthly subscription
fee, but you forget that you need a LOT of $19/month subscriptions to make real
money.  Do you really understand how many subscriptions you
need, and how realistic is it that you are going to get there?

19.    You think that you need to offer an onsite solution to go along with
your SaaS solution, but you forget the huge costs involved in supporting on-site
software.  Besides, if think your market is both an on-site corporate solution
and also a SaaS-based consumer application, chances are one of those assumptions
is wrong.

20.   You think you have come this far, you can’t possibly stop
now.  It’s like you are swimming across the lake, and you are more than
halfway there.  So you just keep on going, but the shore keeps receding into the
distance…

—

If you have your own list of “signs
of trouble” in a software startup, please leave a comment.  Or, if you’ve got a
great article that you think will help software entrepreneurs, email me to
discuss making a guest submission to OnStartups.com. 

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Here are the six simple steps for building a startup (in this case, a
software startup).

1.  Figure out what to build.  You can do this by being
brilliantly insightful (which you might be), or by just talking to some people. 
Ask them questions.  Would you use this?  Does this solve a problem?  Would you
pay for this?  Do you know anyone that would pay for this?  Are you going to
roll your eyes and laugh out loud once I leave the room?  Are you going to tell
you spouse this idea over dinner this evening to demonstrate that you indeed
do have a sense of humor?

2.  Build something.  It doesn’t have to be the
world-changing thing you devised in step 1, but a close enough approximation. 
It should do at least one useful thing from the list of game-changing things
that’s on the feature-list from #1.   Oh, and it should sort of work (even if
requiring the assistance of some chanting, prayer and promises to recycle
more).

3. (Option A)  Release!  Get your product out there.  Even
if it’s buggy (which it will be).  It is possible that everyone that sees it
runs screaming in the other direction.  Mothers protect their children in its
presence.  But, get it out there and work like heck to deal with the aftermath
of the steaming pile of elephant doo-doo you’ve unleashed upon the world.

3. (Option B) Make Perfect, Wait, Release!  This avoids the
problems with Option A because people will no longer run screaming.  But, nobody
cares about your product now because everyone is flying around with jet-packs on
their back and 16-core processors are embedded in people’s brain as an
outpatient procedure.  Your market changed and your doohickey (however
“perfect”) is irrelevant.

4.  Sell.  Sell.  Sell.  The law of large numbers says that
the larger the number of people exposed to the product (see Step 3a), the more
people you’ll encounter with average coordination who will trip and fall when
trying to run away from your product demo.  Some of these people will buy while
still in a semi-dazed state.  Voila!  You have customers.

5.  Refine.  Armed with a few paying customers, see what you
can learn from them.  What are they like?  How do they use the product?  What do
they say between the screams of frustration?  Figure out how to lower the pain
quickly and treat them gently.  During these brief spites of happiness that you
customers have, other customers will come into contact with them think “Hey, Joe
seems to be happy — even though he’s got this far-away look in his eyes”, maybe
the software isn’t too bad.  Let me try it out…”  Bing!  You have another
customer.

And the story goes on. 

For the really, really simple minded here’s the summary:

Decide what to build, launch an imperfect version, sell unsuspecting
customers, keep improving, sell more unsuspecting customers.  Lather, rinse,
repeat.  SUCCESS!

—

By the way, if you haven’t joined the OnStartups Group on LinkedIn, you’re not missing much.  There’s not much functionality there yet (but the group is big).  The hope is that someday soon, we’ll have more functionality so you can collaborate more meaningfully with other startup folks.  Until then, if you’d like to request access, please do so. That way, you can say you joined the group when it was just 11,692 members.  Come on in and join.  It’s quick, painless and free.  Request access to the group.

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Chances are, if you’re reading this article, you are either involved in a
startup already, or looking to be involved in one.

This article is for the folks in the latter category, the
“wannabepreneurs”.  The ones that have always wanted to be entrepreneurs, but haven’t quite gotten around to it.  The folks still slogging it away in BigCo land waiting for
the “right” entrepreneurial opportunity to come along.

Here’s my advice:  Stop Waiting!

If you’ve got a passion for startups, you need to be in a startup.  Either
run with the best idea you have and start your own thing (even if the idea sort
of sucks), or join the best people you know that are already doing something. 
Just get out of the daily slog that is most big businesses.  Scratch
that itch. 

Be an entrepreneur, not a wannabepreneur.

Here are a few quick points to help convince you:

1.  You’re probably overestimating the risk of leaving that BigCo job. 
Chances are, that sort of job (or something awfully similar) will be there a
year from now if things go miserably.

2.  Though nothing compares to doing your own thing, joining a startup team
is not bad either.  It’s a great way to dip your toes in the water.  Often, half
the battle is just getting out of your comfort zone and being around startup
people.

3.  Regardless of what your risk tolerance is, you can likely still find
opportunities that are more entrepreneurial than what you’re doing
now.  There are startups with really high risk, with nothing but a dream and a
developer (or two) all the way to startups that have raised several rounds of
funding and are on the IPO path.  You should be able to find a startup that
meets your risk profile.

4.  Unless you have some compelling evidence that things are going to get
easier later to do something more entrepreneurial, chances are, they’re not
(going to get easier).  So, if the question is when, not if, then ask yourself
“why not sooner, rather than later?”

5.  For those that are thinking: ”Yeah, this is all easy for you to say,
you’re not walking in my shoes”, I say this:  You’re right.  If you truly don’t
have the situation or circumstances to take the leap, that’s ok.  I just implore
you to at least think about it and decide for yourself whether your
obstacles are real or perceived.

I’ll close with a quote that’s been on my list of favorites for a while:

“Regret for the things we did can be tempered by time; it is regret
for the things we did not do that is inconsolable.” -Sydney Harris

Cheers.

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A few days ago, my startup HubSpot, launched a new app called Press
Release Grader. It’s not our core product, but a free tool for marketers
and PR folks to analyze a press release and provide suggestions.

The launch has gone exceptionally well for us (and by that, I mean,
the uptake in the community is much, much better than we were expecting). Would
put some stats here, but it’d seem a bit like bragging and the focus of this
article is not on press release grader or its specific results, but things I
learned from putting it out there.

Warning: As noted in the title, I have an uncanny knack for the obvious, and
I like to focus on the fundamentals (which is a polite way of saying that you’re
unlikely to find any brilliantly insightful lessons here).

7 Uncannily Obvious Lessons From A Product Launch

1. It’s Not Too Early To Release: I’m a really, really big
fan of the “release early, release often” mantra. But, even I fell prey to the
“let me just get a bit more done” mind-set. I could have released the product a
few weeks earlier, and I should have done exactly that.

2. Be Ready To Iterate: I intentionally cleared my
schedule of other major distractions so I could focus on the software and
iterate, iterate, iterate. In the days after the release/launch, I iterated
like crazy with multiple production updates a day. Not a day should go buy that
the software doesn’t get better for the users. Continue this as long as you can
(maybe even weeks and months).

3. Provide Simple Feedback Mechanism: You don’t need
anything fancy. Just a place for users to click a link, type in some feedback
and send it to you. That’s it.

4. Respond To Feedback: This goes back to #2. You should
be ready to fix the “obvious” bugs and add the enhancements based on user
feedback (as long as they make sense). The magic of immediate user
responsiveness is underestimated. I’ve had a couple of noteworthy bloggers
write about Press Release Grader simply because of the rapid response-time.
It’s just good, clean living.

5. Track As Much Data As You Can: For a web product, I’d
suggest that at a minimum, you track all the standard web data (this can be done
via a web analytics tool) + any “inputs” that the user is providing.

6. Don’t Waste Time Coding Reports: Although you should
track/store as much usage data as you can, don’t waste time creating fancy (or
non-fancy) reports just yet. Just capture it. Some simple mechanism to get a
sense of usage is fine, but don’t try to build ways to look at all the data
you’re tracking. It’s a distraction. Focus on what will make the users happy.
You can work on reports later.

7. Watch It Spread, Nudge It Along: You should be
spending half of your time not just on coding, but on promotion. This
includes watching who the product is getting picked up by across the web and
who’s writing about it. When people do write about it, thank them and offer to
do something about their ideas and feedback. This works wonders. Even if
you’ve got the luxury of business people (marketing, PR, etc.), stay involved.
There’s no replacement for being “plugged in” to the community.

On point #7, here are places I check to see what’s being said:  Google (mostly blogs), Twitter, delicious, StumbleUpon and digg.  (I have a wee bit of an advantage because I’ve got some internal tools to help with this stuff). 

What lessons have you learned from releasing a product out to the wild? What
will you repeat and what will you change the next time?

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Don Dodge posted an interesting article recently on his blog titled “Web
2.0 = Bubble 2.0“.

The part that really caught my interest are the four “stages” of a bubble
that he describes. Here’s a quick summary:

Stage 1: The smart money declares we are not in a
bubble.

Stage 2: People agree that we’re in a bubble, but declare
that there’s still a year or two left to make real money.

Stage 3: The bubble has actually burst, but people declare
it is just a “temporary setback”.

Stage 4: Everyone recognizes and agrees that the bubble has
burst, and life will never be the same.

Don believes we’re well into Stage 2 of the cycle this time around. I sort
of agree, but think we’re getting really, really close to being in Stage
3 — if we’re not there already. Though the Web 2.0 bubble may not have burst quite yet, I’d argue that folks
are not blowing a bunch more air into the bubble (i.e. so the expansion of the
bubble has started to taper off a bit). I could even argue that a little bit of
the air is being let out. I could argue that, but I won’t.

What do you think? Are we at a point now where the bubble has actually
burst, but we still haven’t acknowledged it yet?

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My startup, HubSpot (which provides online marketing for
small business) recently released the news that it has closed a Series B
round of VC funding of $12 million, bringing our total capital raised to over
$17 million. In response to this news, I received many messages from friends
and colleagues congratulating me on my success. To all of those well-wishers,
thanks! It is indeed an exciting time and I’m thrilled to have hit this
milestone.

However…

Raising VC Funding <> Success

Getting a round of funding from venture capitalists is not really “success”.
Sure, it provides resources to build a great company, but it’s not success.
Sure, it demonstrates that some really smart people think the opportunity is big
enough to invest money in it, but it’s not success. Sure, it provides some
credibility that will help recruit employees, get customers and sign-up partners
– but it’s not success.

VC Funding = an opportunity to create success

Success is different for different startups. For HubSpot, success is
building a real, sustainable and significant business that has lots of delighted
customers. For others, it might mean being bought by Google/Microsoft/whoever
someday. Regardless of what you think of as success, it’s unlikely that simply
getting some outside funding qualifies. It’s just a step down the path — and
even then, it’s not the only path.

Having said all that, it’s great to have received the vote of confidence from
some super-smart people (our investors) and the cash in the bank is nice too.
[smile].

Now that this milestone has passed, it is time to get back to (real) work.
For me, that means increasing TDC (Total Delighted Customers). Right now, TC
(Total Customers) = 401 and I’m not foolish enough to believe that TDC = TC.

Hopefully, we’ll make all the folks that have believed in HubSpot (customers,
employees, investors) look brilliant. In fact, that’s not a bad definition for
success.

Success = Make Those That Believed In You Look Brilliant

Cheers.

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If you’ve been following OnStartups.com
for any period of time, you likely know that I’m not a big advocate of startup
founders going out and trying to raise venture funding in the early stages.

My argument boils down to two things:

1) Most folks don’t need venture funding in the early stages

2) the odds of first-time entrepreneurs actually raising VC is pretty low.

Oh, and 3) it’s one of the least fun activities an entrepreneur can take.
Raising funding is often harder than building a product/business — and
much less fun!

So, given my general disposition, it will come as a surprise to many that
know me that my startup, HubSpot, announced
today that it has closed a Series B round of funding of $12 million. This is in
addition to the $5 million Series A funding we raised less than a year ago. So,
the total capital raised is now over $17 million. The news was big enough that
TechCrunch
wrote about HubSpot today.

So, back to the question. Why would a seemingly reasonable and modestly
successful bootstrap entrepreneur raise venture funding of this magnitude?

Insanity? Maybe…

How A Bootstrap Entrepreneur Winds Up Raising $17 Million In Venture
Funding

1. I seed funded HubSpot with $500,000. To do this, I used
some of the proceeds from the sale of my prior startup (which I had bootstrapped
with $10,000). The seed funding was an easy decision, because I mostly had to
convince myself, and I’m pretty convincing when I talk to myself.

2. The seed funding was enough to build our SaaS product
for internet marketing and get it out into
the market (i.e. start charging real companies real money to use to it). People
bought it. Sure, the product was “pre-alpha” and crappy, but it was useful. We
also improved it every day (literally) so it got less and less crappy
over time. More and more people bought. This gave us some evidence that there
was actually some sort of market demand out there. Interesting.

3. The fact that things were headed in the right direction
led us to raise another $1 million in angel funding. For us, that was a fair
amount of money (we’re capital efficient). Raising the angel funding was
reasonably efficient because we had the inside track. The fact we had
paying customers was helpful. So, no we’re up to $1.5 million in
capital raised. Cash in the bank. Life is good.

4. Then, the VC community starts to get interested in HubSpot (this is weeks
after we have our angel funding finalized). “Not really interested,” we say.
We’ve got a $1 million of fresh cash in the bank. We don’t need VC money. As
it turns out, one of the best times to raise venture funding is when you don’t
need the money.

5. My co-founder, Brian Halligan and I have lots of interesting discussion
and debate. We’d both debated the whole VC thing while grad students at MIT
(where we met). For HubSpot, we had confidence that the market opportunity was
big enough to warrant venture-funding, we just didn’t think we needed it quite
yet. (This is June-ish of 2007). But, we knew we were on to a potentially
really big idea. We’d both made some money and weren’t really looking for a
“modest outcome”. We wanted a big, significaint, immodest outcome.
So, on the VC front, we figured with the right set of terms and the right
partner, we’d consider raising it sooner rather than later. We got the right
set of terms and the right partner. So, we raised another $4 million in VC
bringing our “Series A” to $5 million. We’re off to the
races.

6. We did what I think is the best possible thing a startup can do with lots
of cash: Not spend it too quickly. No advertising, no
marketing, no high-flying salaries for high-flying executives. We hired the
smartest, most passionate people we could find. People we knew and respected
immensely. People fanatically focused on building a real business and who were
constitutionally incapable of spending money willy-nilly. We behaved a lot like
we were spending our own money. Because, we were. [Note to self: Write a
future article about why VC money is as much yours, once you’ve given up the
equity to get it].

7. Life is good. Sales are ramping steadily. Every month is a record
month. Not in terms of visitors, eyeballs or some other proxy for future
revenues, but in terms of actual revenues. The business is
growing fast. By the time we officially launch the product in
November, 2007, we have 100+ paying customers.

8. As it turns out, success attracts more capital. We started getting some
“pre-emptive” interest in the company from VCs. “We don’t need more money right
now,” we say. We hadn’t even spent half of the last round and lots of cash in
the bank. But, we’re practical guys and willing to listen. As it turns out,
one of the best times to raise venture funding is when you don’t need the
cash… (see point #4 above).

Fast-forward to today: We’ve closed a $12 million Series B round.

But, seriously, why did I raise VC funding? Did I change my mind?

The simple answer is no, I have not changed my mind on VC. I still
don’t think most early-stage entrepreneurs should go out on the venture
fund-raising circuit. They should maintain the option of a modest exit. Focus
on solving the customer’s problem (not the VC’s problem). My situation with
HubSpot was special. I had already done the bootstrap thing (multiple times)
and made money. I had above average odds of raising money for HubSpot.

So, why did I raise funding? Because, this time around I wanted to
take a shot at the big leagues. Sure, any success (even a modest one) is nice.
But a modest success is not going to change my life much at this point. I want
to swing hard. It’s not about the money. It’s about the fun and excitement of
pursuing a really big idea, working with really smart people and doing what I
love. [And, of course, the money won’t hurt either]

And that, my friends, is why I raised $17 million in venture funding.

If you have questions, feel free to ask them. I’ll do my best (within
reason) to answer them. Otherwise, I’ll keep you posted with future articles as
things progress.

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I’m becoming an increasingly big fan of infrastructure services like Amazon’s
EC2 and S3. The reason is simple: You pay for what you need at around the time
that you need it. This is the point I made when recently interviewed by Erica
Naoone of MIT Technology Review in an article aptly and succinctly titled “Cheap
Infrastructure“.

In the interview I was my usual, highly opinionated self,
but this particular statement that made it into the article jumped out at me:
“There’s no correlation between the amount of money an entrepreneur actually
needs and the money a venture capitalist puts into the business.” Of course,
there are some qualifiers here: I’m talking about software companies and I’m
talking about the Series A investment (first institutional money). Also, if I
had done the interview in writing, I likely would have said there’s
little correlation instead of no correlation. But, my larger
point still stands. The way the system works, you often don’t raise what you
need, you raise what you can.

But lets shift gears just a little bit, before we get deeper into the VC
funding stuff.

In the early stages of an internet startup, one thing that’s always difficult
is predicting the level of infrastructure that is needed to support the
volume of users/customers. Entrepreneurs often overestimate how popular their
software is going to be. There’s also the notion that too much infrastructure
is better than to little because “you only have one chance to make a first
impression.” Finally, there’s that whole nagging thing about reliability and
uptime.

The net result, before EC2/S3 and similar services, there were few
options. Costs were relatively high and somewhat “spiky” (you bought a few
servers, threw them into a co-lo, bought more servers, etc.). There wasn’t a
good way to handle this common situation: “Hey, we only have X users right
now, and we expect to grow by Y%, but we need to make sure we can handle Z users
just in case we get written up on TechCrunch or get on the front page of digg.”
You ended up compromising somewhere. Either you spent little (and
dealt with spikes if/when they came as best you could) or spent too much,
resulting in a fair amount of “unused capacity”.

Now, back to the VC funding part. When my co-founder, Brian
Halligan first kicked off HubSpot, we
thought a lot about the capital needs of the company. I funded the seed round.
We later successfully raised some angel funding — about $1 million. We felt
that was enough to get us to the next “milestone” (product launch). The
rationale we had was reasonable: Raise a little money early, raise more
money later. By raising money “closer to when we needed it”, we felt we could
continue to reduce the risk, increase the value of the company, and ultimately
dilute less. And in fact, this is how the VC process sort of works. You raise
a Series A, Series B, etc. and each round is targeted at getting a company to
the next “milestone”. The problem is, it’s awfully “spiky” . This led us to
ponder the other side of this spectrum. In theory, the “optimal” path would be
for us to sell just enough shares every month based on the cash needs of the
company at whatever the right “price” is at that time.

In a way, the Y Combinator folks do
this as the first step. They give founders just enough to get through the first
few months and build a prototype. Many of the YC startups then go on to raise
follow-on funding from VCs. But at that point, the funding process looks like
the usual — it becomes “spiky” again. We don’t have a pure incrementally
scaling model for startup funding anywhere.

Of course this scalable funding model probably only works in theory — and
even then, it’s a stretch. There are lots of reasons why this doesn’t work in
practice. Here are just a few:

1. There’s no efficient way to appropriately “price” the shares that
frequently.

2. Entrepreneurs don’t want to worry about whether they’ll have the cash
they need next month.

3. There’s likely not going to be agreement on how much cash should
be burned month-to-month.

4. There’d likely be some friction and transaction costs.

There are ways to mitigate some of these challenges, but I still don’t think
it’s practical and would work. My VC friends (and yes, I do have those), would
likely agree.

But, the geeky and analytical side of me still finds the purity of this model
appealing for the same reason I like Amazon’s EC2. You get what you need and
grow incrementally instead of spikily (yeah, I made the word up).

What do you think? Yes, the idea is crazy and wouldn’t work, but just
how crazy is it?

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I’m looking forward to BarCamp Boston coming up on May 17th and 18th. If you’re in
the Boston area, and reading this, you’re probably just the type that should be
attending.

1. How To Run ASP.NET Apps on Google App Engine

2. Why RoR Doesn’t Rock: Productivity Is For Pansies

3. How To Install and Run Firefox on Windows Vista SP2

4. How To Tie a Tie Without Strangling Yourself

5. Careers in COBOL: Not An Oxymoron

6. Learning RSS: Because It’s Really Not So Simple

7. Stylesheets? We don’t need no stinkin’ stylesheets: If Al Gore wanted
us to separate content from presentation, he would have included CSS when he
invented the Internet.

Yes, I know, humor is not a talent of mine. Don’t worry, I don’t plan to quit
my day job. In any case, register and attend BarCamp Boston 3. I promise there
will be funnier people there.

Looking for other startup fanatics?  Request access to the OnStartups LinkedIn Group.  13,000+ members and growing daily.

You can also find OnStartups on Twitter.

Go to Source at onStartups.com