Preparing for failure: startup’s karma conundrum

To best describe an object, describe by what it is not than by what it is

– Unknown

In this post, by a startup I shall mean an upstart venture created by its founders with a vision to create an enterprise of value.

The law of causality simply states the relation between a cause and an effect. Every effect has three possible outcomes for an action: best, average, worst. The best case outcomes are always the happiest; there is champagne and there are more investors ready to pour money into the company. The average case is still good; it’s a lot better than the worst case; the current investors will still hopefully stay with the company. It’s the worst case that’s debilitating for a startup. The killer for every startup is the limited revenues available with it, there is always a cap on the amount of resources available to expedite. Every step is line a mine, a misstep and you as an entity don’t exist anymore.

Every entrepreneur always dangerously lives in a make believe world of assumptions, scenarios and checklists; living off on a heavy dosage of caffeine. In this highly charged potentially sensually overloaded environment of a startup, the entrepreneurs are either paranoid or optimistic. Optimism is a people magnet no doubt, but it can potentially shoot down the startup even before it has taken off. In cases where the other side is a body (institution/corporation/client/person) greater in stature than themselves, it should a good heuristic to go for the worst case to average case out come of the result.

Say you have a project coming your way. And your client is yet to send a complete requirements spec. Expect at least three times the delay in time for the version to reach you. Same goes to their response and maybe for the payment too. I have this friend of mine who constantly lives his life on the worst case scenarios and even prepares and plans for it. He consistently and diligently prepares for the worst outcome from everything he is involved with. And he has had a much higher rate of success in life than an average Joe boy. A startup too must prepare itself for the worst and aim for the best possible result. The final result is often midway through them.

The general rule of thumb.
For a given uncertain scenario expect the positive outcome to have a probability of occurrence as 1/10 as against a negative outcome of 9/10. Lets take a simple scenario and try to understand the point.Say you are in negotiation with a client for a project that you expect the response to come over to you within a week and project to run for 3 months. In this scenario always estimate the response to take three weeks time & the project to run for 6 months. And hence your idea of buying the new computer with the payment from the first phase can essentially be postponed or shelved.

The reason for this rule is simple: Startup entrepreneurs are a optimistic lot. In the rush of passion for `their` product, they forget about the most crucial aspect of the game: the market and its attitude towards their product. Not all ideas are groundbreaking and not all are welcomed by the market with open arms. In this case, the simple rule of the thumb of expecting success with a 1/10 probability. Remember, the general rule of the thumb is that only 1 startup out of 10 survives the haul. Every step in the problem must be broken down into a simple manageable piece and put all of them down on the storyboard. Now, for every step put down the probability as 1/10 for success and failure at 9/10.

Prepare yourself for only a 1/10 of the success possibility.

Marketing
Whenever you approach the client from your side, expect the client have a meaningful conversation only 1 out of 10 times. After the first meaningful conversation, expect the client to show interest in your product only 1/10 times. Now that means only one client in a hundred will show interest in your product and would want to know more about it. Expect the deal to be made only 1/10 times. Now that means out of 100 clients you go to meet only 1 `might` turn into a real client.

Long term vision + short term survival strategy
A startup cannot afford a short term debacle to live and see its long term vision fulfilled. It has to survive every huge storm to be able to live another day. The startup experience is a sensory experience: it requires constant monitoring, evaluating, analysis and change. A huge company can easily afford a long term cut in its revenues to be able to fend off a short term debacle. A whale can stop flapping its fins and it will still stay afloat; the large lung capacity and the fat help it through. The sharks cannot afford to stop swimming; you stop and you go deep, very deep.

With such heavy odds against it every startup has to balance two visions of itself. Short term survival & growth on one side and long term vision. Each are important and must not be traded off for the other. Once the short term survival is compromised, it ceases to exist. The long term vision is important and must be carefully tallied by the founders regularly otherwise there is the danger of it getting just getting lost in the local minima and maxima for ever.

And its generally this very tendency of a startup to be extremely vulnerable to events outside of is sphere of influence that make its existence shark like. The lean muscle of a startup makes it extremely easy(compared to a well established corporate juggernaut) for a startup to be able to change its direction as per the demands of the situation. This however should not be understood as a change in the vision of the company. Its very easy to confuse vision with the direction and it can be fatal to misunderstand this difference.

This ability to quickly adapt and innovate is the basic survival tactic of a startup and will/should remain so.

Uncaffeinated Desktop Discussions 1: Buxfer

I had had a personal interest in understanding the dynamics of social money in some personal posts of mine. Recently on Rajat’s blog I had the chance to meet up with Amit, one of the cofounders of Buxfer. The meetup coincided with our plan to get entrepreneurs to talk about their products… from a more critiquing PoV.So here’s the first edition of Uncaffeinated Desktop Discussions with Buxfer. I have used it and personally felt the UI feel polished compared to BillMonk.

Q. Can you tell us a bit about your team? More specifically, each of your roles
and responsibilities and what all each of you are accountable for?

The Buxfer team consists of Ashwin Bharambe, Amit Manjhi, and Shashank Pandit. All three of us are Ph.D. students in the Computer Science Department at Carnegie Mellon University. Â Shashank does research in the areas of information retrieval and data mining, Ashwin in large-scale distributed systems (high-performance multiplayer games), and Amit in scaling data-intensive Web applications. We have included the URLs to our research pages at the end of this answer.

Currently, we do not have a clear division of responsibilities. Since we can only work on Buxfer in our spare time, anyone who is free has to take care of any issue that arises. So pretty much everyone has to take care of everything.

Research page URLs:
Ashwin Bharambe http://www.cs.cmu.edu/~ashu
Amit Manjhi http://www.cs.cmu.edu/~manjhi
Shashank Pandit http://www.cs.cmu.edu/~shashank

Q. My ideal app is always a very simple, intuitive app very much unlike GNUCash. Buxfer takes care of that for me at least helping me track all my expenditure… But I’m still not comfortable sharing my finances on the network. Whats your reply to this kind of profile of user?

Buxfer makes use of HTTPS to encrypt all the information that is sent to and fro over the network, so that it can’t be intercepted by a third person. Furthermore, you do not need to put your credit card number or bank account number into Buxfer. In fact, we don’t even ask for things like name, age, gender, zip, etc. Passwords are stored in an encoded format, so that no one (not even us!) can recover them as plain text. Â Users who do not want to reveal their email to Buxfer can use their Facebook or Yahoo! account to login. In short, users with the profile you mention can use Buxfer while disclosing very little of their personal information.

Q. Buxfer is a stranger name like my pet dog. Was this intentional, to have this zing feel to it?

Buxfer is an abbreviation of “bucks transfer.” We wanted to come up with a short and catchy name, and Buxfer fitted the “bill” perfectly!

Q. How would you profile your company ideally as?

Buxfer is a service meant to simplify tracking of shared expenses. Â By shared expenses, we mean expenses of an entire group of people which are paid for by just one or two members of the group. Examples include house rent for a group of roommates, dinner or movie outings with a bunch of friends, vacations or business trips with work colleagues, etc. Buxfer provides a centralized mechanism for such groups of people to report their shared expenses and be able to track how much money they owe each other. Currently, the service is web based, but it could be integrated with a variety of devices (in particular, cellphones).

Q. Tell us about the buxfer growth story? The first people to fall in love with it, the evangelists and other adopters?

We opened Buxfer to public in late September. Since then over 5000 users have joined Buxfer. The growth rate has been phenomenal, given that we invested very little time in marketing or publicizing Buxfer. Its just that our users have been very happy with us, and spreading the word around for us. Many of them write us fan-mail saying “Buxfer rocks!” or “We have always wanted such a service!”

Buxfer has also gotten media attention. It was covered by the Pittsburgh Post Gazette and
Associate Press.

Recently, the AP also put an article on the international wire, which was circulated as far as India and Australia. This article also appeared in Business Week and NY Times. So we have been getting very good coverage via the press too.

Q. Now about the idea. There is Billmonk and then there is Quicken, two plays concerning the individual but their target user profiles are much different. Buxfer is probably a mix of both – social money combined with individual expense tracking. However your target user profile (non-professional, non-serious but money tracking individual) Â looks very niche, ideally suited for students who have lots of small expenditures and it becomes difficult to
track them…


We believe that our student market is big enough to make money. We estimate the size of this market to be in the millions. Moreover, this is the market that many advertisers want to target, making it possible for us to generate revenues via advertising.

Q. What about its vision? Do you intend to make it mainstream as in for the general mainstream audience or make it the niche play?

Currently, we intend to focus only on the money tracking student market.

Q. How many users have you had till now? How is the viral growth compared to the general organic growth (the numbers or %)?

So far, our growth has been exponential, doubling every month or so. We currently have over 5k users with an increasing number of users joining every week. So far, the viral growth and organic growth are more or less equal.

* Q. Any interesting trends that you observed till now; say some spurt of growth during a season? *

The number of users signing up on Monday is almost twice the number of users signing up on either Saturday or Sunday. However, the maximum number of transactions are posted on Sundays. Maybe people are partying hard over the weekend, and on Sunday night they sit down to enter all their shared bills 🙂

Q. Considering that your name includes transfer of [funds…], do you intend to combine Buxfer with a payment gateway say PayPal? If yes, are you in discussions with anyone?

We are investigating the possibility of integrating Buxfer with a payment gateway in the near future, but so far, we are not in discussions with anyone.

Q. Any possible funding by VC ideas?

We have been contacted by a few angel investors, but haven’t yet finalized any deals.

Q. Is Buxfer earning you any bux?

Not so far. So far we have only earned the praise of many of our users.

Q. You guys seem to have put quite a thought on the UI front; mostly concentrating on the functionality. Like the signup form appearing in place of the login form – simple and elegant. Or say the groups functionality; which integrates very well with the real world functionality.

Thanks. Indeed UI is, and will remain, one of our main areas of focus. We believe that a simple and intuitive UI is extremely important for a website to be popular. We also like to thank our early users for helping us hone our UI.

Q. How about the inspiration for UI. My first impression was the GMail – global links at the top, dashboard in the center, contacts & groups & invites on the left, vertical tabs…

It does bear some resemblance to Gmail, but it would be incorrect to say we were inspired by Gmail. We tried out a couple of different design ideas, and this one was the most appealing (as per the feedback of our initial users), so we went with it.

Q. Billmonk does plan to go into individual accounting. Are you concerned about
that?

It is not a matter of concern because we think (and we are sure Billmonk will agree) that our main competitors are bits of paper and spreadsheets, which a vast majority of people still continue to use to track their money.

Q. Your thoughts on making a successful webplay?

First, you need to address a real need that people are facing, and second, you need good execution to make the site very simple and intuitive to use.

Q. Any parting thoughts to other aspiring entrepreneurs?

Well, we are not exactly experienced entrepreneurs, but we can say one thing for sure: being an entrepreneur is FUN! Yes, its a lot of hard work, and a tough path to pursue, but at the end of the day when you see people out there using your product and liking it, there is no better reward you can get for your work. From our experience, we would say that the most important thing is focus and dedication to your product, and a strong determination to make it succeed. The idea is as important as the execution, and a motivated team with a good mutual understanding can achieve the impossible. We wish good luck to all of
you!

Readers, do leave your comments! 🙂

-kopos

Where Is Superman

Where is superman (Aka Suman) ?

1) Fighting the gargantuan zepholodi of neptune and trying to save earth.

2) Getting his new and better fitting unform for his laterally expanding waist.

3) Is stuck in an elevator in an old decrepit mine

4) Trying to log into his computer which uses face recognition as authenitcation and is refusing access because of its suspicious disposition.

5) Creating useless polls with ridiculous options

Leave Your comments.

BTW Superman(Suman) is expected back anyday now so hold onto your toothbrushes.

Why Google is dangerous than Microsoft!

Everyone loves the underdog, or lets say most people root for them. Microsoft was the evil empire hellbent on world domination and Google was the david; the only hero capable of felling the Microsoft Goliath Juggernaut. But just looking at the way Google is rapidly gobbling up startups or more specifically eating into lunches of other startups markets; Google has long ago lost its ‘Startup Badge of Honor‘. I still think the most awesome technology to come out of Google stables is its search technology; not that I dont love Gmail or its Desktop Search(still to use this one though!). Ok back to the point.

Every corporation is a hulking conglomerate of people (manpower, resources, experienced moronic bosses he he), hardware, software and ton loads of dollars. This hulk makes it an inevitable juggernaut and most companies do use this advantage to the maximum. But this bulk itself is its biggest hindrance to pace. So all they do gain on this lost advantage is by taking the M & A route. Thats a very simple top down approach to abuilding a company compared to a startup’s bottom up.

Think of it, a top down approach to corporation doesnt allow a company to go into a new niche area (which is not its strength) even though theres lot of money it; it simply cannot just change gears and shift focus so rapidly; that was the beauty of startups playing with the big ones; you know its a virgin market and there are no direct competitors and for any biggie to come to this play it still gives you a enough window of time to ship your product before they can change direction to accomodate this new money making opportunity.

Now, just look at this discussion.

HUFFINGTON: Whatever products Google (Charts) is developing, they are incorporating a 60 Percent to 70 percent failure rate. I find that utterly fascinating. Talk about that culture and how that translates into our lives.

MAYER: As we’ve grown, one of our challenges has been, How can we continue to innovate? We have a theory around failing fast. If you assume that one in five things you do will turn out to be really successful, and maybe two of five will be moderately successful, and the other two will languish, you want to do a lot of things. It’s all about being agile. Most of the teams at Google are three to ten people. Five people launched Google News. About five people launched Google Toolbar. They operate like small companies inside the large company. Google is a lot like managing a VC firm, because you’re placing bets on different teams.

Semco was probably the only other company that had this bottom approach. As is each of its smaller more specific functionality units spun off as a new company by its own employees. But then that was an extreme case of zero shittake in the company; but i digress.

With such a bottom up approach, Google no longer becomes our typical hulking conglomerate but a sprinting juggernaut! As the myth goes, think of every interesting problem that you want to solve and Google already has atleast one team of 10 folks working on it and looks like this might not be a myth at all! Google just probably became the worst startup nightmare. Look at the developments. Google releases API to enable vertical search and has almost instantly flattened out IP value being created there by the new emerging vertical search startups. And the number of startups it bought?!

Google just might be the beginning of a new nightmarish approach to corporation building. Lets petition with the almight market to stop Google for inducing such horrible nightmares onto startup entrepreneurs.

-kopos 

Understanding Smack Shopping – Deal of the day

The first thing that comes to your mind as soon as you read about Jellyfish’s Smack Shopping – Deal of the day is Woot. Woot was a very innovative concept which took the consumer market to a new paradigm. It was just a limited time, cant-miss deal, which had the users hooked for the one main reason – one product, great discounts. It made great sense to the wholesalers too, for one day their product is assured to be sold.

Since we dont have any details on the discount rates on items by the W00t retailer, lets just say W00t buys the products at some x% discount on the market price from the wholesaler. And then W00t sells the items to its consumers at y% discount on the market price. The final profit that W00t nets is (x-y)/100 * N * Cost of each item.
However, Smack Shopping Deal of the day (SoTD) makes this number game much more interesting. The main reason is the number of variables involved is more than two {x,y}. Lets now consider SoTD here. For instance, consider the statistics provided here. In the first three days, the lowest cost has risen from 0$ to 60$ to 100$ (agreed though that the items are different on each day!).

Because of the many different variables involved in this market, the major play is by the consumers, the questions im having are:

  • Is there a standard price at which the users might stabilize? Will the prices hit a plateau in the long run?
  • Can the system be gamed? Of course, in India, people would not go on a shopping spree and wait to buy the items for free.. he he.

Lets consider for a second how the mathematics might work:

First the variables.

  • x% is the percentage discount price that SoTD gets from the wholesaler. To make a profit on the deal, on average the item should sell for more than (100-x)/100*Unit Price
  • We dont have a y% here as the reverse bidding on the item starts from its Market Price.
  • Whats tough to quantify will be the users response; because here’s its the race between greed of one consumer and the wisdom of the community. In the general case, when the wisdom overwhelms the greed, there will always be customers who will buy the item for zero [Heres the point where Smack gets Gamed]. When the greed overwhelms the wisdom, the customers will buy the item for the least possible discount; maybe even for less than the y% discount price .
  • Mostly the average cost of item bought will mostly be the region where the consumer feels he has got the best buy. On Woot, we understand that 62% of customers buy 1 of an item, 14% buy 2, and 24% buy 3; i.e for every 100 users, the number of items they buy are 162 (62 * 1 + 14 * 2 + 24 * 3) implying on average every user buys 1.62 items to get a standard discount of y%. This unit price / unit profit made on W00t is not important to us; the point is can this statistics of user behaviour predict how it will extrapolate for SoTD? Can we without no useful data on SoTD, extrapolate that of W00t to SoTD? Can it correspond to that
    • 62% of the users buy the item in the first time slice.
    • 14% buy it in the second time slice and so on?
  • Also is there a pattern that will emerge to the number of items that SoTD puts on sale? I dont think the variation will be a lot, or that the numbers will be less. Mainly because if SoTD has to survive it has to get large numbers on sale to reap the benefits. An occasional rapid random decrease of the number of items on sale will keep consumer on their toes.
  • The SoTD market looks very much like the stock market, Im guessing that overtime, there will be a definite pattern that will emerge that will behave the stock market tendencies – rewarding consistent study and effort and punishing small time investors who follow the herd.

SoTD will emerge as a very interesting social experiment in the consumer space not only because the consumer deals with escalating discount but also with the uncertainity of the number of items involved in the sale. User patterns that will emerge will for sure show

  • How users react to uncertain buying deals?
  • On average, there will always be the high risk-high reward folks who wait till the end, which might actually be the 24% of W00t. The average buying pattern in general will be those individuals whose asking price on SoTD is marginally less than the discounts they get at other areas. This might consist of the 62% that W00t had. The losers might be the early birds who on getting a good enough deal buy it – that might be our 14%.

Other links:

More about W00t

PS

Though not an economist, I sometimes assume supereconomist role to the T. However, my excitement is at seeing a simple product like SoTD exhibits properties of many other markets mainly the free markets existing today – stock markets, job markets.

– kopos

Entrepreneurship for the Employed – II

Please note that this post is second in the series formerly called ‘Taking the Leap: Job Holder to Jobless and Beyond‘ now called ‘Entrepreneurship for the Employed‘. After our Why? post here’s the How? post. In this post Ill say what I think are the best ways to prepare mentally for the leap and test if your answers are true.

Know Thyself: Evaluate your thought process.

In situations of extreme monotony, its not uncommon of think of entrepreneurship as the best way to escape the mindnumbing monotony. It is dangerous to the self if this escape route to monotony is mistaken for passion. The problem with turning into an entrepreneur from employed is by the time you realize, its a bit too late and your loans are upon you and your financial situation has turned horrible. Use some mantras (which are actually heuristics) to see if you really are fit to take the hit.

Mantra 1. Evaluate Financial Hit Resistance (most obvious yet most underrated)

Monthly operating costs for the enterprise, costs to sustain your basic needs of food, clothing, rent & entertainment, unforeseen liabilities, all these are the compulsory basic expenditure from your pocket. Now add a couple of ten grand per annum to pay for those Mutual Fund bonds, PPF or any funds you have invested in to escape the tax net. Now add a few more grand if you have a bike loan, car loan or some education loans to take care of. Sum all of these expenditure up. Find how much it costs you per month. Now just calculate & see how long your savings can take care of your expenditure, if it comes to less than 6-7 months, be forewarned, the first important thing to kill your enterprise would be yourself by not supplying enough capital.

And give it a second thought as how long you can survive like that. Can you take a financial drought hit like that for 6-7 months and still stay in the game?Assume this zero-revenue period as 5-6 months for a service company; for a product company make it atleast 9-12 months.

Mantra 2. Test your passion

Do you strongly and fervently believe that the amount of time you give to your enterprise is being sidelined because of your full day job? That your passion is being unfulfilled because of a serious lack of time? Ok then, try the following tests.

    1. If you have normal 8 hour shift or a normal day time job do this. Allocate daily 2-3 hours for working on your idea/passion/project. Change your weekends to be `full-day-job` days. Note down your progress, evaluate it and find if you are going anywhere… If frankly your passion is there where your reason is, you must be making progress & now maybe the time to quit becuase the time spent on this will be much more valuable than you do by sticking with this model. Else cheerio to venturing…
    2. Take a complete leave for about a month (comes to 22 days which you already must have accrued if you used them well) and start working in the project. Are you ready to work in such a unstructured, chaotic environment? Are you ok being the CEO, COO, peon, clerk, accountant, developer, QA? Are you ready for this sort of thing and sure it will not turn to be a monotony? Answer them well my padawan for they are the answers to your destiny.

Passion is not about having the time but getting it and squeezing everything you can. No time is not a very good excuse for not work diligently about your passions, if we are truthful to the self.

Mantra 3: Time your exit

Timing your entry and exit is a very important part of life of a startup; so it is in your corporate lifespan too. Be very aware of the policies of your company while you are quitting from it. Is there a time period for the PF or gratuity to be vested to you? And where do you stand in that time line? Is this time period negotiable to you?

I had been careless in my side [or assumed no issues] where i did not actually find anything of the vesting process of the PF/Gratuity of my former company; as a result of this by leaving 20 days before my 2 year service, I was not able to take my Gratuity amount in full. Do your corporate homework.

Mantra 4: Be prepared for delays

As against the highly overpampered environment in a MNC, where sending a mail solves all your problems (ok, not as magical as that, but the bureaucracy headaches are a minimum); it will be a strange experience how slow things can go on. Dont expect your client to respond to your requirements document by tonight, ping you back, setup a conference call and finish it in an hour. Expect an average of atleast a 3 days – a week’s delay for any response; which actually makes you more vulnerable to disaster (think of all the money lost during the times of zero productivity!).

Mantra 5: Sense of urgency / Demo Fast/ Proto first

In the same vein of relaxed work, life heading a startup can be pretty hectic. Considering that your captial resources (read savings) are constant and constantly depleting faster and faster every month, it makes sense to jump into the idea as quickly as possible (of course assuming you’ve done your homework). Dont wait for anything else, only aim to demo fast and prototype faster. Work with a sense of urgency on everything: your meetings with your team (keep them short, straight for deux sakes), that protocol setup, everything… F.A.S.T.