A Crowded Space

My Secret Source of Deal Flow

Tue, 18 Jun 2013 11:13:00 -0700

It’s not demo days. It’s not AngelList. It’s not lawyers or bankers. It’s the stuff that happens behind the scenes.

Due diligence calls.

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I recently led a $2M Series A investment for my firm, Sigma West. It’s in a company that’s building a killer analytics and engagement platform (still private, announcement to come soon). I met the founder of the company (let’s call him “Andy”) about 2 years ago when I was doing due diligence calls on another analytics company. I was looking for info about how gaming companies were building their analytics tools and what they thought of the various 3rd party solutions out there. I knew a friend of mine had gone to be a PM at a prominent gaming company - so I asked him who was in charge of analytics. He referred me to Andy.

When I called Andy it was on the pretense of seeking his advice and information in an important investment decision. It was a back channel reference. It was not made by the company we were looking at, but it was made via a trusted mutual friend. This sets the stage perfectly for a completely open conversation. The other important note is that Andy was a clear rising star in the company, which is why he was leading a very important department like analytics. On the first call with Andy he told me candid and detailed feedback and problems with every vendor on the market. It was information I just hadn’t heard before. It was clear and succinct. He clearly had a phenomenal grasp of the space and had a crystal clear understanding of what these gaming companies really needed. He was years ahead of the rest of the pack in terms of his thinking. During the call, he also told me about some problems with the company we were looking at, and he explained to me why the system he built internally was significantly better. I believed it.

So, I was interested to learn more. We met for a sushi lunch in San Mateo. We spent most of the time talking analytics - talking about the system he had built. I was blown away. I had already looked at a dozen companies in the space, but nobody was doing what he was doing with his internal tools. At the end of the lunch I picked up the tab and asked Andy if he’d thought about going out on his own. I encouraged him to pursue building his technology for others and founding a company himself. I told him to call me if he ever did.

Two years later, he called me. And I invested.

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This deal came through a back channel diligence call. I believe that these calls have two very significant benefits that make them good sources of deal flow.

1) Pretense - in normal meetings with VCs and entrepreneurs, someone is always selling. Selling puts people on the defensive. Nobody wants to be sold to. In diligence calls, it’s quite the opposite. It’s a trusted mutual connection for the open exchange of information. The conversations tend to be very candid and opinions are shared freely. Nobody is trying to impress the other person - and as a result, both people are impressed.

2) Quality - any introductions for diligence calls are typically made to the smartest person about a particular subject. It’s not necessarily the CEO of a company, more frequently it’s the uber-smart director or VP that knows a subject at a deep level. People are inherently very good at assessing relative knowledge in other people. If you ask me for a contact who is very knowledgeable in tax issues, or legal issues, or freelance marketplaces, or the solar industry — I will have a specific and immediate response for each one of those. I will refer you to the best person I know (assuming I think it’s a valuable use of both people’s time). The same goes for any back channel reference intro.

Due diligence calls are an important part of deciding whether or not to invest in a company. The best diligence calls tend to be through back-channel references and intros. These intros are made to very high quality people and you start the call with a strong pretense to establish a good relationship. You’ll get a bunch of good information, and as a nice added bonus, the person you’re talking with may be about to break out and start a company. And when they do — you have the inside track.

The lesson for me as a VC is to treat every person you talk with as if they could be the next founder that you’ll back.

A Critical, but Ignored Metric for Marketplaces

Wed, 10 Apr 2013 14:49:50 -0700

In the press and on home pages across the web you see metrics like 100,000 expert freelancers or over a million sellers or “adding 3,000 new users per day.” Those all sound great, but they are irrelevant to the health of a marketplace company. The press and other VCs still eat them up though, and that’s why you keep seeing more of them. There is a much more critical metric being overlooked because it’s just not as glamorous.

That metric is the number of full timers.

What sounds better to the press and investors?

100,000 experts or 100 full-time experts.

I’ll take the 100 full-timers, but I think most others would go for the big numbers.

Take a look at successful marketplaces:

eBay has power sellers.
Etsy has the 10k club - for sellers that have sold over 10k items.
Uber has full time drivers.
Rev has full-time transcriptionists.

oDesk’s core user base in the beginning was a very small (about 50) number of php programmers in Russia that we quickly employed nearly full-time. I chatted with almost all of them on a weekly basis. When they were under-utilized, I would work my ass off to find them a new client so they could continue working full-time through oDesk.

Full timers define the health of the marketplace. The 80/20 rule is in full effect here. Marketplaces need a metric to indicate how many people are really heavy users of the platform. In labor marketplaces, you can think of it as the people that are relying on the platform for their primary source of income. Those people will be incredibly motivated to help the company, to increase their earnings, and to invest in their online reputation. In contrast, if you don’t have people that are relying on you for their primary income, you’ll have a very fickle audience. They will not care much about their online reputation, they will not drive turnaround times lower, and they will be disintermediation risks. They won’t open your emails, they won’t participate in your community forums, they won’t give you product feedback, and they won’t be telling all their friends about the platform.

It’s the full timer who will do that.

You can also be sure that if you ask the full timers the Sean Ellis question, “how disappointed would you be without the <marketplace>?” — you’d definitely get the answers you’re looking for.

Second, look at the issue of utilization rates. When I was in consulting, I had to maintain an 80% billable ratio. Same goes in labor marketplaces. But, you need to work with the supply side to help them achieve the high utilization. Make sure you have enough demand to support your network - make sure they can spend most of their time working and earning. In many cases, you need a surprisingly small number of providers to support the demand.

In the past couple days I’ve had chats w two successful marketplace entrepreneurs. I was amazed to see that one of them had only 12 individuals on the supply side supporting a 32k monthly business. He knew every one of their names and new that one was having some health concerns. They were all part of the family. In another conversation, Chris Waldron from TakeLessons shared that he included every provider in the network in a bi-weekly town hall meeting. They were treated just as he treats the full employees of the company. This could only happen with a complete focus on the core full timers of the business.

To judge success, a key metric should be determined for the business - maybe it’s # of people earning more than $500 per week, or # of people working more than 30 hours per week. I bet Uber has phenomenal metrics in this regard for their drivers. Every driver I’ve talked to says they get all their business through the platform. If they had instead added 1000s of drivers before they had the demand to support them - all of the suppliers would lose interest very quickly.

So, the next time a VC asks “how you are going to get the providers” - just tell him that’s the wrong question to ask.

Innovations in Customer Effort - Trader Joe's

Wed, 13 Mar 2013 15:04:12 -0700

I love anything that lowers the customer effort. The best companies in the world are on a constant quest to make things easier. Trader Joe’s has made a very simple innovation to the standard Express Lane.

What’s easier?

a) counting the items that you’ve selected to see if you’re under the 14 item limit, and then deciding which items to put back if you’ve accidentally selected 16 items.

b) know if you’re carrying a hand basket.

Running an Antifragile Startup

Wed, 13 Feb 2013 16:30:51 -0800

I recently finished reading Antifragile from Nassim Nicholas Taleb. In short - it’s amazing. Easily makes it to my Top 10 Books Ever Read list. Everyone should read it for business and for life. It unifies Wall St bailouts, Silicon Valley’s success, why restaurants are good, and why the Paleo diet is best for your body.

What does antifragile mean? - It means things that gain from disorder.

Or as wikipedia says:

“Simply, antifragility is defined as a convex response to a stressor or source of harm (for some range of variation), leading to a positive sensitivity to increase in volatility (or variability, stress, dispersion of outcomes, or uncertainty, what is grouped under the designation “disorder cluster”). Likewise fragility is defined as a concave sensitivity to stressors, leading a negative sensitivity to increase in volatility.”

So, I’ve reflected on my time at the early days of oDesk and what we did. I believe we were doing some practices that were antifragile, we just didn’t have a good way to describe it. Obviously, Taleb is far more eloquent and intelligent than I am.

We had some sayings in those early days:

Throw stuff against the wall and see what sticks.
Break sh!t.
Play whack-a-mole
Fast fail.
Try before you buy.
Be more experimental.

All of these things have elements of being antifragile. It’s also basically at the heart of the Lean Startup movement. Embracing failure and learning by observation tends to be better than lots of theorizing about the best strategy.

If I were in a startup now, I’d constantly be thinking about how to make the businsess antifragile. How to make mistakes and learn from all of them. How to make sure that all employees have “skin in the game.” How to create a culture of rapid iteration and experimentation. How to limit downside and maximize upside potential.

Now - go read the book and Be Antifragile.

All Introductions are Not Created Equal

Fri, 14 Dec 2012 12:20:13 -0800

Everyone knows that the best way to approach VCs is through an introduction. Mark Suster points out 4 obvious channels for introductions: lawyers, recruiters, portfolio companies, and other entrepreneurs. There is also other VCs and angel investors. But, from a VCs perspective, all intros are not created equal. There is a huge difference in my level of excitement for a startup based on the person that makes the intro.

The point of going through an introduction is widely understood: VCs get tons of pitches and going through an intro is a good first-pass filter. I take meetings with almost all introductions that are made to me (fire away). But, like I said, I place my own filter on the quality of the referrer.

Here’s a little inside peek into the way I think about it:

The questions are:

How good is the deal flow of the referrer? Do they hang out in elite circles? Or are they fishing from the bottom of the well. The quality of the referrer’s network is usually proportional to the quality / success of the referrer. If the referrer has had great success, chances are their network is damn good. In addition, seeing a lot of deal flow tends to increase the referrer’s judgment. As a species, we’re really good at determining relative strength and poor at determining absolute strength. So, seeing lots of deals means that you’ve seen enough data points to understand which ones are the best, and hopefully you’re helping those companies out with introductions. This criteria is far more important than how well I know the referrer. I have some great friends that make intros, but I don’t necessarily respect their judgment about startups.

What is the incentive of the referrer? Introductions are the social capital of the valley. What’s in it for the referrer? I want purely intrinsic motivation. If the intro is coming from an existing investor, it may be great, but they are also protecting their investment. If it’s coming from a lawyer, they are probably on the startup’s payroll. If it’s coming from another entrepreneur who is just a friend, the motivation is to improve social capital by making quality introductions on both sides. I like it when intros don’t have any financial incentive attached to them.

So, the 2 key things that matter when I assess the intro:

Quality of Referrer’s Network (their deal flow)
Incentive

Disclaimer: I sincerely hope that nobody is offended by the following statements. These are simply my candid observations from the past couple years. These statements are all broad generalizations, of course there are exceptions. I hope to continue receiving deal flow from all of these groups, so please don’t step sending intros. :)

I took a stab at charting out introduction quality on this 2x2 matrix. The most interesting finding for me was the VC introductions. It’s possible that the conventional wisdom about VC introductions is wrong. (conventional wisdom is that VC intros always beg the question ‘why didn’t you invest’ and therefore are a deal-killer) If a VC that hasn’t invested in a company refers a deal to me, I have to believe that 1) they see a lot of deals, 2) there is some reason they passed, and 3) the motivation is to strengthen future co-investor relationships. In order to strengthen relationships, you obviously need to send quality introductions. Therefore, I have to assume they passed because it wasn’t a fit for industry, stage, or competitive reasons, but not because they thought it was a bad business.

Let’s look at a few categories in more detail:

Lawyers - I value these fairly low. Lawyers are paid contractors for a startup. If I’m paying someone and I ask for an introduction to people they know, they’re somewhat obligated to do it to preserve the paid relationship. Also, since they don’t have the benefit of seeing a lot of the same type of company, they are not great at judging the relative quality of each one.

Bankers - these are the worst. If you hire a banker to try to help raise an early round, it’s the kiss of death. It reeks of desperation since you can’t get intros without paid help.

Recruiters - I rarely get these, probably because I don’t know that many recruiters. I think they fall into the same camp as lawyers though.

BD folks - these are interesting. Take for example, a BD director at Salesforce working on the Force.com platform. They see a ton of startups building apps on top of their platform. They have inside information about how well these apps are performing in the marketplace. They have a good instinctive sense of what their customers will adopt and what they will not.

VCs - As I mentioned above, I think the conventional wisdom might be wrong on this one. Of course, if everyone believes it then it doesn’t really matter. VC intros that are looking for co-investors or follow-on investors can be really good intros. I believe there probably should be more VC to VC intros when someone is passing on a deal and it shouldn’t carry as much of a stigma as it currently does today.

Angel investors - depends all on how much I respect the angel investor. Have they done good deals? Are they making the intro because it’s a deal they’ve done and it’s going south? Or because it’s a deal they’ve done that’s doing well and is a unique intro to me because of my expertise. Is it an angel investor that’s in a ton of companies or is it an angel investor that does a few, focused investments (the latter is better).

Entrepreneurs that we’ve passed on - We passed. There was a reason. These are still usually good and my second favorite source of intros, but it’s a mixed bag. If the entrepreneur knows me well, there’s a good chance that I was quite interested in the startup and have a lot of respect for the referrer. If I’ve only had one meeting with the entrepreneur, chances are lower that it’s a strong intro. You could ask why we passed and that will give you a good hint of whether or not you should ask for an intro from them. Overall, these are my second favorite source of introductions, just be aware.

Entrepreneurs that we’ve invested in - Well, this is kind of obviously the best. I saved it for last. We clearly love the entrepreneurs because we invested. The motivations are very “pure” - they don’t want to send poor quality introductions and will usually apply the strictest filter. Whenever possible, try to go this route.

So, my final thoughts: From the entrepreneurs perspective, just know how which introductions are the most powerful and act accordingly. From my perspective, I welcome all introductions and almost always take the meetings, but the referrer does have an influence on the “starting point” for the startup. Great introduction - I’m already excited. Poor introduction - I still need to be convinced.

The biggest product mistake I've been making

Sun, 30 Sep 2012 11:07:56 -0700

Over the last 8 years I’ve been either responsible for or involved in product management at a number of different startups. I think I’m ok at product management — hopefully I’m better at VC. I’ve made many good product decisions over the years, but I now realize the biggest mistake I’ve made over and over again.

It is summed up simply as “Let’s give consumers choice.”

It is surprisingly easy to fall into a trap of offering too much choice. When we were building out features, there would be healthy debate about which options to offer and the pros and cons of each choice. Frequently, we lacked good customer data to choose only one option so we offered both to see which one customers adopted. In other cases we thought we were doing a great job of capturing the voice of the customer. We were getting feedback like I “I love your product but I really wish you offered it in green.” So we’d say “great, let’s make it in green too.” Or we’d get a really big enterprise customer calling on us and they requested just one little change to the product… So we’d build out a custom option that would allow a different configuration by each user account. On another occasion, I’ve used a checkbox on order forms to offer premium services. It’s easy to make an argument for it — some customers specifically asked for the premium services and we could capture more revenue from them. Why wouldn’t we offer that premium service?

The paradox of choice is a pretty well-known concept, and of course I know about it too. Basically, too many options cause higher levels of inaction and stress. I recently read on Farnam Street (my favorite blog), about how the president reduces choice in his life because humans are only capable of making so many choices each day. So, he’s eliminated mundane choices in his life. He only has 2 color suits: blue and gray. Asking customers to make choices adds stress and pain to the experience. I now summarize this as: More choices = more customer effort = lower satisfaction = lower organic growth.

But, it’s not just that. Having this as a strategy causes further problems in startups that may not be as obvious initially.

1) Offering low quality. Why not just provide the best? But you might say its too hard to figure out what the best is. You might say it’s hard to tell which option is best for which consumer. I’d say too bad. Make some tough choices and pick what to focus on. If I use Yelp to pick a 4-star restaurant and it turns out to suck, I’m going to be disappointed with both the restaurant and Yelp. I will not admonish Yelp of guilt in the matter just because they are a directory. Yelp would be more useful to me if I simply never saw bad restaurants.

2) Inability to course-correct. Let’s say you offer 3 options. 60% choose option A, 25% choose option B, and 15% choose option C. Then later you decide that you’d like to focus more to provide a better experience. So, do you just cut option B and C? Not an easy decision to make. Practically speaking, there will be some discomfort with taking away an option that your valued customers have chosen. This makes it more difficult to make the right decisions for the company.

3) Less control of liquidity. For any marketplace business, you want to be able to optimize liquidity. You want your best suppliers to be busy all the time on your platform - that will create the best overall experience with your company. It’s part of a framework we’ve developed for marketplace quality: attract, screen, optimize, retain, expel. Optimize is a key step. All of the best suppliers should be able to dedicate all of their time and energy to your platform. They should not work to get jobs or sell products. Look at the App Store. The App Store is very highly curated and contains a Featured section which gets a tiny number of apps a massive number of downloads. Now look at Craigslist. It’s one of the most amazingly resilient companies I’ve ever seen, but I still think its doomed because it requires tremendous effort on the user’s part to find the best apartment / job / etc. If you’ve made a strategic decision to offer choice, it paralyzes you on the optimization step. You can’t make decisions that favor one supplier over the other even though it’s the right thing for the business and the consumer. If you’re set in your ways about giving consumers choice, you would never have a Featured section.

4) Inability to go Mobile - this concern has surfaced in the past couple years as traditionally dominant web companies try to make the move to mobile, and in many cases, fail miserably. I believe several have failed in the switch because they’ve tried to simply replicate their web experience on mobile. The problem is that the web experience had too much functionality that made the mobile app experience overly complex. This migration problem opened the door for companies like Flipboard and Instagram to storm in and create a better mobile experience because they are focused on one, and only one, use case.

Oh and one final point, who the hell wants to maintain all those options and keep them working for users? Everything gets easier when you’re focused on as few choices as possible… Marketing, development, QA, customer service. Everything.

I used to think mission statements were stupid

Mon, 24 Sep 2012 10:51:58 -0700

I was running online marketing… my main goal was user acquisition. We were doing quite well against that goal through SEM, SEO, social, and optimizing NPS for word of mouth growth.

Over the years on the marketing team, I’d end up in conversations about our mission statement or our positioning statement and I would usually groan a little bit. We’d spend hours going back and forth over existential questions like “who are we” and “why are we doing this?”. I wanted to leave every meeting where we talked about the pros and cons of a single word for an hour. I found it to be distracting from my core goal and so I didn’t spend much time thinking about it. I didn’t see how it would help me achieve my goals. Now that I’m in VC I have seen the real purpose of the mission statement and I never understood it back then.

A mission statement is critical for recruiting.

Maybe this is obvious to people already, but I had never fully internalized how critical it is to recruiting world-class talent. A-players have lots of options and need more than just extrinsic motivators to take a job and dedicate their life to it. They need strong intrinsic motivators as well, a strong sense of purpose. How motivated do you think Zynga employees are to copy the latest hot game and optimize the hell out of virtual pigs and goats? See Zynga’s brain drain.

Now that I examine more companies I see the mission statement as a substantial differentiator. If a company can clearly articulate their mission, they have a huge edge on recruiting. Look at some of the statements on the career pages below.

Facebook - Make the world more open and connected.

Tesla Motors - Tesla’s goal is to accelerate the world’s transition to electric mobility with a full range of increasingly affordable electric vehicles.

McKinsey - Enabled development of cutting edge vaccines.

Votizen - Help us repair democracy.

Inkling - We’re going to change the way an entire generation of people learns.

Twitter - We’re connecting people everywhere to what they find most meaningful.

What do they have in common? They all talk about a mission that makes the world a better place. What’s your mission statement? Is it something that people will rally behind? Is it a cause that will fire people up? It better be if you want to recruit the best.

I’d love to hear your mission statements in the comments.

PS - Just for a little contrast, it’s funny to look at NASA’s career page that begins with “Our work ranges from the everyday operating of our facilities…

Want Better Employees? Play Musical Chairs

Tue, 18 Sep 2012 11:31:31 -0700

Ever wonder what’s going on in marketing? Development? Finance? Go find out first hand.

Jack Welch and GE are famous for their management rotation program. The basic idea was to take promising up-and-coming executives and put them through a 2-year program where they spend 6 months working in each of 4 different departments. At GE, Welch produced a management team that was second to none. After appointing his successor in Jeff Immelt, the candidates that LOST out on that race all quit. They weren’t good enough for the top spot at GE, so they almost immediately went on to be CEOs at 3M and Home Depot and later CEOs at Boeing, Chrysler, and board members at IBM, P&G, and Coca-Cola. Pretty, pretty, pretty impressive.

Jack had to rotate executives at a 200B public company. He had it the hard way. If you’re at a ten person startup, you can do the same thing, faster, cheaper, and more effectively. If you do it right. You’ll end up with a much higher performing team. Your company might sacrifice some short-term productivity loss as people spend more time getting up to speed, but you will reap phenomenal long term gains in productivity, morale, and innovation.

At oDesk, we never had a formal policy of rotating people to different departments, but I was fortunate enough to fill several different roles over 5 years. At various points I ran sales, product, community, customer service, operations, recruiting, marketing, and business development. I firmly believe that the broad exposure made me better at every single role. In practice, my thousands of sales calls made me a much better product manager because I knew what customers wanted. My time in sales made me better at marketing because I had “A/B tested” hundreds of different messages on the phone in 1:1 conversations. My time in product made me better at business development because I knew what was possible and how to integrate with the product. My time in community made me much better at customer service because the forums were answering many common customer service issues. Hell, my time as the Foosball Tournament Coordinator made me better at management. You get the idea…

Generalists are not born, they’re nurtured.

So, in your startup, create generalists. Play musical chairs with some of your team and make them move around to different departments, roles, or projects. Announce a switch one day. Have the marketing manager take over a product feature, have product take over sales. Just switch a few key people around. Stop all projects in marketing and move everyone to sales. Then switch them back. Push people out of their comfort zone. Put them on a steeper learning curve and challenge them to increase it further. Create some chaos. What’s the worst that could happen? :)

So, play musical chairs with your team. As result you’ll get:

More creativity - Diversity of opinions and approaches is good.
More cohesion - Increased understanding of everyone’s role can only make people appreciate each other more. It increases empathy and fosters better collaboration. No more marketing vs sales standoffs.
Happier employees - A players like challenges. They like learning. A players will thrive, B players will be uncomfortable.
More productivity - A lot of time is spent (and sometimes wasted) on team collaboration. Quite frankly, having more generalists reduces the need for some of this collaboration. If the customer service guy already knows all about the product, then they don’t need to escalate as many issues. It makes people more effective at whatever role they’re currently in.
Better retention - Your people will stay with the company longer. I was at oDesk for 5 years - that’s an eternity here. I was there because it was constantly exciting to me since I was always learning.
More flexibility - Priorities in early stage startups change frequently. One day you think acquisition is the biggest problem, the next day you think it’s a usability challenge. Having Seal Time Six available means that your best people can fill any seat at any time. This makes the whole company more nimble.

Obviously, sometimes it won’t be practical. I’m not about to take over the job of the CFO in a one-day switch and I’m not going to start pushing releases tomorrow. I haven’t tried this before, but I think in those cases, it would be interesting for the CFO to present to the rest of the team a day-in-the-life type scenario. She should educate the rest of the team about what her job entails, the challenges and the goals. It also shouldn’t be done erratically, it should correspond with the overall shifting company priorities. Given how frequently startups pivot and shift priorities, I think there are ample opportunities to give key employees lots of exposure to different parts of the business. Take those shifting priorities as opportunities to train people, even if it’s just for a 1-week project.

A note on developers: Most of this theory is geared toward the business side, but I believe it can be adapted for developers. I don’t think they should actually switch roles, but I believe giving them a wide variety of projects including marketing, sales, finance, and customer service features is beneficial to the individual and the company. I’ve seen it unlock some impressive innovation as the people with the skills to make automated process improvements are directly exposed to the processes that other people are going through on a daily basis. I recently asked a developer to do some data entry work for 2 hours on a project that will require thousands of hours of data entry work. After those 2 hours, the developer was so frustrated with the process that he spent the next 2 days improving the back end and admin interface so data was entered 3x faster.

In my experience, Managing by Musical Chairs works. Try it.

Have you done it? Tell me how it worked?

How to get the truth from VCs

Thu, 05 Jul 2012 21:51:57 -0700

This is a followup to my last post, VCs are liars. I got a lot of interesting comments from that. Many were outraged. Many called me names. One commenter discussed his future plans:

after I make it bigtime and roll up in the Maserati, with a 6’ tall, red-headed supermodel with a Scottish accent on my arm… and I’d say “fuck you, dude” and then buy a round of beers and sit back and laugh about the whole thing.

Some gave me constructive feedback - thank you! And many others thanked me for the candor either publicly or privately. It also spawned a followup post from Brad Feld called It’s Hard to Tell Someone They Suck.

Throughout the discussion, it has become clear that people have a variety of opinions on the subject. But all of us in the startup ecosystem agree on at least one thing:

Candid feedback is exceptionally valuable.

If you believe anything about what I said last week or what Brad said in his post, you may also believe that it can be hard in some situations to give candid feedback. There are various reasons for this, but I’d like to focus this discussion on how we can all foster a more candid and open environment.

Also, please note that this discussion is really geared toward the early meetings between VCs and founders, where we may have only spent a single hour together. Relationships are obviously much stronger and deeper when you’re working together for a longer period. I’m really not talking about those relationships.

So, here’s what both parties should do if they’re looking for a more open environment in those early meetings. At a high level, it’s all about improving the relationship and signaling that both parties are willing to both give and receive critical feedback.

How to Get More Candid Feedback

Display quiet confidence. Let’s go on the basic assumption that we are all good people, all relatively smart, and don’t need to brag. Everyone I meet is impressive in some respects. Of course you want to present yourself as impressive, but there is a big difference between quiet confidence and bragging and we can all tell the difference. The most successful people don’t shout it out - they are relaxed, humble, and confident.
Eliminate idle compliments. I don’t believe these are helpful in any way. It sets the wrong tone. I’ve had entrepreneurs come in and do a bit of over-zealous complimenting. ”That slide presentation you prepared was simply amazing, changed my life!” kind of thing. There’s a balance to all of this. It’s good to let people know that you enjoyed their work, but sucking up is unhealthy to the relationship. It just sets a strange tone where I know things are disingenuous from the start. Likewise when I’m trying to pursue entrepreneurs with prior successes. I don’t believe it’s helpful to start by sucking up like crazy, “oh my god! you were the founder of oDesk! You’re amazing! I love you!” It puts the founder on guard. Same thing happens with celebrities. Sucking up to them puts the relationship at a different level, treating them like regular people can lead to a more useful discussion.
Ask for feedback. Ask a question like, “What would you do if you were in my shoes?” I believe this is a really helpful question because it accomplishes several things at once; it establishes a peer relationship and opens the door for candid feedback and allows the feedback to be slightly less direct and sensitive. Even just since my post a week ago, founders have started asking me for direct feedback and they add, “Give me candid feedback, I want to hear it.” That is a great way to signal that you won’t be overly defensive.
Invest in personal relationships. Spend some time in the beginning of the meeting talking about personal backgrounds. Talk about the industry as a whole. Talk about some current startup events. Talk about sports or colleges or recent blog posts or tweets. If an investment is made, it’s basically a 7-year commitment or more. It’s worth investing some time in establishing common personal ground. It’s obviously nothing like the level of relationship between cofounders, but it’s one that needs to be nurtured just like everything else.
Don’t lie. (yeah, i get the irony) We all know the stats — the vast majority of startups fail. So please don’t pretend that there’s no risk to your startup. I’ve asked some founders what they believe the risks to be and the answer was “the only risk is that we don’t raise enough money.” That is kind of a funny and accurate answer, but obviously BS. Don’t be vague when it comes to customers and partnerships that you have in place. Be direct and honest when answering any questions. If you answer a question with defensive dodges then it signals that the relationship cannot have complete candor.
Accept feedback. During the course of an hour long meeting, there will likely be a lot of banter back and forth including some questions and feedback. Early on in the meeting, the feedback and questions will be about things like market and product. If you receive feedback about some product decisions that have been made and get instantly defensive about it, there is no way that the candor will continue when it comes to team issues.
Read between the lines. No matter what, as Brad says, it’s hard to tell someone they suck. We may do it sometimes, but it’s never quite that direct. That would just be called being an asshole. So, we may say different things and we may do it in the classic “compliment sandwich.” (good thing, bad thing, good thing) In order to get the most valuable feedback, make sure you’re attentive to everything someone is saying, not just the good things. If you hear, “I love your background, I’m worried about your strategy, but I think this has a lot of potential.” —-> what you should take away is that your strategy needs work.

VCs are liars. And so am I.

Wed, 13 Jun 2012 19:18:00 -0700

They say it’s all about the team. They’re not lying about that. They’re lying because they never mention “the team” as a reason for passing…

I started in VC about a year and a half ago. When I was getting started, I was moving from an early-employee-business-generalist type to a VC. My heart was still on the entrepreneur’s side, so I was looking at VC with an entrepreneur’s lens. I read a lot of entrepreneur’s blogs and reviews on TheFunded. There was a pretty major theme I saw from a founder’s perspective:

VCs are jerks because they don’t follow up.

So, I thought I would change that. I’m not a jerk (according to at least a few people I know). I know how much time and energy went into preparing a pitch deck and trying to describe the vision for the company. I know that a startup at the early stages is the founder’s baby. I know that it sucks to try hard to get something only to receive… no response, no clear indication of what the investors were thinking and why.

I decided I would change the norm. I would reply to everyone who pitched me. I would give clear and concise reasons for passing if I decided to pass. I would offer to help out in other ways and I would actually mean it.

And then I learned the first cardinal rule of VC - it’s all about the team. Every time we receive a pitch as a group, we’ll try to convene immediately after for a very quick discussion. Most of that discussion is about the team, then some about the product and market. It’s about whether we like or dislike the founder. It’s often more subtle things than people realize, things like:

* Did you see the way he fidgeted in his chair when answering the question?

* Did you see how vaguely he described this particular issue - seemed like there was a lot of hand-waving.

* He seemed a little agitated, he must be getting frustrated in the fundraising process.

* He seemed a little desperate, he must be losing faith in the business.

Now that we’ve concluded that we’re not going to invest in the team, it becomes time to let the founders know that we’re going to pass.

And here is the dilemma: What do you tell a founder when you’re passing because of team issues?

I mean, have you ever noticed that most early-stage VCs talk about the importance of team - but it’s almost never mentioned ever as a reason for passing on a company. Notice anything wrong with that?

I decided I’d test the waters a bit. I told some founders that it was because of them. I told some founders it was because of their co-founder. And I’ve lied and said “you just don’t have enough traction yet.” Here’s what happens:

1) When the issue is with the CEO / founder. I’ve had a handful of unpleasant conversations as a result of telling people that I don’t think they have what it takes to create a successful startup. I honestly have the best intentions in sharing this feedback. I think many people see the Zucks of the world and think they can start a company at any age with no experience. And I see the flip side, people that are past the age of 50 and are trying to start a mobile, local, social startup but really have no experience creating compelling social products. This issue becomes even more difficult when the market they’re going after is huge, they have a bit of traction, and the product vision is interesting. But, there’s a belief that the person doesn’t have what it takes to move company past a beta stage or they are a poor leader and will have trouble recruiting talent. My feedback to these folks is nothing like “you’re stupid and we’re not going to invest in you.” It’s more about taking a different path.

“I think you’re going to have a hard time raising VC money because you don’t have prior success and <fill in irrelevant reason here>.” (this is just a warning)

“I think you should get some experience at a startup or incubator before going out on your own” (this is a genuine recommendation to founders that are still ultra-early stage).

“I think the executive team is missing these skill sets and you should first try to strengthen the overall founding team.” (this is my best recommendation to founders that have made genuine progress on their startup but have some weaknesses that someone else needs to cover).

Unfortunately, these conversations are not fun at all and turn tense or defensive quickly. I’ve stopped doing this. It’s just not worth it. Nobody wins.

2) When the issue is with a cofounder / executive. This is a really interesting situation. I’ve had conversations go both ways here. Some founders have thanked me for sharing that we’re passing because of their cofounder. I think they were on the fence about the cofounder in the first place. The feedback confirmed their fears and hopefully leads to a better outcome for the company. I believe my candid feedback greatly strengthened the relationship we will have going forward as I hope to see the founder again in 12 months for their next round.

Other conversations have turned real ugly and killed any potential long-term relationship with the founder. I had one founder go off on a tirade about some people that he assumed I called during due diligence (I had not). He went on to tell me how their former colleague was somewhat immature and stupid and I shouldn’t listen to his opinion (much more damning).

3) When I lie. Listen, this is what many VCs do. Perhaps it’s more like leaving out some details than outright lying. Or if they don’t want to lie, they just don’t respond. If you’re out pitching VCs and you feel like you keep getting rejection reasons that don’t really make sense to you — the harsh reality is that it’s likely a team issue. ”We need to see more traction” is the ultimate easy-out, because you can’t argue with it. I’ve had people followup with “how much traction do you need to see.” And this question is an easy dodge as well — “I can’t really give you a hard number, it’s more about proving unit economics that could scale.” I feel bad about giving bogus reasons, but the alternatives aren’t great either.

So, is there a solution?

I think there is. Here’s what it requires:

* More direct soliciation of feedback. ”Do you have any feedback for me personally?”

* More two-way feedback. VCs should seek feedback from entrepreneurs too. If you pitch me or know me, please give me feedback!

* Check egos. It’s easy to get defensive… just try hard not to.

PS - this post was in part inspired by Dan Ariely’s fantastic work on Dishonesty. I find the subject fascinating.

Dan’s book on Amazon.

The "Desperation Line"

Thu, 12 Apr 2012 18:52:00 -0700

Every marketplace or network tries to deal with the quality problem. There’s one line that is critical to understanding the problem, I call it the “Desperation Line.”

Why is this relevant to quality?

Let’s start by looking at the supply side of any labor marketplace. The primary motivation for all of these people on the supply side is to make money. This will be counteracted by the number of “hoops” in place. Let’s break it down into three stages:

Acquisition: the process of coming to the site and signing up.

Activation: the process of going from sign up to first earning money.

Activity: the continued engagement with the marketplace to keep making money.

Everyone knows nowadays that the process of Acquisition should be streamlined as much as possible. This is why things like Facebook connect are so awesome, it’s just a 1-click sign-up. Most marketplaces have good sign up processes that are just a couple clicks. As long as potential providers can see the benefit of making money - this step shouldn’t be a big problem. Not many hoops here.

Then comes Activation - and this is where things frequently go horribly wrong. Like I said, every marketplace attempts to solve the quality problem. The employees at the marketplace are constantly brainstorming ways to address the quality problem. I know, I’ve been in hundreds of these meetings before. The conversation goes like this:

Someone: “We have a problem - our buyers are complaining about quality”

Someone else: “Ok, how are we going to solve the quality problem?”

Someone else: “I know! We could do more testing and screening of the applicants. That way only the good ones will get through.”

As a result of all these brainstorming sessions, lots of new screening tactics are typically implemented. They look something like this:

Reviewing resume of providers
Screening providers with additional tests
Requiring work samples or trial projects
Requiring credential verifications
Requiring identity verifications
Requiring video interviews
Requiring the providers to compete with thousands of others

This is when the Desperation Line enters the equation. Adding all of these hoops that providers need to jump through seems like a great idea, until you realize that the best providers, the ones that will make your marketplace great, refuse to jump through hoops. They’re not desperate. They won’t jump.

My advice would be: “Design for the Best.”

More to come on other ways to screen out the bad providers without hurting the experience for the best ones… or let me know ideas in the comments.

5-Star Feedback Systems are Broken

Thu, 05 Apr 2012 20:33:00 -0700

In the early days of 2004 at oDesk, we had no feedback system. I answered hundreds of phone calls from customers. I would always ask for their feedback on what we could do better. Almost all of them told me their great idea - “You should launch a feedback system! Like eBay!”

So, we got it. We desperately needed a feedback system. We had Mary Lou Song (1st eBay employee) as an advisor. We studied other systems like eBay and RentaCoder. Ian Ippolito, founder of RentaCoder, deserves a lot of credit for building some very interesting elements into his feedback system which is now in place at vWorker. Elance had a 5-star feedback system, RentaCoder had a 10 point scale that had text descriptions for each point, things like “Good deliverables, but not on time.” eBay had a variety of different feedback mechanisms, but most of it started as A++++++++++++ and then evolved into % positive vs % negative (essentially a simple thumbs up or down).

When we set out to design oDesk’s system, we had no idea how some of our early decisions would become absolutely critical in shaping the marketplace. I distinctly remember one night debating until 11 pm whether or not people should receive default feedback scores when they were first getting started. Thankfully, we didn’t give out defaults but we did make feedback mandatory in the beginning. As with many things at oDesk, we debated each seemingly small aspect of the system very intensely for weeks.

This is what we ended up with:

5 star feedback system
Composed of 6 different categories, eg Deliverables, Communication, Attitude
360 Feedback - buyer rates seller and vice versa
Dollar weighted feedback
All feedback scores are public
Text comments could be hidden by recipient
Mandatory feedback at end of job
Cannot see the feedback you’ve received until you also provide feedback
A user can change a feedback score once and only once if allowed to do so by the other party.

I’m proud of the system we built since it has led to a virtuous cycle — feedback scores are always increasing. However, when I look back with the benefit of seven years of results and experience, there are definitely a lot of things I would have done differently. And I know there are many things that are broken about current 5 star feedback systems.

Let’s look at some of the problems with typical 5-star feedback systems today.

False Sense of Security

What if I told you that almost all of the books on Amazon have top feedback scores? Doesn’t seem all that useful, right? Take a look at the numbers below. There are a grand total of 140k items in this category. 99k out of 140k are in the highest feedback filter - 4 stars and up. The problem with this is that it leads to a false sense of security. You may think it’s a highly rated product. In reality, it’s just not one of the worst 20% of products.

The Law of Averages

Take a look at rating distribution charts on Yelp. Most of them look pretty similar. Unfortunately, that means that the simple average of these distributions pretty much always equals 4.0 stars. More interesting perhaps is to look at % 5 star rating or maybe simply total # of reviews.

I examined the scores at Amazon, Yelp, and oDesk and display the distribution of feedback scores below. With the exception of Yelp which is 4-centered, everything else is 5-centered. More importantly, about 90% of all the results fall in the top feedback tier across all of these marketplaces. So, the next time someone says we have over a 90% customer satisfaction rate, consider that 90% is just plain average.

Feedback Inflation

This is one of the trickiest issues. Most people in the world are:

a) generally nice, and b) avoid confrontation. The unfortunate results of a + b = c, feedback inflation. This issue is especially prevalent in oDesk, where feedback is public and personal. In the cases where you may want to leave negative feedback, it may not be worth it to you because you know that you’ll be insulting someone publicly. In oDesk’s case, it literally could mean the end of their career. I’ve heard stories of people leaving a negative feedback score and then being pestered with 38 consecutive emails demanding that they change the feedback score. Sites should consider making some more aspects of the feedback and reputation systems private to avoid these sort of issues.

Categorical Feedback Breakdown

Some sites allow users to rank something on a few different attributes like price, value, service, etc. These breakdowns are fairly useless. There is almost no variability in the scores of each category. People either love something or they don’t.

Bimodal Distribution

Most feedback systems are optional. Therefore, the user needs to be motivated to leave feedback for some reason. Mobile developers know this well and are getting pretty savvy about the timing when they pop up a little notification asking for a rating. They only do that after the user has become engaged and clearly is enjoying the app. The issue is also well known to the NPS community - there are promoters, passives, and detractors. Passives are the ones that rate you in the middle, and well, they tend to be passive. What that means is that you end up with a fair number of 1s, almost no 2s or 3s, a big number of 4s, and a huge number of 5s.

So, what is the solution:

I really don’t know, but I think the future of feedback and reputation systems will be:

1) More social - let me see what friends recommend

2) More authoritative - apply Page Rank principles to feedback system users

3) More objective - let me see behavioral data like return rates, engagement rates, etc

Disintermediation - It's a Bitch.

Tue, 13 Mar 2012 21:15:00 -0700

Every marketplace deals with disintermediation: oDesk, eBay, Airbnb, CustomMade, and Etsy. No matter what, if you take a fee, some people will try to cut you out of the loop. This is known as disintermediation.

From Wikipedia:

In economics, disintermediation is the removal of intermediaries in a supply chain: “cutting out the middleman”.

Disintermediation initiated by consumers is often the result of high market transparency, in that buyers are aware of supply prices direct from the manufacturer.

What causes disintermediation?

This is simple. If the fee to a user exceeds the perceived value of the service, he will try to disintermediate. When that happens, he must suggest disintermediation to the other party; so both parties must agree to cut you out of the loop.

Therefore, as an intermediary, you only have two options. Increase the value to the users such that the value exceeds the fees, or lower the fees.

Let’s look at how users perceive the value of a marketplace and its impact on disintermediation. There is a high value placed on the matching component (the ability to find a useful resource, product, etc) but the value of that is all upfront and has no long-term value. There is a smaller, but long term value of everything else the marketplace might provide, e.g.| payment tools, collaboration tools, security.

Next, let’s look at when disintermediation happens. It’s simple — it happens when the fee of the marketplace exceeds the perceived value.

The only truly sustainable ways to combat disintermediation is to either lower the fees or raise the perceived value. There are other tactics like contractual obligations or masking contact info - but those aren’t nearly as sustainable.

What are the considerations in figuring out disintermediation risk?

The main themes are Security, Payment, Trust, and Collaboration. The following comparisons are some guidelines that could help you understand and mitigate the risks.

Transactional vs Recurring - Transactional marketplaces like Airbnb, eBay, etc have different challenges than service marketplaces like oDesk. In the transactional example, almost all of the value is perceived to be part of the match. Once the transaction is agreed upon, there is little other than facilitating the payment that the marketplace does for the user. Note: Airbnb is increasingly trying to add additional services after the match, I just got an email about a “Concierge” service that they have for me during my stay. They know that they must try to add value after the match to keep people coming back. In recurring models, the challenge is more about how do you stay relevant to both sides after they’ve established a direct relationship and have built up trust between each other.

In Person vs Remote - In situations where the buyer and supplier never meet in person, you have a much easier time with disintermediation. If your marketplace facilitates transactions that are going to take place in person, the users can fairly easily establish a trusted payment relationship.

Small vs Large Ticket Price - In small ticket price items, the payment hassle for the individual user is significant. Imagine Mechanical Turk - would you want to deal with paying 1,000 different people 5 cents each. Disintermediation isn’t a problem there. On the other hand, let’s imagine a single transaction for a 10k watch. Are you going to want to pay 20% or $2k to some website where you found the watch? Suddenly, it’s reasonable for a user to spend a couple hours figuring out if the party is trusted and how to pay them and exchange the item.

Legal & Security Risk - Is there a high degree of legal complexity or security risk in dealing direct with the party? If there is, then your marketplace is safer from disintermediation, but of course, there’s the downside of dealing w the risks. The good news is that the marketplace is usually in a much better position than any individual to mitigate those risks. A good example would be 99Designs protection of a buyer in terms of copyrighted materials.

Standard vs Custom Offerings - standardized offerings are much easier to carry out through a marketplace because they require less communication between buyer and seller. The more communication that’s necessary between parties, the less relevant the marketplace and the more trust that’s established between them.

Ways to Reduce Disintermediation

The following are the tactics that I’ve seen that reduce disintermediation. Keep in mind that you’ll have to tolerate some of it since it’s impossible to eliminate completely. Also, by definition, when people want to cut you out of the loop, they usually don’t tell you — so it is difficult to measure. Rest assured though; some people are trying to cut you out of the loop.

1) Restrict direct contact - I have some issues with this one since it can frustrate users, but it does work. It can reduce conversion though; if you require users to communicate through your system they will be more likely to miss messages. You can eliminate email and phone numbers from any free text messages so that people are more or less required to communicate and transact through the marketplace.

2) Exceptional payment service - Be on time, don’t get greedy with float, and pay every single week (or more frequently). This is one of the biggest values of the marketplace from the supply side, so make sure you don’t blow it on this one.

3) Exceptional customer service - Every marketplace will have some level of disputes where the users can’t sort it out between themselves. In these cases, be overly generous with your payout. Just make it a goal to get the dispute ratio very low, like <0.2%. Think Zappo’s - don’t like the shoes, return ‘em, no questions asked.

4) Awesome collaboration – One other way to keep people in your system is to provide tools that make their jobs easier. Whether it’s just organizing their transactions or checking in code, make sure that your platform makes their lives easier. Think about how many tools EBay has provided to power sellers if you have any doubt about this one.

5) Feedback and reputation - This is the classic answer, and I believe it’s true, but only to a point. For example, if I invest a ton of effort in building up great feedback on my oDesk profile, at some point the incremental feedback doesn’t do me much good. Frankly, keeping things on the system once I have exceptional feedback is more risky, because a single verified negative review would cause significant harm. Make sure you include some recency factor in your feedback systems.

6) Legal obligation - if you’re dependent on this, you’re f#%ed.

One helpful test to ask yourself (courtesy of Ashish Gupta) is: “Would a buyer and seller with an existing relationship prefer to move their relationship to your marketplace?” If yes, let me know, and I’ll invest.

A quality framework for crowds

Thu, 23 Feb 2012 00:03:13 -0800

The number 1 issue facing the entire wave of crowdsourcing companies today is quality. Everyone can setup a service that is cheaper and has a faster turnaround time, but quality is holding the industry back. In some recent discussions, we came up with a simple framework for thinking about the problem and building a roadmap of features and policies to address the concerns. I think this framework is a useful starting point – the features and policies you build in each one of these areas will vary greatly, but it helped me structure my thinking. Also, this is for paid crowdsourcing companies, not the unpaid user participation type models. I don’t believe it applies as well to unpaid models.

Attract

Screen

Optimize

Expel

Retain

——-

Attract

It all starts here. I’ve frequently argued that it’s “easy to find people that want to make money, and it’s hard to find people that want to spend money.” I still believe that’s true – but it’s missing the important qualifier that it’s still very hard to find high-quality people. Everyone knows this since hiring is probably the #1 challenge for almost any startup. Your company needs to be attractive to the best workers in the world. Or if not necessarily the top 1%, at least the top 10%. If your site or marketplace are viewed as a “race to the bottom” – then that’s what you’ll get. I think it’s critically important to consider the saying As hire As, Bs hire Cs. Same applies in crowds although not as directly. If an A player is browsing around the site and sees mostly Bs, then they will not be interested. Think about what works to attract employees in the “real world” – do the same thing in the online world. Perks for workers, positive culture, big vision, fair compensation… read the Netflix culture deck. See what Facebook and Google do to attract the best developers in the world. Why should it be any different in the online world.

Screen

Ok great – so you’ve proven that people can make money on your online platform and you’re attracting a lot of good candidates. Now the job is to decide who to let in. Many online marketplaces or crowdsourcing sites simply let everyone in the door and then build systems to try to identify the best. But what can you do on the front end before the individuals become part of your network? There are lots of different ways to test candidates and a vertical approach works best here in my opinion. Have a category-specific test for your applicants. Utilize LinkedIn / Facebook connect to screen. You all know how to screen for potential employees, it’s not that expensive and you can do it for your crowd as well. Or perhaps someone will start a crowdsourced candidate screening company. J

Optimize

Assuming you now have an active network or crowd performing tasks, you should be gathering a lot of data. The types of data you’ll want to capture also vary by industry, but you can imagine a host of performance metrics. Let’s take a crowdsourced design contest. I might want to capture metrics for each individual designer such as time to submit a design, # of designs submitted to unique contests, % of designs that received input from buyer, community ranking of design, % win rate, CTR on the actual designs submitted, time on page of submitted design, etc. You’ll also no doubt want to have a user feedback system. Then the point of the “optimization” theme is to get the most work to the best workers. You can do this by preferred placement of the people, preferred / early notifications, job quotas, limits, etc.

One important part of the Optimize theme is to make sure that you have true individual metrics. Metrics about a design firm / BPO company’s performance isn’t really that helpful.

And regarding user feedback systems – I hate 5 star systems. They end up becoming terribly biased, but that’s a subject for a different post.

Expel

You don’t need to worry about this one right from the start, but it will become important over time and as you scale up. The lowest performers need to be removed from the network. A big company doesn’t keep their lowest performing employees. There is the constant lifeboat test performed in some companies. The highest performing consulting companies have an up or out policy. In theory, paid crowds should operate along similar principles. It is always a little bit more delicate in the crowdsourcing world, but you have to do it. Low quality poisons everything about the marketplace and results in dramatically increased procedures and costs in QA, customer support, etc. Just get rid of the bad apples. You can do this based on the same metrics that you capture in the optimize theme.

Retain

By now you should have a nice high quality crowd. That crowd is now your most valuable asset (and by the way, you should truly own your crowd, don’t completely rely on somebody else’s crowd). You need to work to retain your asset and make sure you’re getting as much of their attention as possible. With any freelancing type situation, you always have the benefit as the payer that you only pay for time worked. Which means you can make things very cheap for the end consumer, but the flip side is that freelancers go where the money is. So, one of the most important things to manage is utilization rate for your crowd. Make sure the most important people are earning a good amount of money and make sure there is a path for the middle tier to start making more and growing their business. Take surveys, measure NPS of your crowd, and of course, provide exceptional customer service.

Psychologists will be the new UX Designers

Fri, 02 Dec 2011 18:35:27 -0800

Over the past couple years, we’ve seen designers really rise to the forefront of key talent for a company. I think it pretty much started with Mint. You looked at Mint and said holy crap, this is a hundred times nicer than Quickbooks or any old busted personal financial management software.

As a result, design is rapidly getting better across the web - more and more companies have great design since there are enough good role models. Most people copy when it comes to design, so a few truly exceptional designers pave the way for the rest of sites to become almost as exceptional. Overall, I think the caliber of UX design has been dramatically improved over the past couple years.

My new theory is that the next “design” will be psychology. Every consumer internet startup is trying to increase conversion, increase engagement, and increase virality. They are trying to employ both extrinsic and intrinsic motivators to get users to perform these types of actions. Gamification is the buzzword of the year - and it’s reached that level because 1) it works and 2) everyone is trying to ‘gamify’ their applications or sites.

So, I believe that some leading startups will start hiring psychologists to lead the charge on affecting user behavior. And a few exceptional psychologists will start to pave the way for improved user understanding and user motivation across the web.

Gamification sounds Trivial - Let's call it Unlocking Intrinsic Motivation

Wed, 24 Aug 2011 18:21:00 -0700

Ok, so maybe it’s not as catchy, but I think it gets to the true power of gamification. I would say that game mechanics are on the upward swing of the hype cycle right now and for relatively good reason. I think people are instinctively starting to understand what Dan Pink and Dan Ariely have been writing about for the past couple years. If you haven’t read Drive from Dan Pink – I highly recommend it.

The main point is a distinction between extrinsic motivators and intrinsic motivators. Hundreds of psychological / behavioral tests have been performed over the last several decades and they are all pointing to some very interesting conclusions. The net of it is that extrinsic motivators like financial incentives, bonuses, free round of golf, etc – do not always serve the intended purpose, especially for any tasks requiring at least some creativity. In fact, they may narrow focus which restricts creativity and actually demotivate people in the long run (when the rewards aren’t there). On the other hand, a culture that fosters intrinsic motivations like helping people, getting “nice job” compliments, and making a difference in the world are vastly outperforming extrinsic motivation cultures. Pink puts this into a very effective framework for understanding intrinsic motivations of Mastery, Autonomy, and Purpose. Give people these 3 things, and they will perform far better than controlling environments with lots of financial incentives.

So, how does this tie in to game mechanics. Well, many of the badges, leaderboards, levels and other staples of games serve to give feedback on Mastery. Getting that next badge gives you the sense that you are progressing along the mastery path. I see a lot of startups that are introducing game mechanics in a somewhat haphazard manner - I think it’s important to introduce them while giving a lot of thought to how users will progress along the Mastery path.

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Article

Sun, 21 Aug 2011 07:01:51 -0700

Sample Page

Sun, 21 Aug 2011 06:56:52 -0700

This is an example page. It’s different from a blog post because it will stay in one place and will show up in your site navigation (in most themes). Most people start with an About page that introduces them to potential site visitors. It might say something like this:

Hi there! I’m a bike messenger by day, aspiring actor by night, and this is my blog. I live in Los Angeles, have a great dog named Jack, and I like piña coladas. (And gettin’ caught in the rain.)

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The thing everyone forecasts wrong

Sat, 20 Aug 2011 17:12:18 -0700

I’ve now been through a bunch of board meetings at a variety of different startups. The typical meeting goes through the plan and compares to actual and we all review where the company is ahead or behind plan. One observation that I made recently is the discovery of the most incorrectly forecasted number. It’s not revenue, traffic, conversion rates or anything like that.

It’s headcount.

Almost all startups I’ve seen overestimate their hiring needs and under-hire against plan.

Here’s why I think this happens. When putting together the plan, the CEO asks each department head, how many hires do you need to make plan? Every human being has a tendency to want achieve their goals. So the heads faced with aggressive goals and timelines have a natural instinct to want to add more to their team. And it’s also a natural instinct of many ambitious managers to want to have larger teams. So, they say that they need more than they really do. For me in marketing, it was usually something like this – I need one smart generalist that can execute and analyze and I need 2-3 more writers and maybe I need a designer. In reality, I didn’t need half of this – I needed to better utilize my existing resources and prioritize better. And VCs and CEOs love to see a company growing – our mantra is usually grow, grow, grow and worry about margin and profit later (as long as there is a clear path to it).

So, the typical plan is usually more aggressive than it needs to be with respect to hiring.

But they have the plan in place, so why do people under-hire to plan?

A few reasons:

· Increased execution – with more learning comes better prioritization. Excellent managers will prioritize better and become more efficient and thus alleviate the need to hire more. Basically they become aware that they overestimated their hiring needs.

· Talent is hard to find – this is the best reason to underhire. If you don’t find an A+ player, just don’t make the hire. I’m more and more a believer in opportunistic hiring. Hire A+ players when you can, don’t hire non-As. The plan should not dictate your hiring, the available candidates should.

· Hiring takes a low priority – most startup execs have a strong focus on meeting the numbers – which in almost everyone’s mind means things like customer acquisition, revenue, NPS, uptime %age, etc. Very few people are referring to headcount when they talk about hitting the numbers. So, in the relentless pursuit of meeting revenue-type goals, hiring becomes a lower priority since an employee now will probably not help the numbers this quarter. The short term focus deprioritizes hiring – and therefore great candidates don’t make it into the process and execs rightly don’t make a hire.

I don’t have any suggested solutions – these are just observations. Let me know if you’ve seen the same thing or not. I do wonder if it makes sense for startups to hire an HR manager / recruiter earlier than the current norm.