“Animal migration is a phenomenon far grander and more patterned than animal movement.  It represents collective travel with long-deferred rewards. It suggests pre-meditation and epic willfulness, codified as inherited instinct.  They are prolonged movements that carry animals outside familiar habitats; they tend to be linear, not zigzaggy; they involve special behaviors of preparation (such as overfeeding) and arrival; they demand special allocations of energy.  And one more: Migrating animals maintain a fervent attentiveness to the greater mission, which keeps them undistracted by temptations and undeterred by challenges that would turn other animals aside.” – National Geographic – November 2010

Sounds like a startup.

So, initially, just keep everyone in the loop.  Talk about how excited you are and how huge you think the business could be.  Just build excitement.  Hopefully someone catches your excitement.  Share details about how big the market is and what the tasks are that you need to do and how you plan to do them.  Have a really well presented business plan and let them take a look – just to look and see what they think – if they care.  They are probably already impressed with you for all your other accomplishments, but showing them a super pro looking 25-pager with all the market research etc can really confirm that you know what you’re doing.  Hopefully you can paint a picture where it seems that with just $____ (and hopefully $____ is a number they can afford) you will be able to achieve certain milestones and either be making money or be super attractive to some particular investors.

Show momentum. Mention that you just got cold called from such-n-such vc and he seemed really interested and this other vc wants to meet you for lunch tomorrow and this strategic partner emailed you all these interesting questions this morning and this really experienced person is becoming an advisor and you just signed up your first customer.

Objectively ask yourself if it makes sense for them to invest. Asking has the potential to make things awkward if they feel guilty for saying no, so be judicious.  If your friends and family can’t afford to lose $30k, and you’re working on some potentially massive, but objectively risky venture, you probably don’t want to be spending their money.

When the time comes and you absolutely need funding to take any more steps forward and you’ve demonstrated both commitment and competency, your friends and family will probably volunteer.  They will be thrilled to help you achieve your goals and optimistic that you’ll make them rich.  Only when you sense that they are on the verge of volunteering should you ask.

And when you ask, or after they volunteer, don’t leave it up to them to have a formal agreement.  They probably don’t make investments like this all the time and probably know less than you.  It’s up to you to prepare the term sheet.  Structure it as convertible debt.  Start with a 10% interest rate and a 10% discount to conversion or increase one and decrease the other.  Convertible debt is good because you don’t need to discuss valuation which can be touchy. Come up with your own term sheet and have a lawyer draft a formal agreement once you have everybody comfortable with the rough terms.

Innocent student trying to impress – “To start a successful startup, do I need to go to Silicon Valley, or should I stay in Boston?”

Defensive Boston VC – “You should definitely stay in Boston.  Many great companies are started here.  For example: (list of network infrastructure companies started in the 90’s)”

Semi-cocky Silicon Valley VC – “This is the only place to start a startup.  I would never invest in a company that was more than a 5 minute walk from my office. Facebook left Boston to come here (don’t you want to be like Facebook?).”

In NY, it’s the same discussion all over again.

1. It starts when a few startups in New York get funded.  Someone in the press sees it as a trend and proclaims that New York is the best place to start a company.
2. VC’s, bloggers and other entrepreneurs in New York weigh in on the subject. (Silicon Valley doesn’t even notice. Not in a bad way – just a completely oblivious kind of way.)
3. A few months later, someone in NY startup is very frustrated that they can’t get funding/cofounder/employee for their startup.  Blames the banks for paying software developers so well, or a lack of successful entrepreneurs as role models, or claim that the cost of living is too high.
4. New headline: New York is the worst place to start a company.
5. VC’s, bloggers and other entrepreneurs in New York weigh in on the subject. (Silicon Valley doesn’t even notice. Not in a bad way – just a completely oblivious kind of way.)
6. A few months later, more startups in New York are successful… repeat.

This debate is pointless and confusing.  I understand it’s possible that one location or the other has advantages, but your company’s fate is probably more influenced by the specifics of the people on your team (or other very specific factors) than your zip code.

There are more VC’s in Silicon Valley (but there are more deals for them to consider).  There are more engineers that work for stock options (but there are more startups way hotter than yours trying to hire them).

I know plenty of entrepreneurs that have failed in Silicon Valley.  I know plenty of dreamers in the bay area that have never even gotten their businesses off the ground. I know people like that in NY too.

Don’t get caught up in this debate. Work hard at understanding your market/customer problem/product. Live where you want to live.  I choose New York.

This show tries to define our generation. College educated young adults.  Non-descript white-collar careers.  A good group of friends having fun and figuring out life through mildly entertaining situations.  Meeting for happy hour (seemingly every day) to catch up.

There’s a sentiment among young adults today that they are entitled to this lifestyle.

Except it’s not true.  Nobody deserves to meet their friends for happy hour every day.  A lot of young adults can’t afford it yet it’s justified as a necessary expense (and debt piles up).  Not to mention that a lot of jobs won’t accommodate it.

Secondly, if it were true, this idea lacks any ambition or inspiration.  The biggest problem the characters face is finding someone to date or figuring out what to do on the weekend.  Nobody cares to change the world.  Nobody wants the responsibility of starting a new company, or inventing something or even excelling at their career.  It’s a passive, lazy, mediocre attitude towards life.

Contrast this to the HBO series “How to Make it in America“.  This show is about two friends living in New York trying to start a new denim brand.

There is nothing given to them.  There is no stability in their lives.  They don’t always know how they’re going to pay rent.  But they are ambitious.  They aren’t content to work 9-5 jobs and hangout at happy hour every day.  They want to start something new.  There is no separation between personal and business life (or personal and business profiles). It’s inspiring to see these guys work to create new opportunities for themselves.

For the cultural and economic benefit of our generation, I wish there were more shows like How to Make It – and less like How I Met Your Mother.  I wish more people in my generation were inspired to create something new rather than just working for a pay check.

But raising money isn’t winning the game – it’s just – getting you in the stadium.

Business plan and pitch competitions feed into this.  Don’t worry about a well thought out product – focus on a slick 3 minute speech instead!  Does that pitch even make sense?  Who cares if the investors like it!

So many entrepreneurs are focused solely on raising capital.  They don’t seem particularly concerned about understanding the market or objectively determining if their business makes sense.  They’re more focused on positioning their story so that investors buy into it.

This mentality is unhealthy.  It cheats the next generation of entrepreneurs.  We’re glorifying and optimizing the wrong skill set.  I’d like to see less time spent talking about how to raise capital and more time talking about how to build a business.

I predict bad things for AOL. I realize Tim Armstrong is a really successful guy and I want to give him the benefit of the doubt, but he has a way of talking for a long time without saying anything.

Example: Q: “What does creativity mean to you?”  A: “Well, I think, um, I think what creativity means to me and… take a step back… creativity is about empowering people that want to be creative… have a chance to be creative… highlight their creativeness… platforms… scale… next generation… spaces… scaled… connect with end users… distribution… explosion of creativity in the next 3-5 years…”

How does he get away with saying this much buzz-word BS?  How does he keep a straight face.  Why not answer the question?

I also don’t buy the concept of “content farm”.   If you treat content as a commodity, I think you’re in a race to the bottom.

This is what it used to look like:

This functionally worked fine, but a couple things always bothered me about it.

• During usability testing, we often saw users that were creating accounts first put their email address in the field on the left before realizing that the Create Account part of the form was on the right. This was not a fatal problem, it just meant that they had to reenter their information again on the right.  It seems to me that folks in a hurry would just scan the page, see the field for “email address” and start typing it in without fully processing all the information.
• This design also seemed a bit visually overwhelming and intimidating.  There are 2 headings, 6 fields, 2 buttons and 3 bright purple textual messages.  It forces the user to think.  With just a glance, it might give the impression that creating an account is a big step, requiring a lot of information.  In reality, we don’t need much information at all.  All we’re trying to do is enable a way for users to save a design or size and access it later.

Our new design:

In the new design we only have two text fields.  Email address and password.  The idea is that – whether you are signing in or creating an account you will do the same thing to start – put in your email address.  I’m counting on users selective vision to see the fields and the button they are looking for and then interpret the form as being for the specific action they are looking for.

Once you enter your email address, we check to see if you have an account and then dull out the button that is not appropriate.

I like this effect – because I think it sort of surprises the user a bit with a “oh, they know me” sort of feeling.

If you don’t yet have an account, you would see the following after you entered your email address.  When the buttons change, you immediately are confirmed that you are taking the right action.

Regarding account creation:

• We no longer ask for name information at this stage.  We ask for the persons name later – when necessary.
• We do not ask for the password twice.  This may increase the chance that the user types the password in wrong (which I don’t think will happen all that often anyways), but we also have worked to make our reset password process much faster and easier to use (if necessary.
• We also had to take a second look at all the possible failure modes and error messages that would show.

So, this is still very new, but I think it’s an interesting innovation on a pretty standard web process.  We’ll be monitoring how well it works. For now, you can try it out at http://propercloth.com.  Just click the “Sign In or Create Account” in the upper right.

Then read the deck as if it was someone else’s and critique it as if you were evaluating an employee or doing diligence on a deal.  What makes sense?  Where are the holes?  What are the first questions you would ask?  Why don’t you have the answers?  Then redo the deck until it makes sense from both points of view.  Usually several obvious things pop out that you’ve been ignoring or missing.

It’s common for smart people to get hung up on stupid things -and I think this exercise forces you to be accountable to yourself and really apply your problem solving skills to the problems you’re facing.

Essentially, the idea is to be your own boss/mentor/critic, so that nobody else has to.

(Theoretically) when this is realized, the startup can quickly scale by “buying” more customers, making a profit on each one.

Proving that you’ve achieved this (or creating a compelling story that you will be able to achieve this) significantly increases your valuation, increases your revenues, and increases the number of  VC’s that want to take you out to lunch.

There are probably great books on this topic that I have not read, but from my own experience, this is how I see it.  (I appreciate comments to clarify/correct my approach.)  The simple way to calculate customer acquisition cost is:

C_acq = A/( T_total*R_conv)

C_acq = Customer Acquisition Cost. How much you spend to get a new customer.

A = Advertising budget.  How much you spend to drive traffic to your site to get new customers

R_conv = Conversion rate from traffic to customers. The percentage of your site’s visitors that you are able to monetize.

T_total = Total traffic to your site in some unit of time.  Let’s say, per month.

Good so far, but we should also consider that a site typically gets traffic from a variety of sources each having different costs and effects. For this post, I want to focus on how viral sharing affects customer acquisition cost, so I’ll introduce the following variables.

T_base= Traffic that comes to your site from organic search, press coverage, bloggers, gift guides, product directories or really any other links to your site that you don’t need to pay for.

T_paid= Traffic that comes to your site as a direct result of your advertising.

C_pc= The effective cost per click you spend by advertising.  Advertising may be purchased as CPM, but you can still calculate the cost per click by dividing the amount you spent by the number of clicks that resulted.

T_wom= Traffic to your site as a result of ordinary users sharing it with their friends (word of mouth).  They find it interesting and email a link to someone, post it on their Facebook or Twitter profiles or mention it to someone at a bar.

Based on these new variables, define the following:

T_paid = A/C_pc

T_total = T_base+T_paid+T_wom

Furthermore, seeking a better understanding of of T_wom, we would see that it is probably a function of how many visitors our site has and some viral coefficient “V”

V = Viral coefficient.  Practically speaking this is the average number of additional visitors that each visitor recruits.

T_wom= (T_base+T_paid)*V

Solving for Total Traffic, we get:

T_total = (T_base+T_paid)(1+ V)

Thus, solving for Customer Acquisition Cost, we could say:

C_acq= A/(R_conv* (T_base+T_paid)(1+ V))

Identically:

C_acq= (A/(R_conv* (T_base+T_paid)))*(1/(1+ V))

Now – that was a lot of math – but if you think about this equation a little bit, you can see the huge value that customers word of mouth brings to the table.

Suppose you have a viral coefficient of 1, meaning each site visitor recruits just one additional visitor. The result is that you cut your customer acquisition cost in half.

IN HALF!

(*Note1: This is even before we take into account the second order effects of referred people referring even more people.  A viral coefficient greater than 1 would theoretically result in a naturally exponential growth – so called “viral growth”.  Depending on the time delay between referrals, and your target growth rate, this could potentially drive your customer acquisition cost to zero. )

(*Note2: You might point out that this equation calculates “average” customer acquisition cost, rather than your marginal customer acquisition cost.  This is correct, as you scale up advertising, T_base+T_paid will approach T_paid, so you could calculate marginal costs this way to be more precise.)

(*Note3: Please excuse the implication that R_conv is a constant.  I realize that it tends to vary widely depending on the nature of the traffic and corresponding intent.  However, for this exercise let’s assume a general, mass-market conversion rate.)

It can come down to pennies per customer, but for many startups this can be the difference between having an exciting, scalable startup and a failure.

Just 5 years ago (ok maybe 10), Word of Mouth for most people meant sending an email or actually mentioning something face to face.  A good analytical marketing person might have even ignored the T_wom component because it was so small – better to just consider it a nice little bonus.

However, things are changing.  With the growing influence of social networks, this viral coefficient is becoming increasingly significant.  It’s increasingly convenient to post things on Facebook and the average person’s number of friends and followers is also growing.  We may be more choosy with what we share to our friends, but with more followers, an AVERAGE person’s post on Facebook or Twitter can now generate your site hundreds of additional visitors.

Two recent startups that have shown explosive growth: Groupon and Zynga are great examples.  While their ability to monetize customers is itself very awesome, without a doubt they are relying on fairly large viral coefficients to keep their average customer acquisition costs low.  If you’ve played with their products, you’ll see that they aggressively push you to refer additional people to their services.

Of course, we cannot forget about SEO, press, usability design, conversion funnels and optimizing ad campaigns, but I predict that increasingly this viral coefficient will be the metric that startups rely on to justify the economics of their businesses.