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.

Fundamentally, for ANY product or startup idea, there is someone who will pay it.  People are just that diverse.  We come from different backgrounds.  We have different financial resources.  We have different hobbies.   We have different value systems.  It is highly likely that somewhere out there, some group of people that are faced with the problem your product solves, have been unsuccessfully looking for a solution and are willing to pay you real $$ for your product.  Just consider the $14,000 coffee machines, and $10,000 scooters.  There are markets for these items.  That doesn’t make them good business ventures though.

The right question to ask, is more complicated.  “Are there enough people that would pay for my product, and do I have the ability to reach them cost effectively?” Not as simple to answer.  This is why understanding your total addressable market size is so important.  It’s also why you want to really understand your customer acquisition cost.

Things are never as black and white as we like to make them seem, but it’s human nature to be drawn to extremes.  There are benefits to telling a story that takes a strong point of view.  It makes information easier to process and remember.  It makes us feel like we know what’s going on. We over simplify things all the time.  Either a person is good or bad, a price is a good deal or a bad deal, the economy is growing or shrinking.

Problem is, it’s not true.  For a lot of things in life, it’s not that big of a deal.  But when your startup’s success depends on it, you better understand the issues inside and out.

Your startup has a shorter runway than any company you’ve ever worked for.

Maybe you are getting new leads – but how many per week?  Maybe your revenue is growing – but how fast?  Maybe the market is growing – but when will it become big enough?

As an entrepreneur, “eventually” is not an acceptable answer because you just don’t have that long.  Timing is often everything.

• What do I want?
  • The next business goal or objective.
• How do I think I can get there?
  • Take a step back and look at the original business plan.
• Why am I not already there?
  • What is preventing me from reaching that objective now.

I think the last question is critical to constantly consider.  It’s so easy to be satisfied with the “we’re making progress and eventually will get there” attitude – and sometimes you should be – but I think the CEO always needs to be prepared to push things harder and faster.

Ultimately, businesses are not simply judged on what they are able to accomplish – but on how quickly they accomplish it.  “Eventually” does not win races.  Business is always a race.

Asking this question identifies the bottleneck of the situation and (in my opinion) the CEO or program manager should always be focused on the bottleneck.

Research

You need to know who the competitors are, what their products look like, who the customers are, what their buying processes are, what the industry experts say, how the macro economic environment is effecting everything, how your own solution would work (roughly), who your partners would be, etc.  This is serious research.  It’s important to write out a complete business plan (and have other people read it), interview people in the industry, recruit advisers, model out your financials, pitch to everyone that will listen, begin the product design, maybe even prototype a beta version.  I think good entrepreneurs can do this quickly so hustle through this like its your job.  You can’t make good decisions without good data – it’s the assumptions that will screw you later.

“Reasonably Viable”

All of this research needs to suggest that you have a “reasonably viable” startup opportunity.

It’s You vs. The World

Deciding something is reasonably viable requires both a solid business background (know the world) and a solid understanding of yourself (know yourself).  You’re basically trying to estimate how hard something will be to do and how good you will be at doing it.  For me, the process of looking at lots of different ideas, boiling them down to their core challenges and taking the first few steps at building those businesses was very helpful.  Continuously listening to, talking to, and reading about entrepreneurs also helped.  Finally, studying business case studies and theories (innovators dilemma) has been insightful.

Get Ready to Commit

I’m a pretty non-committal type of person myself so I can sympathize if you get hung up at this stage, but (as an ex-girlfriend used to say) you’ll never have anything significant if you can’t get past this point.  I think you need to:

• be able to realistically visualize yourself going through the series of steps that ultimately lead to success
• accept that it won’t be “easy money” (if it seems too easy you need to do more research)
• accept that there is no such thing as “easy money” (lest you get distracted when the next idea comes along)

Nothing is Certain
At this point you may find yourself trying to dissect exactly HOW viable something is.  This is inevitable and worth thinking about, but at some stage it becomes pointless analysis-paralysis.  Even the most thorough research is inaccurate or will be inaccurate 6-months from now.  If your business plan is truly “reasonably viable” then this won’t matter.  Suppose it turns out the market is $1.5B instead of $2B?  It just doesn’t matter to your tiny little startup.

Trust Your Gut

If you have multiple, reasonably viable ideas or are trying to decide if you should commit to one in particular, I think it’s time to go with your instincts and ask yourself the following questions:

• Do I like the industry?   -assuming you understand it
• Does the industry move at the right pace for me?  -nuclear technology moves too slow, social media moves too fast
• Do I enjoy the sorts of people in the industry?   -if you can’t stand engineers then don’t start a tech company
• Do people in this industry value what I value/have to offer? -graphic artists probably should not start solar companies
• Does the risk/reward match my own risk/reward style?  -some ideas have binary results (either $0, or $1B) and some scale more smoothly (maybe $100K, maybe $500K, maybe $1M, maybe $5M, maybe more?)
• Do I feel like the product is a worthwhile product? -helps to feel like you’re making the world a better place – otherwise, porn is very profitable
• Will I be able to play the role I want to play?  -there are no fresh MBA’s running venture funded cleantech startups

Doing what you love in life is super important and if you try to be too analytical about your options you’ll probably end up in a job you hate.  If you hate your job, you probably won’t stick with it through the tough times.  If you can’t stick with it through the tough times then your odds of success will be diminished.  And we don’t want that…

Good luck.

That being said…

Entrepreneurship is not the point

I am very skeptical about entrepreneurship for entrepreneurship’s sake.  Remember, you don’t want to start A business.  You want to start THE RIGHT business.  And figuring out THE RIGHT business is not trivial.  You can’t force it.  You can’t say “I have a month to evaluate these different business ideas and then I will choose the right one”.  I’ve never seen this work.  Either one month turns into three, or you end up trying to start a few businesses simultaneously to “see which one takes off” (answer = none of them).  Entrepreneurship is no fun if you never win.  Finding the right opportunity is critical.

You’re not invincible

You’ve had success in the past.  You’ve done things that other people told you were not possible.  You set records, got elected, got the girl.  You got accepted to good schools and got promoted quickly at work…  So, naturally you feel super confident, like you can do anything if you put your mind to it.  The problem is – you’re entering a whole new league… You’re not competing against your high school classmates or your big company coworkers anymore.  You’re now going head to head with some of the best, most focused organizations there are.   They have resources and connections and are smart.  You won’t win in entrepreneurship out of pure effort and enthusiasm.  You need to make sure you fight the right fight.

Roller coaster

You must (try to) be prepared for the emotional roller coaster.  Right now you are super energized.  You hated your job.  You KNOW that you need to do your own thing.  You have tons of ideas and options.  You’re excited about the future and can envision the millions of dollars you will soon have.  It’s nothing but possibilities all around you.  You’re even still getting paid by your previous employer.  Life is good…. you pay the bill, you take cabs, you go shopping or on a vacation when you feel like it…

But life is going to get a lot more painful and uncomfortable.  It’s going to really, really suck when you work on something for several months and invest whatever money you have into it and then nobody buys it, or it doesn’t work, or you find a competitor is launching a product that even you think is superior.  It’s going to hurt when your friends and family are asking you “what the hell are you doing?”  and all you can talk about is the possibilities – and then 6-months later that’s still all you can talk about.  It’s not fun when you look into your bank account and realize you can’t pay rent and need to call in a favor from a friend or family member.  It’s stressful to have to second guess yourself constantly.  The point is – this is not all glory (I know you think you know, but you don’t know till you’re there).  To succeed, you need to be positioned so that you can push through these tough times.  Have enough money saved, have a low enough cost of living, have the people you count on for emotional support on board.  If you can’t push through the tough times then you just won’t make it.

Cynical-optimistic-realism

The honeymoon doesn’t last forever, so it’s important to stay grounded.  I’ve developed a sort of cynical-optimistic-realism over the last few years… I always believe in myself and I always believe that there are big opportunities that others have missed.  But, I’ve learned that most seemingly big opportunities end up being flawed when you really look into them.  I don’t believe there is any “easy money” out there – at least not any that is legally/ethically sound.  Being realistic means recognizing the challenges you’re facing and the odds that are against you.  It means relying on LOTS of factual information and questioning all assumptions.

I am having the time of my life with Proper Cloth and can’t imagine doing anything else.  I want to encourage entrepreneurship in everyone because I think ultimately it is worth it.  Just know what you’re getting into and be smart about it.

2.)    Become really good at something.  Generalists make great management consultants and mid-level managers, but starting a company requires serving a particular customer need better than anyone else.  Become a real expert on that problem.

3.)    Don’t listen to Venture Capitalists.  Listen to customers.  VC’s are looking for the next “game changer” and they’ll be unimpressed with your “small” $100M opportunity.   That’s ok.  Not all startups are right for VC funding.  Listen to customers.  Find real problems they are facing now.  Verify that they represent a sizable market.  Find/design/arrange an innovative solution.  See if they will pay for it.

4.)    Focus on building a business, not raising capital. The time you spend obsessing over each letter in your pitch deck is time you take away from building a real business.  Success is not raising capital.  Success is creating a profitable, sustainable business.  If you can demonstrate the ability to do that, you’ll have plenty of interested investors.  Meanwhile, prepare to bootstrap.

5.)    Work your ass off.  Starting a company is not a 9-5 activity.  Get ready to work really hard – all the time.  And it’s about getting stuff done – not hanging out at the office – so learning how to stay focused and productive is critical.  Your hustle is your edge.