Author: Paul Singh

The era of competing over technical specifications is over. Users want better experiences from devices, applications, websites, and the offline services they enable. It is no coincidence that interaction design is replacing technical prowess as the primary competency at startups.

I totally agree with the first part of the statement but fundamentally disagree with the last sentence above. Interaction design isn’t replacing technical prowess, it’s requiring startups to have even more of it. After all, those sexy interfaces aren’t going to build themselves.

So, here’s a thought for the founders out there: focus on building the best business you can – regardless of where you’re located. The money will find you, I can promise you of that.

Founders *shouldn’t* be wasting time consciously trying to make their city better – they should focus on building fantastic businesses that will attract other founders to do the same. After all, hackers attract hackers.

Leave the city/regional stuff to investors and politicians – not because they’re better at building community but because they’ll be *forced* to figure it out when the smartest founders start threatening to leave (or when savvy investors try to lure the best startups away).

As much as AngelList has helped founders obtain capital from investors that may not be in their physical backyard, it’s important to recognize that AngelList has given investors the ability to see deals that used to be out of their physical reach.

What I mean to say is that we often hear about how useful AngelList has been to founders. What we don’t hear often enough is that AngelList also helps investors — we get to see even more deals and, subsequently, the bar gets raised for any investments we end up doing.

The fundamental investor-founder relationship is based on asymmetric information. The bottom line is that the investor sees (in some cases) hundreds of deals while you probably are only thinking about yours. Here’s a couple of tips you can use to make your company stand out of the crowd:

• Use AngelList to scout the market. You’ve probably already looked around to see who’s invested in your competitors but you should consider looking into which other startups are raising money in your space. One tactical suggestion is to drill down into the tags on your startup profile and look for the startups that have the most followers in those categories. Pay particular attention to the contents of their profiles and the investors that are following them.
• Your Solution Is Not My Problem is good reading. Know your customer. Please.
• Come to the table with the right founding team: you need some combination of the hacker, hustler and designer on the team. Noob mistake: avoid outsourcing any of your early work unless you have solid experience with that model. Chances are that you’re going to pay too much anyways.
• Don’t approach investors without a prototype (or previous success). I’m sure we all know “idea guys” – people that have been talking about an idea for a long time but haven’t ever built it. Don’t be that guy. At the very least, hack together a “ghetto, but useful” prototype and get it in front of users. That shows me that you can execute.
• You should have small, but measurable usage. You don’t need hundreds or thousands of customers (though, that won’t hurt), but showing me that someone is actively using the product often and/or paying for it shows me that you’re building something that people want.
• Try to be as capital efficient as possible. The less cash you need to launch/iterate/learn, the easier it will be to raise. We generally prefer to fund companies that can operationalize the business with less than $1M investment. (To be clear, it’s OK if you need more money than that to scale… for the sake of this post, we’re just focused on early stage startups.)
• Exploit the shit out of online distribution channels. You’ve got access to 700M+ people via Facebook ads. You’ve got even more access to people via Adwords. And don’t forget about LinkedIn ads, Quora, Pinterest, Twitter, Android, iOS and other networks. Show me that you’re testing distribution models on those channels.
• Keep your revenue models dirt simple. We have a particular affection for transactional, subscription based and affiliate models. As a general rule of thumb, stay away from ad-based models unless you think you know how to drive a lot of traffic. And, by a lot, I mean nine-figure+ uniques per month.
• In general, stop chasing investor money. 80% of your time should be spent making your startup awesome. 20% of remaining time will be spent fighting off investors.

Above all else, be CRISP about what you want. If you’re looking for advice, be ready to ask the one question you really want me to answer. If you’re looking for funding, be ready to tell me what *exactly* you want. You may not get the answer you’re looking for but I guarantee you that we’ll both be happier that we got it out of the way quickly.

At 500 Startups, I’d like to think that our founders see us differentiated via the functional expertise that we bring to the table. (Though, I suspect a number of them would argue that our ability to throw good parties is differentiation enough… but I digress.)

We’ve spent an incredible amount of time building a network of 150+ mentors with expertise with data, design and distribution. More recently, we’ve been building tools to help our network of 500+ founders and 150+ mentors connect with each other via discussions, office hours and other events. We even have a full events team that helps us build thought leadership within the verticals that we invest in — that’s directly useful to our startups via access to investors, companies and other smart folks that care about those same verticals.

If you’re an angel group, I’d bet good money that your brand is probably something along the lines of “a bunch of people that move slow and/or never make a decision.” If you’re an angel investor or VC fund, it’s not uncommon to be lumped into the “dumb money” category.

At the end of the day, your brand isn’t what you think it is… your brand is what founders think it is. If you’re an investor (or even thinking about getting into the game), please understand that your brand is the most important thing you should build and protect.

The smartest founders in the world will have no problem raising any money, make sure they wantyour money.

If you’re a hacker trying to figure out what to work on next, please stop building the next Twitter, Facebook or [insert social-media-oriented-consumer-business-du-jour]. Small businesses need your help and they have money. Lots o’ money. With your name on it.

Consider this:

• The majority of gas stations with convenience stores in this country are privately owned. These mom-and-pop stores are forced to buy franchise approved point-of-sale systems — that’s fine. The problem is that they all use a basic CRM/inventory management system to track store inventory and nearly everyone uses the one incumbent in this space. The product is terrible, it’s expensive, has no supportand they win because they simply showed up.
• Most (hair, beauty, nail, etc) salons know that their products (nail polish, shampoo, etc) are the highest-margin items in the store. As a rule of thumb, it’s almost always easier to sell something to a customer that has already purchased something from you. So why aren’t these salons cross-selling and upselling? Because no one has made this easy for them.
• I get my hair cut every two weeks by the nice old man down the street. I’ve been going to him for years but, to this day, he only knows my first name because I have to write it on a sign-in sheet every time I walk into the store. Do I need to say more?

Technology is not the problem

It’s 2010 and finding smart people to build feature-rich applications for business is easy. NEWS FLASH:business owners don’t need features, they want solutions to real business problems. Help them turn tables faster, identify high margin items sooner, cross-sell and upsell customers easier. They will pay you for this.

Salesforce.com is powerful CRM software (and they make a shitload of money) but most small businesses don’t care about 90% of the features. In 2010, more features does not make a better product. Your customers, business owners that just want to run their business, don’t care how cool your technology is or how many features you’ve crammed into your product. To them, the interface is the product. The successful business apps of tomorrow will take complex business operations and roll them up into beautiful, easy to understand applications that anyone can use. Great user experience will be the differentiator.

Smart money is getting easier to find

It seems that nearly everyone with a little bit of money is itching to throw money at startups. Unless you’ve been hiding under a rock, you’ve also noticed that discussions about VCs, Dipshit Companies, And Super Angels have been dominating the blogosphere lately. I don’t think it’s necessary to add yet-another-opinion into the mess, but here’s the point:

Today, IPOs are practically non-existent, which means that we all have to deal with the reality of smaller exits.

To a VC, many startups are “dipshit companies” because they can never get to a scale that will generate “VC returns”–defined as a 10X return on a $5 million investment that buys you 1/3 of the company. For that to work, you have to sell for at least $150 million ($5 million X 10 X 3) and probably more.

But for a founder with a majority stake, a $25 million exit is life changing. Hell, a $10 million exit is life changing.

Layer in the fact that VCs go for a home-run strategy that results in no money to the founder in a super-majority of cases, and it’s no wonder that entrepreneurs are flocking to super angels like Dave.

Everyone wants to invest but founders prefer smart money on good terms — just having money simply isn’t enough anymore. “Dumb” money will increasingly be excluded from the earliest rounds to make way for “smart” money (probably via high resolution fundraising) — investors who bring connections, domain knowledge and functional expertise will win. That’s good news for founders but bad news for (most) investors.

Traction is hard to define for B2C, but much easierfor B2B

Traction in consumer internet companies is roughly defined by eyeballs and actions. B2B startups focused on solving real problems have it much easier — they have customers (other businesses) that will pay good money for products that solve real problems. Traction in these deals is much easier to find: B2B companies either have paying customers or they don’t. If you can’t get a customer to pay you for your product, you pivot. Repeat this until you figure it out or realize that you’re solving the wrong problem. (Contrast this to a consumer product where each pivot is usually followed by a long period of trying to pull in enough traffic to figure things out.)

If you hang around tech blogs long enough, you’d think that being a startup is about creating the next Google, Twitter or Facebook. That’s all well and good, but the biggest opportunity lies in solving real problems for “traditional” brick and mortar shops — the companies that haven’t seen innovation in many years (speaking from experience: MailFinch and NotaryCRM are two good examples of this). This is awesome(read: huge opportunity).

Build awesome business applications

…and tell me about them. I want to help.

I was talking with one of my favorite entrepreneurs the other day, who was trying to choose a lead for his next financing round. This is a guy who had plenty of options. Facetiously, sort of, he said he was planning on picking the VC who had the most unique visitors to his blog. That, of course, sent a chill down my under-publicized spine. Again, i think he was kidding, but also kind of not.  He went on to explain that his biggest single job, and therefore problem, is recruiting, and a VC who can help him tout his company, and add credibility simply through association, is a major asset. [Full article:A venture capitalist’s confession: Why I blog]

Founders prefer smart money on good terms — “dumb” money will increasingly be excluded from the earliest rounds to make way for “smart” money: investors who bring connections, domain knowledge and functional expertise will win. That’s good news for founders but bad news for (most) investors.

The purpose of raising money is to accelerate the progress from Point A to Point B. That means you need assumptions around what Point B is and how you’re going to get there.

Well said.