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How does OWS affect start-ups?

Guest Post by Parris Khachi, friend of SF New Tech, Founder of Let’s Whoosh, and an all around tech geek with lots on his mind.

So, I only half support these OWS guys. I love that they are out there. I love that they are raising awareness about various injustices. I adore the fact that they are relentless. I just wish they were providing more solutions and demanding more tangible things. Sometimes the whole thing feels like a union strike without demands. I am all for revolution and such (being the data pirate that I am), but I still don’t know how I feel about all this.

One thing they have accomplished is a re-evaluation of standards. While I don’t necessarily think their pseudo class war of the 99% vs 1% is a very accurate picture; I do think it brings up one very fundamental point that hasn’t necessarily been discussed at great lengths. What do we do with all these entrepreneurs that actually make their way into the 1%? Perhaps the OWS movement isn’t really seeking to affect innovators but they are. Sometimes it feels like there is a double standard. In other words no one “hated on” Steve Jobs, a supplier of shiny toys that just happened to be filthy rich; although, they will hate on various bankers. Perhaps they deserve it though (just kidding, well not really, I don’t know).

In any case, consider that entrepreneurs, before any major successes, are generally part of this 99%. Most of us in this category can barely bootstrap our businesses (or can’t at all). There is generally no help for entrepreneurs looking to start something. Sure there are venture capitalists, SMB loans, government grants for certain projects and other forms of assistance; however, the risk of failure and the consequences still fall to the company founder, artist, or entrepreneur. This risk then propagates to future projects and a loss of credibility to some degree. Not to mention what the risk of failure means to all those working with you.

With that much on the line no wonder we expect the pay out to be amazing. Sure we all love what we do and we do it because we are passionate about our creations; however, there is no denying the pressure. Where is the government when people are trying to start their companies and change the world? Sure they provide some government grants, but I’m not really looking to make a missile guidance system right now, nor would I like to make airline security any more invasive. I’d say in this case the OWS is actually stifling innovation and technology rather than being redeemers of the 99%. Why should I, someone who has spent years on the side, doing something interesting, ambitious, great with my life need to pay more tax when I’ve been pouring my own money, time and even health into my company.

What is the solution then? Well, perhaps something like a review board that is part of the government that helps companies start would be useful. Turn the government into a monolithic unix kernel that has its hands in everything and assists everyone. Yes this sounds like Star Trek and I love it! The problem we have now is that both sides are right. People who start business did actually earn the right to be filthy rich and they did it on their own, and guess what most of you helped them in some way. So what are we to do? Well if we don’t want entrepreneurs to feel entitled then we, as a society, need to help them. Having them become starving artists is not a solution at all. If no one earns the right to be in the 1% then no one will be in it. One caveat though, this idea should be limited in scope. It should only seek to kill that 99% vs 1% mock class war. This should solve the tension that OWS has been addressing and it would help propagate our country’s technological fronts.

I am not saying this is the only possible solution. In fact, this is probably the solution that most benefits me (ha); however, I do think that the idea has some merit and we need more IDEAS like this not just complaints. So forum, let’s hear them, let that crazy inner voice come out!

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boombotix

Startup SWOT: Selections from Mobile Night

Flixlab

Flixlab has developed a cloud-based social video platform that enables consumers to easily share raw assets and create polished movies from the video clips and pictures on their smartphones, and their friends’ smartphones, and upload them to social networks.

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Stop Ashton Kutcher before It’s Too Late

Stop Ashton Kutcher before It’s Too Late

I don’t want to believe that the tech industry is inescapably bound towards another dangerous bubble. I have been able to rationalize my denial with the idea that the Silicon Valley of the ’90′s is not the Silicon Valley now. We are smarter, more calculating, and led by veterans who know how to help nurture the sustainable growth of a global market.

Then I heard that among the panel of judges at Startup Weekend in Los Angeles were Ashton Kutcher and Demi Moore.

More like "Dude, where's my bubble?"

FML.

The Wall Street Journal recently published an article on how modern Silicon Valley is starting to look a lot like 1999. While the tech industry is more mature than we were 12 years ago, it’s hard to deny that tech’s rise from the recession could very well turn into another unsustainable bubble.

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Hacking The Planet: The business behind high tech’s hacking culture

Hacking The Planet: The business behind high tech’s hacking culture

“I don’t want good students. I don’t want Ivy League kids. I don’t want the typical rank and file that go off to IBM or get pulled into Microsoft and Google because they got an internship via their career center.

I want kids that spent their time doing things that live and breathe algorithms. I want the students that enjoy programming competitions and breaking into each other’s computers. I want the kids that cracked a copy of Photoshop not just because it was cheaper than buying it – but also because it was fun.

I don’t want computer nerds or even software engineers. I want hackers.”

These were the words from my friend Jen, a recruiter at a very-well funded startup in Silicon Valley. Jen’s comment highlights a growing trend in Silicon Valley – the popular embrace of the hacker in establishing and maintaining a culture of innovation.

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The Emergence of Coworking: Startups share offices before they scale

The Emergence of Coworking: Startups share offices before they scale

If the Bay Area economy was akin to a baseball game, the technology and startup entrepreneurs are wearing their rally caps and driving in the jobs. As the startup industry grows, led by founders and powered by angel and venture funding, community has become the glue to hold it all together.

Whether it’s a high-profile departure from Facebook or a graduate from MIT, there is a lot on the line in starting a company, and there is tremendous value in surrounding yourself with others who have the same passion and work ethic.

Founders are joining coworking spaces and venture-backed incubators, sharing offices with larger companies, or leasing office space. There are myriad ways to establish your company’s headquarters, but the common denominator to opening an office is community.

At the GigaOM Net:Work Conference in Mission Bay, we held a coworking workshop in which leaders in coworking discussed the new phenomenon. Julian Nachtigal, the mind behind pariSoma which is quintupling in size in San Francisco’s SoMa district, and Jeremy Neuner, CEO of Nextspace with two locations in SF and Santa Cruz.

The message was clear: co-working thrives around community, where entrepreneurs can share best practices, network with various industry professionals and rent a desk to plug a computer in and get to work. If you don’t know what a co-working space is, read this Quora thread.

Coworking @ Parisoma

Coworking @ Parisoma

“Coworking got a jumpstart during the economic crisis and crisis equals opportunity. Lean startups of 2-6 people with early stage seed funding can’t afford to have their own office, and we offer them a solution,” says Julian.

Coworking spaces in SF are growing at rapid paces, with The Hub at the San Francisco Chronicle Building expanding (See San Francisco Chronicle story), SOMA Central taking more space at 153 Townsend, and Rocket Space opened a large 50,000 square feet in SoMa to fit 500 people geared to later stage startups. See my blog post on the launch of RocketSpace.

“Community is the biggest part. People by nature are social. At coworking, entrepreneurs prove their product, raise funding, then choose when to scale and branch out to larger office space. But the community that was started at places like pariSoma lives on,” Julian explains.

Entrepreneurs may leave the co-working, but the coworking certainly doesn’t leave the entrepreneur.

Coworking works in tandem with the office market. “My dream would be to have every person working at NextSpace start an office of their own and grow to be the next Facebook.” Says Jeremy Neuner.

“The trend bodes well for the city because small businesses are expected to contribute significant numbers of jobs in the current economic recovery.” See the full SF Business Times article on coworking, “Tech startups dare to share”.

The Hub

Coworking at The Hub

Owen Thomas, Editor of VentureBeat, tweeted to me the other day, “Silicon Valley used to be about cheap office parks. Now it’s about gathering brains, shortening commutes, and providing for play.” Entrepreneurs are seeking out community in an office space just as they do at a coworking space.

Community is the main reason South of Market and Palo Alto have become the epicenter for startups. The vacancy in Palo Alto hovers around 5%. Similarly, vacancy in South of Market shrinks every quarter and rates have grown to $40 per RSF at the high end. In my article on VentureBeat, I show the tremendous activity going on in SoMa and Palo Alto despite the rising rates.

Companies like Twiliohave opened their own office, but did not isolate themselves in the process. They shared the office with another startup in the beginning, and they have used their office to give back to the community. Take a look at the pictures from the SF New Tech Holiday Party, hosted by none other than Jeff Lawson and the whole Twilio gang at their headquarters on Folsom street.

My client, Thumbtack, a leading marketplace for local services, opened a beautiful office this month in South of Market and wants to encourage groups to work from their space. They have a full kitchen, open layout, loft space and a cook that visits their office two times a day to cook them meals. They certainly will have a great community within their own office! Check out their ad!

2011 is ripe for another tech boom, and the lean startup method with smaller starting offices and coworking spaces will make it sustainable. The Bay Area is on the verge of an exciting year, and more lights will be burning late in coworking spaces and startup offices alike.

We are having a Coworking Unconference event to start SXSW in Austin Texas as well! So if you are planning on going to SXSW, sign up and join the conversation and the movement!

Justin Bedecarré is a real estate advisor for technology and media companies at Cushman & Wakefield, a commercial real estate firm covering the Bay Area. He has represented firms from Fortune 100 to startups in media and technology, including Broadcom, Thomson Reuters, AKQA, and Hearst Corporation, to name a few. He writes a blog on the intersection of technology and commercial real estate at www.BayAreaComRE.com. He can be reached via email at justin.bedecarre@cushwake.com or at About.me, @jtbed on Twitter, Facebook, LinkedIn and Quora

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Microsoft: The Empire Strikes Back

Microsoft: The Empire Strikes Back

Last year one of my friends quoted something from Twitter that has had my noodle cooking for a while now:

Welcome to the 21st century.  Java is a restricted platform, Google is evil, Apple is a monopoly, and Microsoft is the underdog.

The early 2000′s have not been kind to Microsoft. Windows Vista was met with dismay upon release, despite a variety of  technology enhancements over Windows XP. Arch-rival Apple had gone from near bankruptcy to titan with the iPod and a refresh of both its Mac hardware line and operating system. With its new muscle, the Cupertino-based firm has exacted a serious toll on Redmond’s annual revenues across the consumer sector in the past decade.

Google’s rise to power and the introduction of open source as an enterprise standard has also bloodied Microsoft. In addition to providing Redmond with a new major threat in a variety of software markets, the blossoming of Google has helped to propel the parallel rise of open source software in enterprise deployments. No longer was running an expensive Windows Server with SQL, and IIS the norm. The LAMP (Linux Apache MySQL PHP) stack emerged and eliminated Microsoft’s foothold in the web server market – a paradigm shift propelled by competitors Oracle and Google.

Even worse Microsoft was no longer cool. True – Apple’s artistic flair and Jobs’ beatnick style helped to always make the company the more hip alternative. But Microsoft always remained easily within the top three of in-demand tech companies to either intern or start ones’ career in. Google and Post-Google Silicon Valley firms like Facebook have largely usurped Redmond as the fun place to be for new engineers, jeopardizing Microsoft’s position in the eyes of young hacker talent.

This is a very dangerous proposition for Redmond. If Generation Y decides to go to Microsoft’s competition instead, innovation for the next twenty years in computing will go with them.

Even in the first strokes of this new decade though, it’s clear that there’s a change in the wind coming from the cold north of Seattle. Post-Gates Microsoft has emerged swinging hard, wielding an impressive value proposition to consumers and young job-seeking engineers. Truly, winter is coming. Redmond is striking back.

While Apple certainly commands a significant control of the consumer electronics and ultra-mobile computing space, and both Apple and Google remain the dominant players of the skyrocketing mobile phone market in the United States, Microsoft remains strong in its core competencies and is gaining fast in the mobile OS sector. Windows 7 is considered a success at 250 million units sold as of Q4 2010. Windows Phone 7, Microsoft’s late entry into the mobile OS market, is gaining remarkable steam on Android and iOS and expected to supplant RIM’s OS in market share by the end of 2012. Microsoft Office remains the dominant Office suite despite a variety of (even free) alternatives, and Redmond remains an exciting and fun place to start one’s journey into technology despite heavy competition.

So what happened? How has Microsoft been able to reverse their fortune and strike back at their competition in just three years?

They refreshed their brand and technology strategy from the inside out. In effect, Microsoft is rebuilding the death star we all saw in the 90′s. Only this time it’s bigger, stronger, more popular, and minimizes the number of catastrophically explosive exhaust ports.

Microsoft has started to recover its momentum in three ways:

Beauty – UX/HCI

Much of Apple’s rise to power is arguably the result of their competitive advantage in industrial design. The iPod, the Macbook, and even OSX are all cool because they provide an amazing user experience. In contrast, Windows XP was – while ubiquitous – boring. Early 2000′s and 90′s desktop PC’s were beige monoliths that did little to defeat Apple’s portrayal of the PC industry in their famous 1984 ad. Even when competitors began to release MP3 players with similar functionality to the iPod that were more friendly to Windows, they were quickly discarded in favor of the more beautifully functional Apple alternative. Microsoft addressed this need by pushing their research initiatives towards the ever-important and nascent fields of UX (user experience design) and HCI (Human Computer Interaction). Much of this was the result of them hiring Chief Scientist Bill Buxton, an eccentric computer scientist cum industrial designer who helped the firm revolutionize its approach to how the company’s products interact with the user.

Examples of Microsoft’s new emphasis on UX design can be seen in the Zune and Windows 7/Windows Vista’s Aero interface.While Apple and Google continue to lead at the front by having first-mover advantage with technology like mutlitouch and instant-boot technology, Microsoft’s investments have them hot on their trail – and in some cases even superior. The Xbox 360, Windows 7, and Windows Phone 7 showcase exemplary UX polish that’s accentuated by a fluent and inarguably beautiful symphony of typography, solid realization of core design fundamentals, and functionality. This has allowed them to close the gap with OSX in operating system UX, and even enabled the company to make their late entrance into the mobile phone market a disruptive one.

Popularity – Entice the Resource Market

Being a college programmer is a bit of a mixed bag. Even though you’re an invaluable resource to large companies because of your fresh ideas and wide-eyed wonder, your lack of experience with the development of a company’s technology is a detriment.This makes introducing development experience core to a company’s product development key for major tech firms, and explains why firms like IBM and Google spend considerable sums of money in contributing research and technology to major tech schools in order to help control the curriculum of computer science majors.

Microsoft realized that their traditional approach of “being the only game in town” was slipping with the rise of open source languages and OS’s  like Java and Linux. Furthermore, by not being beautiful, late ’90′s/early 2000′s MSFT was even less incentivizing college students to invest time in learning proliferating core Microsoft technologies like the early .NET framework and the Windows API. Microsoft has since rolled out a series of programs meant to win back Generation Y.

Addressing the issue of cost, Microsoft created the MSDNAA (Microsoft Developer Network Academic Alliance). This allowed vetted tech schools to provide free versions of Windows, SQL server, and development tools to college students. The MSDNAA allowed Microsoft to better compete with free open source software, and trumped expensive student alternatives within Apple that required college students to purchase membership in Apple’s expensive developer program.

Addressing the issue of popularity, Microsoft created the MSP (Micrsoft Student Partner) Program and Imagine Cup. MSP’s are paid Microsoft developer evangelists recruited out of universities to popularize the brand. Soon MSP-run Microsoft events became ubiquitous at many key campuses in the United States, with the attraction of free Xbox 360s and video games helping to add to the brand’s appeal. Imagine Cup, Microsoft’s humanitarian invention competition, allowed  student inventors a paid outlet to compete for seed funding for a socially conscious projects using Redmond’s technology.

All of these measures have been met with wide appeal, and the brand’s image continues to improve with this core audience.

Muscle – Capitalizing off Competitive Advantage

While in decline, Microsoft was far from dead in the ground. The company’s rebound can also be attributed to strategically using more popular aspects of their brand to push the company’s development initiatives.A good example of this is their use of the Xbox 360. The Xbox brand has been a strong player in the video game console space since 2001. Modern development for the Xbox is largely done in the XNA Framework, which uses .NET. This ensures that game developers wishing to release on the Xbox need to use .NET, and further popularizes the .NET suite (particularly C#) via complementary demand.

Microsoft may not be the coolest game in town. But it’s certainly not dying anymore, and companies like RIM – and even Apple and Google – need to realize that Redmond is coming back with a vengeance.

Cue the Imperial March theme.

SF New Tech Contributor Andrew “Andy” Manoske is a PM by day, hacker by night, and sometimes in the evening he fights crime. He currently serves as a product manager at NetApp – the youngest in the company’s history – and previously held technical positions at SAP, Microsoft, and Electronic Arts. He received his Bachelors of Arts in Economics and Computer Science from San Jose State University in 2010, and was a finalist in Microsoft’s Imagine Cup competition and the Silicon Valley Neat Ideas Fair.
Twitter: @a2d2 Website: http://www.zomghacks.net

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The Marketing-Driven Approach to Starting Up

The Marketing-Driven Approach to Starting Up

“Engineers are the ones getting the money. Engineers suck at marketing,” says guest author David Siegel, an internet pioneer, author, and entrepreneur. David’s first book, Creating Killer Web Sites, published in 1995, remains Amazon.com’s longest-running number-one bestseller. He is the fifth person in the world to start blogging. In 1995, he started Studio Verso, one of the first web design agencies in San Francisco, and in 1999, he sold his company to KPMG. He has given more than 100 speeches about the web, and he also lectures on dark chocolate. All together, he has written four books about the Web. His newest book, Pull, describes the coming semantic web and the future of how businesses will use information.  Follow David at @pullnews.

Hey Bay Area!  It’s nice to be blogging to a Bay Area audience again, after all these years. I started my web-design company in 1994 on High Street in Palo Alto, moved it to San Francisco, and Studio Verso was part of the burrito-filled heyday of Web 1.0. Back then, venture capitalists were busy helping entrepreneurs figure out what the web was all about. I remember words like “disambiguation” and B2B, and I remember how surprised we all were when Amazon.com started selling things other than books. It was a great time to be an entrepreneur.

Fast forward to today, where I think we have a problem with venture capital. Today, the typical VC today is moving “up the foodchain” to bigger and later deals, while the angels have flown in by the Cayenne-load to fill the gap left behind. And now there are more organized groups of angels acting like VCs than even Ron Conway can count (and he can count to a google). But there’s still a problem.

Check out any of these groups and you’ll hear a lot of the same thing. Dave McClure, of 500 Startups, has written about how investing is changing. They span the range from Paul Graham’s excellent Y-combinator to larger funds like Accel and Charles River writing small checks. In the middle are a few seriously competent funds, like First Round Capital and Ron Conway’s new Angels fund. These first rounds are often in the range of $200k – $500k. And yet, all angels and VCs alike pretty much agree on one thing. Venture capitalist Mark Suster sums it up when he says you need momentum to get other people’s money. Momentum. Traction. Visitors. Registered users. Customer adoption. Dogs eating the dog food. This is what all funds, large and small, are looking for. Which means you need to build something small and launch it without any capital at all, or from your dorm room while you skip classes, or with rent money paid by family and friends.

Think about what that means. It means that engineers are the ones getting the money. Only a software engineer has time to build something in her spare time or in a few months after being laid off. Even asking for two engineers to work together without getting paid significantly reduces the number of teams that can get any traction.

I have spent most of the last 30 years coming up with ideas for companies and talking with people about them, or helping people with their ideas. And what I have found over and over again is this: Technology isn’t the big problem. Marketing is the big problem. It’s not really that hard to write and launch an application – the trick is to get people to like it and tell their friends about it.

Engineers Suck at Marketing
As an example, look at RichTweets.com – this is a service from an engineer who has a great idea. He realizes that the 140-character limit on tweets is silly, and if you include all the @names, #hashtags, and http:// bullshit, not to mention leaving room for other people to RT, you have about 70 characters to work with, so people end up writing lines of Twitter code that’s “2 tuf 2 rd”. Furthermore, it leads to mistakes, semantic dispersion, insane link shortening, and generally works against anyone or any program trying to assemble all the information coming down about a given topic. Why do that when computers can help us make short messages that carry information on two levels – visual for humans and semantic for machines? HTML is designed to bury the link structure and give you a choice of fonts, bold, italic, and other typographic choices. So a rich tweet really is a huge improvement over today’s ridiculous coded messages. RichTweets should have been funded a hundred times, but it wasn’t, and no one knows about it. Why? Because the nice guy who built it is a programmer who lives in Germany and who doesn’t happen to party with the sharp marketing people who live in Dogpatch lofts.

I’ll give you another example: Rescue-App is a personal safety application for people who want their phone to help them in an emergency. They have an iPhone app to help protect kids and an app to help protect adults. At the touch of a single button, the apps call and send SMS and email messages to people on a pre-defined list saying you’re in trouble. They send your location and sound an alarm. You pay $3 to load it with SMS messages you can send from almost any country in the world. I bought it and set it up in under a minute. Wouldn’t you pay $3 to buy an app that just might help save your life some day? You might, but you haven’t heard of Rescue-App or any of its competitors, have you? That’s because these people have the domain expertise to build a great back-end infrastructure and nail the functionality, but they have no idea how to get the word out about it. And, importantly, they didn’t hire a good designer to go through the use cases that would help build a better, more effective interface, possibly saving lives. This is an app that probably can’t get funding in today’s market, because the angels and VCs will just tell them to come back when they have more traction as they chase the iPhone gaming deals that are taking off like rockets.

It Takes a Team
There are thousands of apps like this that don’t have traction – not because they suck, but because their creators suck at marketing. The few engineers who have wealthy relatives and manage to team up with decent marketing people or get lucky are those who have traction. And this is probably why so many startups that get traction give such poor user experiences – because the engineer who managed to meet a marketing person who would work for free didn’t also happen to meet a designer who also works for free. That’s why sites like Craigslist, eBay, GoDaddy, and many others are such disasters, with bad design at the core of their corporate cultures that continues well past going public.

The ideal team to start a company around a good idea is:

  1. a great coder
  2. a great marketing person
  3. a good designer
  4. someone who understands that treating every customer like gold and offering maniacally great customer service is as important as everything else combined

I think the VCs and the super angels have it wrong. I claim you can outsource #1 and #3, but you can’t outsource #2 and #4.

The Marketing End is the Business End
Many good ideas simply don’t get funded because marketing people with good ideas and a good sense of what the customer wants can’t write software. I believe that many of our upcoming technological breakthroughs could be created much more efficiently if marketers were allowed to dream big and hook up with programmers who could find a way to build them.

And that costs a little money. Listen to Naval – he says you can do marketing on Twitter and Facebook as if it were trivial (he doesn’t mean that, I’m sure, but he glossed over it in seconds in that talk). He’s right that it’s getting cheaper and cheaper to build software, but I don’t see it getting cheaper and cheaper to get hundreds of thousands or millions of users. In fact, while software development costs have come down dramatically, customer acquisition costs haven’t changed much at all. Yes, people are more connected and send more messages. But there’s also more noise and confusion than ever: consumers don’t want another log-in or another account or another “solution” for anything. They get bombarded by too many pitches for companies trying to help them, only to learn that the companies are really trying to help themselves. How many companies say “Follow us on Twitter!” “Visit us on Facebook!” Can you just hire a social marketing expert, buy some keywords, and watch your sales go through the roof? I don’t think you can.

Getting people to use something that can save them time, make their lives better, or even save them money for the cost of changing behavior is one of the most difficult challenges in business – always has been, and always will be.

Marketing Fuel is Super Fuel
In the current environment, investors are sending a clear message: “Engineers, build something cool, make a video, put it on YouTube, and pray you get lucky (as Word Lens did). If it doesn’t magically get traction, build something else and try again.”

I would buck that trend. If I had a fund, I wouldn’t fund anything with traction. I would have a big space where people could come co-work and hang out and kick ideas around, with free coffee, juice, muffins, and games. I would do the same thing online (first have to invent virtual muffins). And, if a killer marketing person with a radical idea happened to meet a fantastic technology person who could see a clever way to build it, I would give them what they needed to quit their day jobs. I’d give them enough fuel to launch and iterate and adapt to the realities of the market, without having to go beg for money in the middle of the process and put the venture at risk. While the other super angels are all fighting over the same momentum-fueled deals, I’d be building companies from scratch, the old fashioned way, one customer at a time. A few of them, I bet, would get momentum.

It might cost a bit more money initially, when things are more risky, but a good marketing person is going to be a more solid bet than a good entrepreneur who has to pivot and raise more money later. I would rather read market-requirements documents and marketing plans than business plans any day. I can fix the financials and operations if I have to. I can bring in a CTO or outsource the coding to a well organized development team. I would rather be talking at 2am about points of customer resistance and business development deals than about PHP vs Ruby. Show me an MRD that identifies the natural energy of customer pull at its source and a marketing plan to get the message out, and I’ll show you someone who’s going to succeed one way or another.

But then, no one is going to give me the money for such a fund, because … well, because I don’t have any traction.

You can read David Siegel’s biweekly blog at www.thepowerofpull.com and get his book, Pull, at any book dealer or at Amazon.com for your Kindle.

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The Coming Startup M&A Shakeout (And What To Do About It)

The Coming Startup M&A Shakeout (And What To Do About It)

Guest author Nathan Beckord is founder of VentureArchetypes.com, a startup strategy consultancy. Nathan acts as part-time CFO and business development consultant to startups that are raising money, building partnerships, or getting acquired. He also produces the StartupExits.com event series. You can follow him on Twitter at @Startupventures

A few weeks ago, I organized an event called StartupExits.com, where Naval Ravikant of Venturehacks gave an excellent keynote on the Rise of the Super Angels.  He was discussing whether there was a new seed investment bubble forming, and one of his comments particularly intrigued me– namely, that while the number of seed investments has grown 20x, the number of acquisitions has barely risen.

The implications of this trend are rather profound; at its most basic, it means we could soon see a serious glut of startups populated by impatient investors, founders, and equity-incentivized employees, but not enough buyers to make everyone happy.  It’s a classic supply and demand imbalance, and my conclusion (echoed by Naval) is that startup failure rates will rise.

So, what are the takeaways for early stage startups?  What should you do now to prepare for this game of ‘M&A musical chairs’?

  • Determine if you really need external funding. Any startup that takes outside capital is obligated to generate an exit for their investors either through an IPO (extremely long odds), or through an acquisition (very long odds).  However, it has never been cheaper to start a startup, particularly in the software / SaaS / Internet space.  In addition, many startups are great at generating healthy cash for their founders, but will never be “M&A material.”  In short, if you can bootstrap your way to cash flow positive, you can control your own destiny, and avoid any M&A shakeout altogether.
  • Work on your exit strategy now. I genuinely believe that entrepreneurs should strive to build something great, and not ‘build to flip’.  But successful exits do not just happen; they need to be part of a startup’s broader strategy and gameplan.  Developing an exit strategy is worthy of its own blog post, but in brief an exit plan covers topics like: when to sell (ASAP, or let the chips ride?); minimum acceptable valuation (at what price would you sell your baby, and give up control?); type of acquirer (who is likely to buy you and why?); type of acquisition (are you ok with an earnout, and working for the acquirer for another 3 years?).  A key exit strategy goal is to set and align expectations for the above between founders, investors, and employees; failure to do so now creates fertile ground for lawsuits down the road.
  • Build acquirer relationships early. Startup acquisitions can happen quite quickly– sometimes in as little as a few months– but in most of these cases, a relationship already existed long before acquisition talks heated up. This can take several forms; for example, Google often buys startups founded by ex-Googlers–they already know the folks they’re buying.  Similarly, many large companies acquire startups with which they have an existing business development relationship.  The key point is to get on the radar of potential acquirers early, and to stay on it; reach out to their business development, developer relations, or corporate development group and start exploring ways to work together.
  • Be ready to pivot faster and more frequently. I’ve worked with startups for more than a decade now, and something I’ve noticed recently is that the cycle speed of business model “pivoting” is accelerating.  Entrepreneurs are getting better at experimenting with different business models, testing and measuring feverishly, quickly scrapping things that don’t work, until they lock on something that clicks with customers (which is usually the point at which acquirers and investors start to pay attention as well).  The classic example is PayPal, which went through multiple, completely different business models before settling on one that was successful.  In most cases I think this experimentation is a very healthy thing, and acquirers are often willing to pay a huge premium for startups that have successfully “figured out” their business model (cue Steve Blank here) and are now ready to scale rapidly.
  • Fail sooner. This might be a controversial one, but the moment it becomes apparent that your great idea is, in reality, just the 22nd Twitter desktop client or the 56th Groupon clone– and you do not have a clear, better idea for a pivot– I would argue that you should fold up shop quickly and return as much money as you can.  This is advantageous for your investors– $0.40 on the dollar is better than $0– and it’s advantageous for you, allowing you to get back in the game with a fresh start (and fresh cap table) and try again.

That’s it for now.  Let me know your thoughts, and let me know what other topics related to startup exits you’d like to see covered.

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Economics, Strategy, and World Domination – What the New Mac App Store Means to Apple

Economics, Strategy, and World Domination – What the New Mac App Store Means to Apple

[Editor's Note: SF New Tech welcomes contributing writer Andy Manoske. Andrew  is a product manager by day, hacker by night, and sometimes in the evening he fights crime. He enjoys writing about economics, computer science and software, and all of the crazy stuff that happens when you mix them together. On the Web . On LinkedIn ]

On October 20th Apple unveiled the details behind Lion (10.7), the newest iteration of the OSX operating system. While Lion adds a variety of feature enhancements for their user interface with Mission Control – a tool designed to manage the wealth of applications your average user opens in a given session – most of the excitement of this release centers around the addition of PC applications to the app store.

The new app store brings the simplicity of installing iPhone Apps to Mac OSX. No more Googling for hours or mounting a .DMG file and dragging icons into your Applications folder. With a few searches and a click, Lion users can quickly find and install programs with the ease of installing a mobile app.

While this may be a big step forward in allowing users to get away from the pain and hassles of finding and installing software, this is also a strategic boon to Apple. Have no doubts: while built to improve the experience of OSX users, the app store is specially designed to better arm Apple in their siege on the market for personal computers.

Developers Deliver the Value

Apple knows just how important it is to have the development community on your side from their experience with the iPhone. The iPhone’s rise to becoming the must-have smartphone is more than simply a result of clever industrial design and exciting advertisement. The luxurious and iconic iPhone user experience is buoyed by its application library just as much as it is by marketing and product placement. A wealth of applications that do everything from helping users manage their bank accounts remotely to letting them know where’s the best place to get drinks nearby adds incredible value and utility to the device. Computers are no different: PC users derive value from applications they can use on their computer, not simply the hardware itself.

For the developer then the objective is to build an application as fast as possible while minimizing the time to bring it to market – a special type of problem in economics known as constrained optimization.

Developing desktop applications that would be deployed on the app store handles this constrained optimization problem neatly.

Software developed and deployed on the app store would easily be searchable by every Lion user worldwide. Assuming a developer’s program is appealing, this increases the probability that someone will use it. It will be easier to find and there will be more people browsing through the library of apps. As the probability increases of someone using their application, a developer can expect more people to install and run their app.

The app store also would minimize the amount of time necessary to deploy an application by doing away with the nastiness of handling dependencies and creating installers. As a developer, simply hacking up an app that compiles from code and runs nicely isn’t enough. You have to write an installer that handles placing files on the user’s computer in an orderly fashion while simultaneously ensuring that all of the libraries and tools necessary to run the program are there. This is a huge hassle for large applications that support different computers or types of hardware.

With the app store, all of this would be handled for the developer. If you build an application tailored for the OSX app store, handling dependencies and writing installers is all done for you by Apple. Much of the heavy lifting around supporting the various types of OSX are done automatically, and you would only have to support one type of install process (versus one for every major and minor iteration of OSX). This saves your average developer a ton of time and stress in deploying and maintaining an application, consequently making it more appealing to create programs for OSX.

Using the app store also has ramifications on the delivery model of software. Dealing with documentation is a much easier affair, and deploying systems to a wide audience without the need to master a series of disks or other physical media saves both time and money for developers. These gains are especially important for developers looking to scale: logistical issues with packaging and shipping often stymie lean, high growth companies like tech startups.

Complementary Demand to Keep Macs Relevant

Apple’s attempt to appeal to consumers with an “easy to search and install” repository of programs is clearly built around the idea of complementary demand – the economic principle of two products having a symbiotic relationship. Much like how the demand for ketchup is affected by the demand for french fries (if more people want fries they will probably want more ketchup to go with it), the demand for a particular type of personal computer is affected by the demand for the applications on it. If Apple can make it easier for people to install programs, this will increase the demand for said programs because the time opportunity cost (e.g.: how much I “pay” in time spent doing something) of installing it will decrease. This increase in demand for OSX-specific programs will increase demand for Apple PCs like the Macbook Pro and the iMac, increasing revenue for Apple accordingly.

If the Mac store catches on, it’s likely Apple would levy some sort of fee on developers deploying applications on it and derive some measure of revenue from there too. Traditionally this isn’t a huge source of revenue for Cupertino. However, that may change.

Apple currently takes a 30% cut from developers in the revenue of each unit sold and charges $99 annually to submit apps to the app store. This might change with the new app store. With the higher per-unit cost of software – Photoshop tends to be more expensive than your average Mafia Wars clone – a 30% per unit cut could noticeably impact Apple’s profits. Apple has to be very careful in how they factor for this new market though, as the marginal costs of producing complex software suites like Adobe CS5 are much higher than most mobile apps. With a higher marginal cost, the profit margins per unit tend to be lower. Apple risks driving large vendors away if they accidentally cut too deep into their software’s revenue.

Apple’s strategy for making it more attractive to build programs for desktop application developers may serve another – arguably more devious – purpose than simply improving the value of Macs to users. It may be an offensive maneuver designed to deprive these rival platforms of developers. Because many of the popular languages, libraries, and frameworks used in developing applications for OSX aren’t available for Windows and Linux (or are otherwise implemented or used in dramatically different ways), the work a developer does for OSX won’t necessarily carry over. Porting the application to either of these competing platforms could require a significant amount of extra work without the commensurate revenue.

Short term, this ensures Apple has de facto exclusivity over any of the apps these developers creates. But in the long run, Apple could keep said developers “locked” into developing for OSX because the switching cost to go back to Windows or Linux will be too high in comparison.

They might have to familiarize themselves with platform specific libraries, learn new technologies and tools that may have been created and become popular in their absence, or even learn another programming language. We see this with very platform-specific languages like Objective-C: a popular language for OSX libraries like Cocoa, but relatively unsupported in the Windows and Linux world. It becomes a logistics and maintenance nightmare developers can’t afford, especially after leaping through the hurdles needed to complete to just sell something in the app store.

The Mac app store is more than simply a great tool to increase the utility and satisfaction of Mac users. It is a strategic maneuver for Apple, designed to shift the balance of personal computing power from Redmond to Cupertino!

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