Friday, January 2, 2009

Lessons Learned on Mashable today

I had the good fortune to be asked to write a guest post over at Mashable, which is running today, called HOW TO: Raise Money in a Down Economy. The major thesis will be no surprise to those of you who've been following this blog for a few months. Here's an excerpt:
Our experience was different from the traditional VC model, in which funding is reserved for true domain experts, those with deep background in their field solving a problem they personally have experienced. For the rest of us, there is an alternative: to create credibility by building a lean startup ...

At IMVU, we were terrified by how early we shipped (and charged for) our first product. Frankly, we were embarrassed by how many bugs, crashes, and defects it had. We were even more embarrassed by the pathetically small number of customers we had, and the pathetically low amount of revenue we had earned so far. It wasn’t uncommon for advisors and even potential investors to ask, when we would show our results, “are there some 000’s missing from this graph?” We’d always cringe as we admitted that, no, we really only had a few thousand customers and a few thousand dollars in monthly revenue.

Despite that, we were able to establish credibility, because we used those early numbers to demonstrate that our customers were getting real value from our product and, more importantly, that we understood how to build more of it.

Rather than just focus on the right kind of pitch to use, I wanted to write about the kinds of startups that create lasting value, and therefore are great companies to fund even in down times. The core of the article is my first attempt to articulate the key metrics (in graph form) that I believe demonstrate customer value. When startups ask me what to measure, I always come back to these three as a starting point:
  1. Revenue per customer.
  2. Retention cohort analysis.
  3. Funnel averages over time.
You can read the article to find out why.

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  1. Thank you for this excellent article. My son is planning a software product that will take the mystery out of wikis and make the technology easier for consumers to use. I just emailed your article to him and recommended that he take your advice to heart.

  2. Thanks for the article. Here in Tampa, our biggest challenge is convincing the region's technology "leadership" that grassroots economic development is a good thing. That fostering and encourage entrepreneurs to bring companies and products to market is a great source of innovation, job creation, etc. Unfortunately, they are disinterested in doing the hard work to help early stage entrepreneurs and companies. Instead spending hundreds of millions of dollars to lure the next big thing to town in the hope they will turn Tampa into the next tech center. I'm sure you can feel me rolling my eyes at this point.

    A few of us have banded together to do this ourselves and are actively working on several projects, including coworking, free startup workshops (our next one in on Jan 7th about product management), jelly's etc. Any advice about what else we can do would be incredibly helpful.

  3. Eric,
    Why is it that every success story gets a pat on the back after the fact? Whoah! Is there s choice?

    My startup business (web development) is being shunned by virtually every other potential investor I approached thus far. The only folks who invested in me were the ones who barely understood the business plan. They just havd faith in me.

    My 2008 revenues were over $100k on a 35k inventory. Now why would investors shy away from that?

    I am chugging along. but, I know I can get there in less than 2 years with funding as opposed to 10. I am 42 years old. I don't have much time.