There are a lot of parallels between wind sports and startups. One thing we’ve encountered lately with JumpBox is something I can only describe as the tendency to “fight the wind” in our desire to artificially accelerate the pace of adoption. Everyone who’s tried to wind surf for the first time falls into the trap of trying to muscle the sail into position instead of respecting the wind and working with it. You end up completely wearing yourself out on that first day. By day two you’re so physically exhausted that your only option is to learn to work with the wind.

I feel like we just woke up on day two with our startup. We work ourselves into a state of mental gridlock with all these “open loops” as David Allen calls them. And the reality is we’re doing fine and just need to continue to execute and lower our expectations of how fast we can realistically run given our size.

I would be curious to hear from others who are running a small business: a) do you find yourself encountering this same tendency? and b) how have you coped with it and do you have any reliable techniques to relax and “work with the wind?” We’re in an emerging space and we’re not for lack of a killer product at this point- we have incredibly positive feedback from everyone who uses our stuff. Our real issue is that we see such incredible opportunities and yet we can’t tackle them as fast as we’d like and the market itself is still in its infancy. On first glance it seems our greatest challenge is in spreading awareness, but in reality it may be more in developing patience and becoming comfortable with the natural pace of adoption.

Anyone else in the same boat (or on the same surf board)?

WHAT: the Adium/Gaim/Trilian of social networks

WHY: social networks will follow the same trajectory of instant messaging services 5yrs ago. We were talking tonight on ReadWriteWeb about how many people misinterpreted Open Social as being an open data exchange initiative for social networks. That it was not, but Dataportability.org is. And as it gets adopted I predict we will see a similar sequence of events that led to the commoditization of the IM platforms. Consider this:

Right now we have a balkanized landscape of social networks, at least 15 major players with varying levels of dominance depending on the country. Remember back when you had to run ICQ and Yahoo messenger on your desktop alongside MSN messenger and AIM because you had friends on each network? Dashboard products like the ones mentioned above emerged though and they unified the messaging so you could chat with whomever you liked via a single interface. Effectively the IM channels became irrelevant - your only awareness of which “carrier” you were using was maybe the color of the dot by the person’s name in the dashboard.

Now granted, this analogy isn’t entirely analogous (probably more accurate would be the advent of the jabber protocol), but right now social networks are like the IM services were B.C. (before consolidation): you have to sign on to each individually and maintain disparate profiles in multiple places. But as more players adopt the blueprints put forth by groups like Dataportability.org and we transition into A.D. (after dataportability), you’re going to see the same type of commoditization occur to the social networks. Now keeping in mind Clayton Christensen’s “law of conservation of modularity,” value never just evaporates, it gets teleported to a different layer. Where do you think the value will reside once the networks themselves become commoditized?

Bingo- the unifying client that is used to manage one’s communication and presence across all networks. You won’t login to Facebook/Hi5/Orkut/Beebo/Linkedin/whatever to interact with your peeps at that point, you’ll fire up your _______ client and have a single place to talk with everyone and manage your identity. This sequence of events seems inevitable to me and the startup I would keep my eyes on (besides our own ;-) is the one that has killer Flex UI designers on staff and is living/breathing the DataPortability specs right now thinking down this path. If that happens to be you, drop me a line and let’s talk.

Newly-remodeled, fully-furnished 3BR 1700sqft rental home in the heart of the action in Phx available for the entire week of the Super Bowl and the FBR Open. Located in north Tempe on the border of Scottsdale this house is perfect for entertaining and in the ideal location:

• 2min access to the 202 and 101 freeways
• 5min from famous Mill Ave in Tempe (shops and restaurants)
• 10min from Old Town Scottsdale (Superbowl festivities and commentary on the water front)
• 25min from the stadium in Glendale

House sleeps 7 (TV room has a pull-out couch and one room has bunk beds). Ammenities include:

• hot tub
• barbecue
• 17′ HDTV projection screen and 24" flatscreen both with cable
• wireless internet
• all new furniture including leather couches and recliners
• new stainless appliances and granite counters
• covered 2-car garage
• washer & dryer
• yard with horse shoes

$10k for 7 days rental

$5k due by Jan 11th, $5k due upon arrival plus $2k refundable damage deposit. Will accept paypal, wire or money order. No smoking inside. Pets okay. The game is only one day- proximity to the real action in Scottsdale and Tempe the rest of the week is where it’s at! Check comparables on Craigs List- this will not last long. Call or email Sean with inquiries: 480.221.5500 sean -at- jumpbox.com

So we’ve pitched to ten different VC’s in the past week. There’s no substitute to learning through doing and we’ve learned a good deal in the last few days. Here’s a distilled version of the relevant lessons for anyone else who is in the process of raising venture capital:

1. Logic is expected but emotion is what gets the callback: Your primary mission in the initial pitch is to excite & engage- not to educate (beyond the baseline level of clarifying any obscure aspects of the opportunity). The secondary mission is to instill confidence in the idea / team / market, but that comes after catching their interest- in that case all you’re doing is free consulting for them so they know more about the space. Educating them about the technology is worthless if you didn’t grab their interest. Nobody is going to pick up the phone next week and call you back because the numbers worked and the model made sense, they’ll call because they want to be involved and are excited about what you have.
2. Feedback across VC’s is highly inconsistent: this is not a science by any means, it appears to be more of an art. For us there was very little overlap in consistency of feedback across VC’s. Going into it I thought this was a fairly standardized science in the way that insurance companies have templated ways of analyzing risk but feedback and types of questions asked to assess the opportunity were all over the map.
3. Nobody cares about speculative TAM and projections slides: only one out of the ten VC’s we pitched asked us for a slide on the total addressable market and nobody asked to see our financial projections. We had a deck of 12 slides and included 3 appendix slides at the end as optional ones we could bring up to show projected financials, list of applications in our library and quotes that corroborated our claim of a promising TAM. They recognize these type of slides are highly speculative - they just want to see that you’ve been through the thought process and understand the space and where you fit in.
4. Quality of the referral is everything: I’m stunned with how easy it was to secure meetings when we had a referral. Rapport by proxy via a trusted mutual connection is invaluable and gives you a great ice breaker to start the conversation. I’m not saying you couldn’t land meetings via cold calls but having an email intro produced a near 100% success rate for landing a meeting. It probably helps that we have a very disruptive technology that sits squarely at the intersection of two important trends right now, open source and virtualization. But still the intros were invaluable.
5. A few minutes spent researching the people and firm is priceless: it’s not about you, it’s about them. What does your product mean to them and how does it fit within their portfolio? It’s completely acceptable to ask the VC what types of investments excite them right now. Knowing their background and about the companies in their existing portfolio helps you couch your opportunity in terms that they’ll be receptive to.
6. It’s a conversation, not a pitch: if it turns into a one-way presentation, you’ve lost. Just pack up your stuff at the end, exchange pleasantries and don’t expect to hear back from them. The phrase that springs to mind is “people don’t like to be sold to, they like to have the ability to buy things.” When you approach it from this mindset it becomes a simple show & tell of your company given what you know that excites them.
7. Nothing beats having customers: our confidence in talking about our business was hugely boosted by having four month’s-worth of customers under our belt. I would have been way more stressed and defensive if we had pitched without customer validation. If you’re planning to pitch a VC, do what you need to do to get at least a handful of customers first. Heck charge people even just $5 for whatever you have. The simple confirmation that people are willing to pay for what you have strengthens your position immensely.
8. Remember they need you as much as you need them: Roger Dawson says that it’s a natural human tendency to always under-value your hand in a negotiation. It’s important to recognize the VC’s (while they may be contacted all the time) need good companies to fund as much as the companies that approach them need funding. Deal flow is their blood supply.
9. The timing of taking money: so we hadn’t planned to be talking with VC’s this early but conversations led to other conversations and somehow we ended up in front of them. So long as it’s not detracting from your ability to execute on the business and you have a good story, I’d say the earlier you begin talking with them the more options you keep open. Having cash in the bank and flexibility on the growth trajectory you’re able to take puts you in a stronger position and gives you that “walk away power” that’s so key in a negotiation.
10. A concrete demo goes a long way: if your product demo’s well and a demo of the actual technology can be appropriately worked into the preso, do it. It brings everything down to a very tangible level and can answer questions immediately that would otherwise manifest from talking in abstractions. A picture is worth 1000 words and a demo is worth 1000 pictures.
11. Getting derailed and not getting through all the slides is a good thing: don’t be bummed if you don’t make it through your slides, in fact rejoice in this situation. We found ourselves in one meeting that ran 30min over- the VC was deferring calls from his wife who was waiting for him in the parking lot and we still never made it through the entire deck. This means you’ve engaged them and there’s more to talk about (which is the whole point of the pitch).
12. Take sources like The Funded with a grain of salt: consider that the population of people posting to those sites will have a bias of being mostly people that got turned down. There’s still value to reading feedback there but take it as one data point and not the gospel of VC quality.

These lessons come at face value from an amateur who is new to this game and the bottomline is that until we actually close the funding, we’ve realistically achieved nothing. We had a good experience with everyone we spoke with and even the ones that flat-out passed on the opportunity gave us helpful feedback about why they weren’t interested. If you’ve pitched and have any advice or perspective to add, please add them via comments.

UPDATE 12/13: one more bonus nugget to add:

#13 Don’t hoard your best contacts until the end: doing so means you miss out on the strongest feedback early on that can sculpt your pitch. Going into it we had thought the strategy would be to cut our teeth on the smaller fish first saving the big guys for the end, but we ended up pitching the most reputable firm on #2 and that actually gave us great confidence with which to approach everyone else. The more you pitch the tighter the story becomes - I would say don’t worry about blowing contacts while you’re still figuring it out. Dive in, listen to their advice, ask them what was weak and strong about the story and iterate on the story to incorporate those changes for next time. They may even refer you to somebody else they know if they like it but find it inappropriate for their portfolio for some reason.

UPDATE 12/22::

#14 Don’t script your pitch: Make a slide deck that serves as a framework for the talk but speak impromptu about the slides and use questions that engage the participants. Have a few key phrases that are like a comfortable home base you can return to and work from if you get jarred but don’t rehearse the pitch verbatim. Doing so will make it forced and contrived plus it’s more brittle to questions that inevitably arise and lead it off course. This is a “show & tell” session for what you’ve built and where you’re headed as a company. If you’re a true believer in what you’re doing, let this candidness shine through and talk openly about your business as you would with a friend or family member. The slide deck gives a predictable skeleton structure to the talk and ensures a logical progression and coverage of the major points.

sfroadtrip

Exactly one month to the day from arriving in the Bay Area, I pulled in an hour ago to my driveway back home in Tempe. What a month! The pictures from the trip say more than I possibly could in a single blog post. I met a ton of wonderful people in the Bay and made some great connections for our company. Here’s some stats from the trip that are interesting:

All told the trip cost a hair over $2k (which was way under budget). I want to personally thank all the people that went out of their way to give me a meal, a pillow, a piece of advice or an introduction to a valuable contact - the trip would obviously not have worked without the generosity and hospitality offered by these people. In chronological order here are some people that get a shout-out:

Christopher Birdsall - for a pit stop at the halfway point in LA
Scott & Sarah Yancey - for their repeated hospitality and their spectacular rooftop office
Ben Flajnik & Corey Marrs and their roommate Justin - for a comfy garage and access to do laundry ;-)
Francine Hardaway - for a fantastic intro and access to her beautiful house in HMB
Robert Scoble - for letting me be on his Podtech show as a guest
Andrew Hyde - for being on our podcast and putting on a killer startup weekend in SF
Tony Jeffries - for all the key intros and drinks at La Bodeguita
Josh Margulies and his fiancee Liv - for an aerobed and many connections (congrats on your engagement!)
Jen Margulies - for 2 critical intros (happy birthday!)
Mark Fletcher - for meeting with me and sharing entrepreneurial advice and a helpful contact
Jay Margulies - for critique on our exec summary and letting me partake in two family celebrations
My brother Connor - for hooking me up with a place and fixing my Quickbooks issues (happy 30th!)
The Carroll family - for allowing me to join the family on Thanksgiving away from home (RIP Pop Carroll)
Jen Behan and her family - for round #2 of pumpkin pie and a warm home on a cold Thanksgiving night
Tom Jackiewicz - for a thermarest and a stellar selection of connoisseur tequila
Jasmine Antonick - a key intro to an important connector
Debbia Landa and her crew - 2 intros to solid funding sources and a wonderful meal
The Hamilton family in Newport Beach - for a crash pad and a family feast at the end of a long trip

To these people my couch and home are yours anytime. More on some of the many things I learned on this trip in a later post. For now, I’m really looking forward to my own bed. Here’s a cool video I shot yesterday while driving back down the coast on Highway 1:

And here’s what a month’s worth of receipts and business cards looks like ;-) G’night.

What is PPA?

Pay-per-action advertising is a model where the advertiser gets paid only when the visitor completes a specified action on the advertised site. This model has incredible potential for both parties because it circumvents the problem of click fraud (it can be setup so advertisers are paid only when sales are made). From the advertiser’s perspective, you’ll happily pay commission on sales that are made and it’s like having an outsourced affiliate program that you don’t have to manage yourself. From the publisher’s perspective, you can “rep” products that are relevant to your site’s content and (in theory) earn more than you could via adsense because the payouts are much higher. Google’s move into this space disrupts incumbents Commission Junction and ShareASale which currently charge significant setup fees to get involved as an advertiser (Google charges no setup fees).

Our experience with the Google beta

The unfortunate reality of the current state of the PPA beta on Google is that it appears to be riddled with fraud. “But I thought you said you couldn’t get burned?” - let me explain. We signed up a few months ago and posted a handful of JumpBoxes in their directory offering a generous commission (over 30% for sales generated) to attract affiliates. We saw downloads skyrocket immediately but zero new conversions came from those new downloads. This probably should have been a red flag that the downloads were bogus, but we were still hopeful that it was just a matter of us adapting a landing page for better conversion and continued to run the PPA ads.

About two weeks into it we had seen not one sale originate from the PPA ads- we weren’t losing money on them since the payout was still tied to a sale, but the spurious downloads were throwing off our conversion numbers and tainting our stats. The participants in the Adsense Referrals network (which is this program from the publisher’s side) have a rating system for advertisers and we were concerned that we’d be blacklisted because we hadn’t yet done any payouts so we changed the rewarded action from a sale to the completion of a lead form upon successful download. We dropped the commission significantly to $.50 and treated it as a pure lead generation program. Fortunately we had set the daily cap in adspend because immediately people took advantage of this change and filled out junk emails repeatedly to earn the $.50 payout. I was surprised with how quickly this abuse came. We promptly shut off the PPA ads and discontinued participation in the program - we only lost something like $30 altogether.

Advice for Google

This has got to be a tough problem to combat from Google’s perspective. Juggling both sides of the equation, they have to attract enough quality advertisers with desirable and discreet products that work in the affiliate scenario while at the same time keeping a high quality of publisher in the referral network so as not to alienate the advertisers. Opportunity for fraud abounds - from the advertiser side, there’s no surefire way to enforce that the payout actions are accurately tracked (ie. i could start with the tracking script on our checkout thank you page and then remove it or selectively serve it every fifth purchase to dilute the commissions we pay and nobody would be the wiser). On the side of publisher fraud, it’s easy to participate only in the referral programs where payout doesn’t require a sale and then surf through an anonymizer to emulate people completing those actions via your ads. Google’s system of ratings from publishers is clearly how they are screening advertisers but they don’t seem to have a good way to eliminate the shady publishers. I didn’t see the equivalent ratings system for advertisers to use for this purpose.

Presumably the advice for now is to simply never pay commission on anything other than a sale- unfortunately that reduces the reach of this program to ecommerce sites only. My advice to Google though would be to disallow payment on actions other than sales to “cleanup the streets” in the near term and make it impossible for scammers to game the system. Once it’s economically unviable for them to make money there, they’ll leave and find another shady neighborhood to haunt. This whole thing oddly makes me wish there was an “Internet-wide Boys and Girls Club” to give fraudsters something positive to do- all that clicking just to earn $.50… you’d think there would be a HIT on the Amazon Mechanical Turk where they could legitimately earn more than that will less work…

I hope they figure something out because I love the approach in general of yoking reward as directly as possible to performance. Having studied the negative extremes of this principle with the Learned Helplessness paradigm in school, the idea of tethering reward to successful efforts has appealed to me on a very fundamental level and beyond business. I don’t have a silver-bullet suggestion for Google on how to stamp out fraudulent activity. It’s a very knotted messy problem that could easily spiral out of control scaring away advertisers and creating negative press. Fortunately they have some of the brightest minds on it - having just had lunch on their campus earlier this week, I can attest that it felt like there were definitely more brain cells per capita at Google than any place I’ve been on Earth.