State of the Internet: 2012

In case you have not seen the recently-published "State of the Internet: 2012" report by Henry Blodget at Business Insider, it is a must read for getting up to speed on what the key trends are in the digital world.  It is jam packed with data on overall trends, digital media, social media, e-commerce, mobile and stock valuations.

To read the full "State of the Internet:2012" slide deck, click here to read it on the Business Insider website.

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Lesson #123: Crowdfunding Details Starting to Emerge

Last week, I had the pleasure of sitting on a crowdfunding panel with Sherwood ("Woodie") Neiss, a serial entrepreneur and one of the original authors of the crowdfunding bill, who was meeting with Chicago's startup entrepreneurs, investors and service providers to gather our input on what desires we have for specific language to be incorporated into the Jobs Act.  Woodie was then going to take Chicago's collective comments, along with the comments from other startup regions around the country, back to the White House, so the President can get a better sense of what the startup ecosystem is looking to acheive via this law, and lawmakers can incorporate such goals into the law.

As part of this discussion, Woodie also presented some more details about where the current drafts of the law are heading.  Understanding this is still a moving target at this point, it should help you better understand whether crowdfunding is a good financing choice for your startup.  Please re-read my original blog post on Crowdfunding Startups as a refresher on what we are talking about here. 

Below were some of the highlights I took away from the presentation, as it relates to startups:

• You must be a U.S. based startup--foreign issuers will not be allowed
• Funding must be pursued via a registered crowdfunding portal or broker-dealer
• You can be either a C-Corp or an LLC, corporate structure does not matter at this time
• You can raise up to $1,000,000 via a crowdfunding effort, although bigger raises come with  higher requirements
• But, don't ask for too much, as it is "all or nothing" in order to close your financing--you need to raise the full amount asked for, before funds will be released to you
• Financings over $500K require a full accounting audit; financings over $100K require a CPA review; financings under $100K require a CEO letter speaking to financials
• You will be held to strict monthly financial reporting requirements (via compliance tools)
• It is still being determined if you can run "parallel financings" at the same time (e.g., concurrent equity and debt), but you can only raise equity on one portal site at a time
• You will be limited to general solicitation of investors only (e.g., via your social networks)
• You can have an unlimited number of investors participate in your financing
• Investors are limited to $2K for up to $40K income; 5% of income for $40-$100K income; 10% of income for over $100K income (up to a total cap of $100K invested per year)
• Investors can live anywhere--foreign investors are allowed to invest in U.S. startups
• Shares issued could be either voting or non-voting stock, depending on your needs (still TBD)
• Funds raised could be either direct shareholder investments, or via a special purpose entity which aggregates all investors into one investor pool for simplicity (still TBD)
• There will be a one-year holding period for all investors in a crowdfunded startup
• Thereafter, it is anticipated that a "secondary shares" market will develop to sell your shares
• Full background checks will be performed on the CEOs of all companies raising funds
• It is anticipated there will be 100's of crowdfunding portals to choose from, both generalists and niche specific (so choose carefully based on reputation and industry)
• It is anticipated that crowdfunding will work best around "community driven" initiatives (e.g., local town wants a new restaurant, and those citizens finance and use such restaurant)

I am still a huge fan of crowdfunding, as it will fill the financing hole until your product is built and "proof of concept" is acheived before the traditional venture capital investors take interest.  And, it will open up more startup capital outside of the tech industry (e.g., retail, CPG), where VC's typically do not play.  But, buyer beware.  As you can read above, it does come with a lot of strings attached (e.g., 1000's of investors to keep happy, primarily from your social network of friends, monthly reporting requirements).  Not to mention, this is simply "dumb money", as crowdfunding investors are most likely not coming in with a Rolodex of relationships or past startup experience to help you build your business (which is preferred).  That said, I am feeling better fraud will be kept in check based on the auditing requirements, the required background checks of CEOs and startups having to rely on their own social networks of friends to solicit investors.

If you would like to read the full act, click here.  If you would like to read a high level summary on the act from the SEC, click here.  If you would like to read comments on the act submitted to date, or you would like to submit your own comments for lawmakers to consider, click here.  Lawmakers are particularly focused on six areas: (i) how startups communicate the offering and spread word; (ii) how to mitigate fraud within social media; (iii) how to avoid a "messy cap table" for future VC's; (iv) how underserved communities can access capital; (v) how to build a local ecosystem for success; and (vi) how best to educate investors on startups in an "eyes wide open" way.  So, feel free to chime in.

Historically, small businesses are responsible for 50% of our country's job creation, and funds available to those startups have only represented 1% of the available capital. Hopefully, crowdfunding will help to rebalance this, and we can finally get our economy and job creation back on solid footing.

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[NEWS] George Deeb Named to Crain's Chicago Tech 50

Today, Crains Chicago released its Crain's Tech 50 list of people that are making a difference in Chicago's startup tech community.  I am honored to be included in this list, along side such well-deserving and respected colleagues.  And, frankly, I could easily add another 50 well-deserving people who are making Chicago a great place to build your startup.  Congratulations to everyone who is helping to contribute to Chicago's thriving startup ecosystem, as summarized in my blog post from July 2012.

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Lesson #122: Setting Key Milestones for Your Startup

Don't launch your startup trying to build a "Rolls Royce" with all the bells and whistles out of the gate.  Why not??  Firstly, the key with startups is speed to market, so you don't want to wait for building out "Rolls Royce" functionality, when you could have launched a "Toyota" much faster without materially impacting the core user experience.  Secondly, a "Rolls Royce" costs a lot more than a "Toyota", and when you are on a limited budget, as most startups are, every penny matters.  And, thirdly, it is best to iterate your product in small bite-size chunks, to see how users engage with the product and what features and functionalities they most use and desire.  For example, you may think they want a "Rolls Royce", but they may really want a "Porsche" at the end of the day.  So, before you get too far into your development, constant testing and surveying of your users can save a lot of wasted re-building expense down the road.

To help you bucket your startup development, break your startup into three phases: (i) piece of paper business plan through minimum viable product (MVP); (ii) MVP through full production site; and (iii) full production site through proof of concept.  From there, hopefully, you will be in a position to raise venture capital to scale up your business for the following growth phase of your business.  Below are a few pointers for setting acheivable milestones, for each of these three phases:

PIECE OF PAPER BUSINESS PLAN THROUGH MVP (roughly months 0 to 6)

Product: A bare-bones site with basic functionality that you won't be embarrassed by.  Build the site in a lean startup, agile process in bite size iterations every couple weeks until MVP complete.
Team:  You and your co-founder, preferably one of you a technical person building out the site.  Outsource for additional developers or designers needed.
Business:  Start laying the ground work to identify and budget for key partnerships you will pursue, and key sales or marketing channels you will test.
Users:  None yet, other then the development team testing the iterations of the product.

MVP THROUGH FULL PRODUCTION (roughly months 6-12)

Product:  Use this time to test with users to see what they like and don't like about the product, and then build out additional features and functionality of your beta site.
Team:  Start to recruit the rest of your senior team or any additional technologists required.  You don't necessarily need to hire them yet, but have candidates identified in the wings.
Business:  Start to reach out to business partners and start testing key sales and marketing channels identified in phase one.  No material revenues yet.
Users:  A minimum base of customers that is large enough to test with, and start to establish trends for monthly growth.  No material traffic yet.

FULL PRODUCTION THROUGH PROOF OF CONCEPT (roughly months 12-18)

Product:  You will no longer be in beta testing, with a full production website.  Continue to add in additional features and functionality over time.
Team:  You should have your full management team hired and in place, even if working for equity without cash salary.  This will be required to get the full attention of the venture capitalists.
Business:  You will have signed a few key partnerships (with a good pipeline in discussions) and proven an affordable cost of customer acquisition.  So, new monies invested in marketing will be used to accelerate proven tactics.  You should be showing preliminary revenues at this point, materially growing month over month.  The closer you can get to $1MM in revenues, the easier your fund raising efforts will be.  Start identifying and laying the ground work with venture investors, relationship building, but not yet asking for any money.
Users:  A material base of traffic, growing month over month, that helps venture investors acknowledge there is a real and growing appetite for your product in a sizeable market.

By this point, you should be ready for prime time and be in a good position to begin asking venture investors for your growth capital from here.  So, said another way, you will have to creatively figure out how to fund the first 12-18 months of your business on a shoe string or with angel investors until then.  So, plan far enough ahead of time what your capital requirements will be to get you from a piece of paper business plan, all the way through proof of concept, which will be required by the venture investors.  And, as always, include a big cushion, as things never go perfectly to plan.

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Lesson #121: Designing an Omni-Channel Business

Today’s consumers are more tech-savvy, seek more value and seek it through more channels than ever before.  Therefore, you need a consumer brand/user experience across all platforms, with content customized to the needs of each specific customer.  A shift in mindset from “comparable store sales” to “comparable customer sales”.  Below are a few high-level trends and considerations for properly designing an omni-channel business to meet these customer-centric needs.

• Omni-channel puts the customer at the center of all decisions and breaks down silos between the retail/web/mobile/social platforms.  See the following graphic from CRMsearch:

• While shopping retail stores, consumers are heavily using their smart phone for product review, pricing comparisons, sourcing coupons, etc.  You need to tap into that trend with mobile apps.
• Tablet visitors spend 50% more per transaction than smart phone visitors and 20% more than PC visitors. Need to make sure you have tablet platform apps built out and optimized.
• 60-70% of offline sales now impacted by digital efforts in one way or another, with digital investments in the 1-3% of revenues range, on average.  One channel drives the other, and vice versa.
• Marketing silos must be broken down, with one centralized effort for sourcing new customers, driving incremental sales from old customers, reducing attrition, maximizing effectiveness, managing inventory, leveraging data and building loyalty on one tech platform.  You can’t have web competing with retail, but collaborating for a combined/unified experience/success.
• Furthermore, marketing and technology are converging into one department, formerly siloed between CMO’s and CTO’s.  CMO's are more dependent on data than ever, and only technology can help them to prioritize and make sense of the "fire hose" of data coming in.
• Multi-channel customers spend 15-30% more than single-channel customers, and omni-channel customers spend 15-30% more than multi-channel customers.  You have to identify, incentivize and grow this base of high-affinity customers to truly maximize sales.
• Study user behaviors while they are not shopping, to look for targeted marketing opportunities (e.g., posted on Facebook they have an upcoming vacation, so you know when to follow up with a targeted luggage offer).
• Organizations must shift to more entrepreneurial startup mentalities—“always be deploying”
  requirements will create reorganizational pressures in the short term.  Digital needs a green light to “do amazing, next-generational things”.  IT oversight will shift towards a more “venture capital” mindset, vs. the current capital budgeting approach.
• Organizations should be designed with incentives/rewards, people/culture, business processes, technology and internal structure to fully embrace the evolution to omni-channel needs.  Capabilities need to be assessed with a “fresh set of non-biased eyes”.  There is no “one right answer” here, need to figure out what works best for each organization.
• Customer experiences need to be seamless from platform to platform, with similar branding, functionality, and content, optimized toward the strengths of each channel.  Here is an example template from Tyler Tate on  how to think about omni-channel design across platforms and customer tasks throughout the entire customer experience:

Add caption

Omni-channel marketing and loyalty are not simply buzzwords, they are based on hard facts and current trends in the market. Think overhaul, not upgrade, while ditching the one-size fits all mindset with consumers and channel silos internally.

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Lesson #120: Plan Ahead for Proof-of-Concept Marketing

It is a sad, but familiar, story in startup land.  An entrepreneur raises a limited amount of funds, plows it entirely into building out their product, and has no gas left in the tank for driving users to the site once the product is complete.  Then they go out hat-in-hand to the venture community looking for additional growth capital, without achieving the proof-of-concept required by the venture investors (in the form of initial user adoption).  Hence, leaving them out-of-luck with the VC's and scratching their head on how to raise sales and marketing monies to achieve their proof-of-concept.  They then typically turn to their friends and family, the same ones they most likely tapped for their initial seed financing to build-out their products, who have nothing left to invest.  This is the typical cycle I see over and over again with the startups that reach out to me for financing assistance.

Fortunately, for new ventures, this is an easily solvable problem to address, assuming you fund your businesses with enough proof-of-concept foresight right from the start.  When you are deciding how much money to raise day one, you can't only think about the cost of building out the product, you also have to leave enough cash cushion in the bank, to allow you to hit the sales and marketing accelerator once the product is built.  And, frankly, this latter amount is equally important as the product itself, as without it, you will not achieve the proof-of-concept points that will open up the additional venture capital to scale up your business from there.

Every business has its own unique sales and marketing objectives.  B2C businesses are usually marketing driven.  B2B businesses are usually sales driven, with enterprise-facing businesses having different challenges than SMB-facing businesses (e.g., tough to identify key relationships, longer sales cycle to drive revenues).  So, you need to think ahead of time for: (i) which tactics are best for your business (e.g., search marketing, social media, media relations, trade shows, salespeople); (ii) what is the "tipping point" that will get the longer-term venture investors over the proof-of-concept hurdle (by establishing relationships with them upfront, well ahead of asking them for capital); and (iii) budgeting how much sales and marketing monies will be required to allow you to reasonably achieve those objectives.

For example, let's say you are an e-commerce website.  And, the venture investor says, we would like to see 1,000 customers buy your product first, before investing.  With a 3% average conversion rate for e-commerce sites (which you learned from market research), you need to be able to afford driving 33,333 consumers to your website after the product is built.  And, if you are planning on buying paid search traffic from Google to do that, you will need to research the average price per click for your keywords and industry.  So, if that answer is $1 cost per click, you need to have $33,333 sitting in reserve to hit the gas on the marketing. 

And, worth mentioning, nothing goes perfectly as planned with startups, so I would set aside at least double what you think you will need.  As an example, if the average conversion rate for e-commerce sites is 3% overall.  It may only be 1% for a brand new company with no brand name recognition in the market, which suggests you would need to set aside $100,000, in the example above, to hit your proof of concept point.

Don't make the same mistakes of the thousands of entrepreneurs before you.  Start thinking through your proof-of-concept marketing needs from day one, to make sure you are raising enough funds right from the start.

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