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It’s true we are already in the second quarter of 2010, but there are still three ahead and things move fast in the internet industry. So a little prediction report published on a VC’s blog would be interesting for any online entrepreneur, I guess. 
The author of the report, Jeremy Liew, also makes some resolutions about the predictions he had for 2009. 

Here’s a list of those for 2010: 

1. Social games overflow out of Facebook.

2. Brand advertising starts to move online, boosting premium display, video and social media

If you read the previous post, you have seen Steven Blank’s amazing presentation from Startup Lessons Learned Conference in San Francisco. You have also seen some case studies on how this methodology was applied on developing startups.

This time, I would like to share with you how Amir Khella used the same methodology in developing a minimally viable research product during his PhD. Amir is a user experience consultant based in the Bay Area, working with companies to plan and design product experiences by integrating design thinking into the product life-cycle.

I would like to thank Amir for agreeing to share his story on Triblr and now, I’ll let you enjoy it:

In the summer of 2004, I had my first entrepreneurship experience in an unlikely place. I was still working on my PhD, when I received an invitation to spend the summer at Microsoft Research. Some of the finest researchers there have been working my topic of interest, and I was eager to see what they’d been working on, and to contribute to it. So I took the blue pill.

After the first day orientation, I went to my mentor’s office to find out which project I’d be working on. When I sat across the desk, he peeked at me through the stacks of research papers and notes, and said with a big smile: “Well, here you are. You’ve got 12 weeks to spend with us, so come up with something useful and exciting!” I looked at him waiting for a specific task, and he proceeded ” You’ve got access to hundreds of researchers and thousands of employees. Make good use of it. Good luck!”. He then introduced me to the rest of the team members, and showed me the way to my office where I would spend the next 12 weeks coming up with the next big thing. Or at least, that’s how I felt back then.

On the following morning, other interns were already printing out research papers, looking at source code, and discussing tasks among their teams.  I didn’t even know where to start. I was scared and excited.

I started by browsing through existing tools, and I read previously published papers. That led me to plan B: If I failed to come up with something original in the first couple of weeks, I could improve on an existing project.

I also brainstormed several ideas with my team, but I couldn’t decide on any of them. I spent the first weekend in the office, trying to come up with my “cool and exciting” idea in the stereotypical lone scientist way: a whiteboard full of ideas and papers scattered all over my new desk. But that didn’t seem to go anywhere, since I had no criteria to judge on which idea is better than the other. That was when my first realization hit me: I’ve been too focused on ideas and I forgot about the most valuable resource: people. My research was about programmers productivity, and I had access to tens of thousands of programmers at Microsoft.

I erased the whiteboard. And with all the ideas gone, I was free to focus on finding out, instead of guessing, the real pain points that developers go through every day.

Lessons learned: Great ideas are seldom found behind office walls.

Step 1: Listen

The following Monday, I prepared a list of interview questions, bought a voice recorder, and prepared a list of developers to interview. That week, I spent close to six hours each day asking them about about their projects, their environment, and their teams. I didn’t know what I was looking for, so I listened to everything they had to say. And they talked as long as I was willing to listen. Every day, I would refine my interview questions based on interesting patterns or triggers I was getting from the day before. Having voice recording helped me go back and confirm a point that someone made earlier.

At the end of the week, I met with my mentor to analyze the results. It became clear to us that there was a common pattern among all interviewees: The most painful and time consuming part of the development process wasn’t writing new code, but understanding existing one. In a large organization like Microsoft, source code moves across several developers, and sometimes they need to go back to what someone wrote few years ago to comprehend it and add a new feature. Without access to the person who originally wrote that code, it was a pain task.

Lesson learned: Be willing to listen without judgment.

Step 2: Validate

I’d found a good pain point, and I needed to know what people did to solve it. I thought about writing another set of questions and go interview more developers. But I wanted to get deeper insights; I wanted to know what they did when faced with the pain point. So I instrumented Visual Studio, the development tool of choice at Microsoft, to record all navigation and editing activities. Then I designed an experiment where users were given an existing project (A Tetris game written in C#) , and they were asked to fix a bug and add a feature. To accomplish these tasks, a developer needs to navigate a couple of the 25 classes in the project, and learn the role of few existing functions and variables.

I had two assumptions I wanted to validate: First, experts were faster than novices in program comprehension (easy one). Second, there is something in common about how expert went about understanding code, that’s less experienced developers don’t do. So, I invited 5 senior and 5 junior developers to help with the experiment. I recorded time, success rate, and frequently asked them to think aloud about what they were trying to accomplish and what they would imagine the solution to be. While they were working their way through the code, their activities were being saved to log files.

Later that week, I wrote some Excel macros that aggregated all the “activity streams” inside visual studio and created charts that summarized the various code areas that developers navigated, and the various paths they took.

To my delight, both assumptions were true: experts were faster than novices in understanding source code, and they took common paths to understand it.

Lesson learned: Don’t just listen to what users say, watch what they do. 

Step 3: Collaborate

At that point, I knew I had a problem that was worth solving, and I had some ideas about how to solve it. But I wanted to do more than just get in a meeting room with my team and brainstorm more ideas; I wanted users to be involved. So I scheduled more interviews with developers, told them about what I am trying to accomplish, and brainstormed solutions with them. And because these users were suffering the pain point I was trying to solve, they came up with some of the most creative ideas! That was new to me, as I’ve always thought that good ideas will come from the team creating them, not people who’d be using them. Once again, I was realizing how abundant this resource was, and how little it was being used.

At the end of the week, I had gathered enough ideas to keep the whole team busy for the following couple of years. We met to discuss those ideas, we agreed that some of them had good potential and were worth prototyping and testing.

Lesson learned: Customers may have problems, but they also have solutions.

Step 4: Prototype and test

During one of the brainstorming sessions, a user asked an intriguing question: “What would it be like for me to browse source code like I browse books on Amazon? you know? with all the social recommendation goodies!” That question inspired us to create the first prototype: the FAN (Frequently Accessed Next) – a social recommendation panel that provided users with a list of places to which previous users navigated after leaving the current location. It carried the same spirit of Amazon’s recommendation language: “People who debugged this variable also looked at the following functions”.

Another prototype was inspired by the recorded log files: users typically worked with a small subset of classes for each task, which required them to repeatedly find it through a long list of all classes. To address this, we created a customizable working set of classes that is automatically filtered to provide users with the classes they need for a specific task. Finally, we wanted to provide users with a gestalt view of their source code, so we created a heat-map UML diagram that provided users with the “hottest” areas in the in the project.

We were curious to know if these prototypes delivered on their premise, so we ran a series of experiments with seven programmers, and measured their performance with and without the prototypes. The results were significantly better.

Lesson learned: Small changes can lead to big improvements.

The prototype has since evolved into a much larger project, with several full time researchers working on it. It has also been internally deployed to help multiple product teams at Microsoft.

I feel that I can take very little credit for what’s been created: users told me about their problems, they helped me with the solution, and they showed me how well the solution performed. They deserved most of the credit!

If you are interested in reading more about the experiment and prototype, you can read the paper published at InfoVis’05 .

If you find this post useful, I highly recommend Steve Blank’s book on customer development, and Eric Ries’ blog on Lean startups.

In the previous post, I’ve made an introduction in what Lean Startup means. About a week ago, Eric Ries has organized, in San Francisco, the first conference which aimed to bring together those who conceived the methodologies that make up the Lean Startup, and entrepreneurs who use these methodologies in order to build successful startups.

If you missed the conference or the simulcast, you can find here the notes including links to the speakers’ presentations, available through the kindness of a group of people at Bootup Labs, in Vancouver.

I watched the simulcast at Bucharest Hubb, in Romania and I believe that the knowledge and experiences shared during this conference are a truly valuable resource for all entrepreneurs. So, even if you attended either the conference or the simulcast, keep these notes close and take a look at them from time to time.

One of the most recent and very fashionable concepts in the field of online entrepreneurship, especially in such important hubs like Silicon Valley, New York and London, is Lean Startup.

Eric Ries is the creator of the Lean Startup methodology and the author of the popular entrepreneurship blog Startup Lessons Learned. He previously co-founded and served as Chief Technology Officer of IMVU. In 2007, BusinessWeek named Ries one of the Best Young Entrepreneurs of Tech and in 2009 he was honored with a TechFellow award in the category of Engineering Leadership. He serves on the advisory board of a number of technology startups, and has worked as a consultant to a number of startups, companies, and venture capital firms.

Bellow is his speech about what the promise of this methodology is:

“The overwhelming majority of start-ups totally fail. Not because they are taking too much risk, but actually because when they finally build the technology, when it finally works, nobody wants to buy the product. A few years ago I started writing this blog called Startup Lessons Learned, trying to answer this question of what is the difference between the successful startups and the non-succesful startups.
The lean startup is an entrepreneurship methodology, that takes ideas from agile development, customer development, lean manufactory and applies them to the process of innovation. There is a number of practices of the lean startup: Continuous Deployment, where we can put code into production up to 50 times per day; rapid Split Testing - incorporating A/B hypothesis testing directly into the product development; the concept of Minimum Viable Product - launching at the smallest version of the product we can, to start the process of learning. Those techniques only make sense in the context of entrepreneurship. It is the attempt to create something new under conditions of extreme uncertainty. Progress is learning about what customers will want. We call it Validated Learning about Customers. When we validate what we’ve learned, we have proof that we are not just crazy, that we are in fact on the right track, that our assumptions that underly our business model make sense. That’s the promise of the lean startup.”

I believe it is a very well structured and comprehensible methodology, and I highly recommend it to all entrepreneurs, no matter their experience.
More posts analyzing separate aspects of it are to come, so stay tuned.

Today, I’m presenting the last part of the series of articles about the legal VC terms.

Restriction on Sales
This term sheet provision states that the company has a right of first refusal on all transfers of common stock, which if not exercised by the company will be transferred to the investors.

Proprietary Information and Inventions Agreement
Refers to the fact that every founder, employer and consultant should sign an intellectual property transfer agreement with the company trying to get VC funding.

Co-Sale Agreement
It means that the founders may not sell, transfer or exchange their shares unless each Investor has an opportunity to participate in the sale on a pro-rata basis. This only matters until the IPO.

Founders Activities
This means your funding VC wants you to be spending 100% (actually 120%) of your time and attention on the company. If you are working on other companies, but not disclosing this, you have violated the terms of the agreement and you don’t want that before even starting. There are some exceptions to this previsions, but they are very rare.

No Shop Agreement  (also Unilateral or Serial Monogamy)
It is a provision that commits the entrepreneur not to look for other VCs while negotiating with another. In Brad Feld’s words, “At some level, the no shop agreement reinforces the handshake that says “ok – let’s get a deal done – no more fooling around looking for a better/different one.”

Indemnification
It is a provision that states that the company will indemnify board members and investors for any claims brought against them by any third party (including any other shareholder of the Company) as a result of the financing.

Assignment
The assignment provision allows venture funds to transfer shares between funds and make distributions to their investors.

Read, also, the first and the second part of the article.

Let’s continue with our second lesson of VC language. Today, we’ll explore some more of the frequently used terms of the VC term sheets. Following the links provided upon each definition, you’ll find broader explanations for the terms.

Redemption Rights
Rights to force the company to purchase shares (a “put”) and more infrequently the company’s right to force investor to sell their shares (a “call”). A Put allows one to liquidate an investment in the event an IPO or public merger becomes unlikely.

Conversion
Refers to the fact that preferred stock is convertible into common stock. This allows the buyer of preferred to convert to common stock should he determine on a liquidation that he is better off getting paid on a pro rata common basis rather than accepting the liquidation preference. It can also be used in certain extreme circumstances whereby the preferred wants to control a vote of the common on a certain issue.

Conditions Precedent to Financing
It is a paragraph in the term sheet that you should definitely pay great attention to, as you could not have a deal at all, even if you signed the term sheet, if your company doesn’t meet these conditions.

Vesting
Typically, stock and options will vest over four years – which means that you have to be around for four years to own all of your stock or options. If you leave the company earlier than the four year period, the vesting formula applies and you only get a percentage of your stock. As a result, many entrepreneurs view vesting as a way for VCs to “control them, their involvement, and their ownership in a company”.

Information Rights
It means that the company will have to deliver regularly to the investors, until the IPO, such documents like Company’s annual budget, audited annual and unaudited quarterly financial statements.

Registration Rights 

These are provisions that allow investors to sell stock via the public market (IPO). On the other hand, registration rights are often the only exit vehicle that, as a practical matter, the minority shareholders can compel. Read also on registration rights.

Right of First Refusal
The right of first refusal gives the major investor, in this case, which can be clearly defined in terms of number of purchased shares, the right to buy particular shares before any other proposed buyer is accepted.

Voting Rights
Refers to the fact that preferred stockholders vote like the common stockholders in the affairs of the company, with some exceptions. Anyway, all the heavy rights are contained in other sections, such as the protective provisions, you have to pay special attention to.

Employee Pool
The employee pool section clarifies the capital structure and specifically call out the percentage of the company that will be allocated to the option pool, allocated to directors, officers, employees and consultants financing.

Read, also, the first part and the next part of the article.

It is a simple, well known rule: in order to have a relationship with someone, no matter the type, one have to understand what one say to each other. Basically, you have to speak the same language. So, before hoping that an investor would become your investor, you have to learn to understand and speak his language. That means not only being able to read the lines, but also between them. The between the lines reading comes with practice, but what you can do is start learning the meaning of the words on the lines.

While surfing the web in order to provide a glossary of the venture financing words, I stumbled upon Brad Feld’s blog, managing director at Foundry Group. He published a series of posts that treat separately each of these words. As the author states, this series have been used as the base for a number of college courses.

I will enumerate them here and I will give a short definition for each of them, but of course I encourage you to read the entire posts for a deeper understanding:

Term Sheet

An outline of the terms of a proposed investment deal, typically set up to be a non-binding precursor to the actual financing agreements that will fully document a funding transaction. Term sheets serve the same purpose as letters of intent and are used frequently by venture capitalists to fix the terms of a deal before they complete their due diligence. While generally unenforceable, term sheets, like letters of intent, often contain binding agreements to prevent management from shopping the deal spelled out in the term sheet. Term sheets vary in their level of formality and in the obligations they spell out for the company and the investors. A term sheet is proposed by investors, signed and accepted by the company, and is the precursor to a due diligence effort before the actual investment or plan is made.

Due Diligence

Usually undertaken by investors, but also customers, due diligence refers to the process of making sure that someone is what they say they are and can do what they claim.

Price

This is the form in which the Price is provided in a VC term sheet: The Original Purchase Price represents a fully-diluted (the total number of shares issued by the company on the assumption that all warrants, options and preferred stocks are exercised) pre-money valuation of $ X and a fully-diluted post money valuation of $ Y. The pre-money valuation is what the investor is valuing the company today, before investment, while the post-money valuation is the pre-money valuation plus the contemplated aggregate investment amount.

Liquidation Preference

The liquidation preference determines how the money a company gets are shared on a liquidity event, a liquidity event being not only bankruptcy, but also mergers, acquisitions, or a change of control of the company. In an accurate definition, the term liquidation preference pertains only to money returned to a particular series of the company’s stock ahead of other series of stock, the preferred stock. But the term describes how the money are returned to participating stocks owners, as well.

Protective Provisions

Protective provisions are veto rights that investors have on certain actions by the company. These provisions protect the VC.

Drag Along

A right that allows majority shareholders to force minority shareholders to accept an agreement. In a typical drag-along agreement, if a majority of shareholders agree to sell or liquidate a company then the remaining shareholders must consent and not raise objections.

Anti-Dilution  

The anti-dilution provision is used to protect investors in the event a company issues equity at a lower valuation then in previous financing rounds.
Anti-dilution provisions are almost always part of a financing, so understanding the nuances and knowing which aspects to negotiate is an important part of the entrepreneur’s toolkit.

Pay-to-Play  

An investor must keep “paying” (participating pro ratably in future financings) in order to keep “playing”(not have his preferred stock converted to common stock) in the company.

Continue with Are you speaking VC? (II)

I’ve been talking lately about the financing stages of a start-up. We know angel financing is one of the early stages, but what are its ins and outs? While wondering, I stumbled upon Mark Suster’s post which I found very useful and comprehensive, and I decided to share with you some of his key points.

I’ll start with defining the terms. Then we’ll see some of Mark Suster’s interesting arguments about which of these two is better, and finally I’ll tell you which one I prefer best.

A priced deal is when the value of your company at which the angels would buy stock has been set at the recommendation of the angel investors.
A convertible debt is when the price at which the angel buys stock in your company is set in the future when you would raise your first round of venture capital money.

Why do angels choose priced deals over convertible debts? When offering money at a very early stage, they take a lot more risks than VCs. And besides money, they offer their knowledge, connections, credibility to the funded start-ups without which they might even not get to the first round of VC funding.

On the other side there is the situation when an angel wants to invest in a hot deal, a deal everybody wants. Then, he would probably prefer a convertible debt than anything at all.

And here are Mark Suster’s opinion on the matter:

- In general, angels should make priced deals.
- Most convertible debt deals are done by angels who are not professional investors, but wealthy ex tech executives, lawyers, doctors, real estate professionals, or others who fear that they would loose deals if not agreeing this structure, or they simply don’t know better.
- As an entrepreneur you should raise money from the most experienced people possible, even if you can do only a priced deal,
- If you’re struggling to raise money at all then you should obviously take the money from wherever you can get it and many times that is reality.

As of me, I did only priced deals, but I am looking forward to meet that company that would be able to convince me to accept also convertible debts.

In today’s global world, you have many choices of places where to incorporate your company. If you are in the online industry, take a look and see which one suites you best.
If you plan to raise money from VCs, you should incorporate in their geographical area, but if you plan to make money from online services and yo want to avoid paying to many taxes, you should consider to incorporate your company in one of these countries.

More details about this index here

This is the algorithm I want to apply when bringing to the market any future projects I will be involved in.

Photo by Jennifer Curtis

Usually, I start a business when I accidentally discover a problem and I want to solve it. That is why I consider these steps to be very important in order to figure out if my new venture has the potential to grow into a successful business. 

Define the persona - I describe the behavior and concerns of the person whose problem I want to solve. For example, if I want to improve the way mothers communicate with each other, the persona is mothers with kids between 0-7 years old. 

Defining the problem - I validate the problem discovering whether it is generic for my type of persona. In order to do this, I have to speak with at least 20 mothers who should agree that they have the problem I’m trying to solve. And it’s awesome, because you can do this even before actually starting the project. 

How many people with this problem live in my country or in the world? - Usually, I am doing a lot of research to find out the number of those I identified as my persona, which I intend to target initially.

What is the solution they are using today? - At this stage, I discover how my persona solves the problem today. It’s important to see, as well, how much does my target spend to solve it.

What is my solution to this problem? - So, I have to come with a totally different solution to the problem, something disruptive. Also, I have to ask the target how much would they pay for the solution I’m proposing. If they are not willing to pay, it means my product is only a nice to have and it doesn’t solve a real problem they have.

The market size  - Now, I can define the market size, that is the total number of people that I target multiplied with the amount they are willing to pay for the product or service I’m providing.When you do your calculations you have to be aware of the fact that even if you have no competition, you’ll probably get only 25% of the market in case your solution is really innovative and hard to reproduce.

Of course nothing is sure, but at least I can say more confidently after having gone through these 6 steps if it is a business that I can take into consideration or not. Same time you can take into consideration Imagine a Bigger Market and You’ll See a Bigger Market