Something has been bothering me, and I couldn’t quite put my finger on it for the longest time.  As I was digging my car out from our recent snow, I was enjoying the always pleasant and never controversial John C. Dvorak and his Cranky Geeks podcast.  The episode had a segment called “Google Must Die” and was based in part on John’s article of a similar title.  His basic thesis is that Google, as a search engine, with its intent to get you, the user, the best information about whatever it is for which you are searching, is broken.  Instead, GOOG has become a portal to commerce.

Then it hit me.  Those words repeated in my head over and over again.  A. Portal. To. Commerce.  When I was running IMSafer, we spent quite a bit of time doing SEO and ad buys.  I always had a great deal of wonder for the many ins and outs of the various search engines, and the many people who claim to have cracked that nut.  It never ceases to amaze me how when I search for either SEO or the name of an SEO firm that wanted to win my business that the firm in question did not appear as the number on link.  That’s a story for another time.

As part of their method for determining ad word link order, Google has a metric which they call their quality score.  You see, it used to be that the only thing that mattered for your ad placement was the amount that you were willing to pay and the click through rate of your ad.  This actually rewarded people who wrote good ads in such way as to move their ad to the top of the page, and not require that they be the highest bidder.  As is the case with any technology business, things seldom stand still for very long, and the quality score metric has evolved.

The one bit that stands out, more than anything else, is that GOOG is in the business or arbitrating the commerce on the Internet.  With a very opaque system which exists, in their words, “to organize the world’s information and make it universally accessible and useful,” I find it very interesting that GOOG is the one who gets to determine the usefulness, and, more specifically, how accessible, any specific piece of information is.  As a business, if you are not on the front page of GOOG search results, you might as well not be in business.

There are several factors affecting quality score which are largely in the control of a business.  They can write great ad copy, and get great click through rates.  However, the addition of the landing page relevancy to the metric swings things dramatically in GOOG’s favor, with no recourse for the advertising business.  I am not the first to trod on this ground, as this post clearly outlines many of the issues calling for transparency from such a large force in the market.  Alan Rimm-Kaufman makes some great points, but the discussion left me feeling incomplete.

The connection I have not seen in any of these discussions, however, is that coupling this debate back to the topic of net neutrality.  GOOG has taken a very strong stance on the notion of net neutrality.  Again, in their own words:

Network neutrality is the principle that Internet users should be in control of what content they view and what applications they use on the Internet. The Internet has operated according to this neutrality principle since its earliest days. Indeed, it is this neutrality that has allowed many companies, including Google, to launch, grow, and innovate. Fundamentally, net neutrality is about equal access to the Internet.

Let me repeat that last point again.  Fundamentally, net neutrality is about equal access to the Internet.  To hear GOOG tell the story, it shouldn’t matter how much you are willing to spend on ads.  If their bot determines that you have a better landing page, then they can get you more traffic than someone who is willing to pay more for the placement.  Traditional media placement actually works the other way - you pay, you get the placement.  Demand determines price.  GOOG will no doubt claim that they are democratizing the web, because they are making millions of customers available to those who can make for a better customer experience.  GOOG is the arbiter of that experience, however, since they have little, if any, visibility into the conversion rates for traffic they send a business.  They have lexical analysis.  Businesses have hard numbers.  This is no doubt why they make Analytics available free of charge - a business’s traffic and conversion data feeds the GOOG beast, and gives them more data upon which to charge the business what they believe to be the appropriate price for a set of ads.

There’s the rub.  GOOG gets to charge you whatever they want for ad placement.  It doesn’t matter that the top link spot is going for $1 CPC.  If you are willing to pay $10, and have no prior historical data with GOOG about traffic or ads, they can decide, through the opaque process of their quality score and the fallback excuse that your landing page didn’t pass muster, to charge you $100 for top placement, or not let you advertise for that ad word at all.

GOOG doesn’t want the network providers to create a tiered Internet based on who they decide should be on whatever tiers they set up, but GOOG are in fact doing that very thing.  If GOOG can arbitrarily decide who gets a link off their search result page, they are the de facto arbiters of commerce.  It’s as if a mall operator showed up to a store the day after they opened, walked in, looked at their layout, and said “you now have to pay 10x the rent because I don’t think people will like coming in here.”  Further compounding this issue is the lack of clarity in the algorithms that GOOG uses.  There is no playbook by which a business can refer that enables them to know with certainty that if they do X, they will get Y result.

Which brings me to the curious case of “Let’s Make a Deal.”  Business owners don’t know if they should take what they have and understand (traditional advertising), or what’s in the box (GOOG ad words).  The box can be mightily seductive, but it can also bring ruin.  Play your cards right, and you get great rewards.  Play them wrong, and you go home with nothing.  GOOG now has close to 70% share in the search market, making them an undisputed monopoly, and, more abstractly, the new version of Monty Hall.  I’m not a huge fan of the government taking on the task of deciding who is and who is not a monopoly, having myself been deposed in the Microsoft anti-trust case.  I believe that customers and users will dictate where the market goes.  With that said, this is an angle on the story which I have not seen anywhere, and I hope more people start asking the hard questions around GOOG’s role as a portal to commerce, and their hypocritical role as the white knight for net neutrality.

UPDATE

Not two seconds after I posted this, I find this article, courtesy Hacker News.  The article lays out, pretty clearly, that GOOG is even more hypocritical than I had thought.  They are approaching the network providers with a plan to allow GOOG traffic to operate on a higher tier of business.  Incredible.

Additionsl coverage can be found at RWW, and GigaOM.

It seems that whenever I am talking with entrepreneurs who are looking to raise money, or are recently funded, and they find out that I went through the entire startup life cycle, from inception to something of a crash to salvation through sale, they ask me the same thing: “what are some of the lessons?” or “what pointers can you share?”  Having read one of my more favorite bloggers for his irreverence, I was compelled to post.

It seems that they sometimes are looking for the one or two things that they can do that will guarantee, or at least dramatically improve, their probability of success.  While I don’t like to call things mistakes, but rather “opportunities for excellence,” I also try to look at things in as brutally an honest way as possible.  As such, in the true spirit of a postmortem, I try to focus on the negative.  Make a mistake once, and you are OK.  Make a mistake twice, and you are un-fundable.

Since I am now close to a full year out from having sold IMSafer, and have in fact been re-assimilated to Microsoft, I have had more than enough time to think about this topic.  There are many lessons, and I am happy to share those over a beer with whomever wants to listen.  However, there are two major mistakes that I made with IMSafer.

First, never, ever, take money from professional investors for whom this would not be a professional investment.  Most of my funding came from old friends and bosses who work in VC, private equity and hedge funds.  For them, they were investing in me, and not necessarily the company.  They aren’t angel investors by trade, though some of them make angel investments from time to time.  Unfortunately, even if they aren’t making the investment as a professional investment (i.e. part of their current investment vehicle), they will still expect to treat you like one of their portfolio companies.  If you consider the tax that this puts on a startup, especially a seed stage startup, you can quickly find yourself overwhelmed with what I affectionately call seagull management.  They will come in, make a lot of noise, crap all over everything, and leave.  It’s a very hard place to find yourself, especially when you know the most important thing that you need to do is execute, not managing a board and investors commensurate with a later stage investment.

This problem further manifested itself in the security that we ultimately closed on.  We spent a little more than 10% of the round paying lawyers for the complicated, ridiculous, onerous security that the investors put on us.  This is my own fault for allowing this to happen, but as I found out the hard way, things get rough when you need the money.  The closing documents were absurdly heavy, and we were required to go with a named Valley firm in order for the investors to feel comfortable the that deal gets done right.  When you hear “named Valley firm,” what you ought to hear is “expensive.”

Second, and this is a big one, make sure that your thinking and style, for the most part, line up with whomever is writing the biggest check.  If you take money from people, they are going to expect to have a voice in what you are doing.  This is even more the case the bigger the checks get.  When you have investors with strong opinions, things can get dicey.  When your single largest investor, who is most likely going to be on your board, has a very particular way of doing things, and very strong opinions, you are likely to find yourself at the losing end of decisions.  Why is this?  First of all, there is the success factor.  If that investor has had it (which is likely the case if they are giving you large sums of money), they tend to believe that they are right, as do others.  Further, the other investors, for their part, are going to want to align with each other.  One strong willed investor, with a lot of money on the table, can have very persuasive sway over the other investors.

I know in my heart that one of our critical errors as a company (a post for another time) can absolutely be chalked up to this dynamic, and my inability to stick to my gut and disagree with the investors cost us dearly.  Hindsight is always 20/20, but I knew better, and I allowed myself to be blinded by his success aura and let my self doubt dominate my thinking. 

I’ve been thinking about business models quite a bit lately.  Mostly because of the work I am doing on cloud services.  In fact, many of the conversations I have been having at our Worldwide Partner Conference over the last few days have specifically focused on cloud compute business models.  I am going to put this out there, and let the VCs be damned.  There’s a reason that “free” and “fail” both start with “f” and have four letters.  “Free” is my new four letter word.  A business model that is based on free is frail and bound to fail.

At some point, the tyranny of the free has to go away.  Mashable had a similar article just the other day.  37Signals hammers on this point constantly.  It’s real simple, as far as I am concerned.  Make something, sell it, make more, and then sell more.  It’s a nice virtuous cycle.  I have lost count of the number of partners with whom I have met this week who have multiple millions of dollars in revenue attached to coding (ISVs or custom application development).  Selling ads against your app requires scale.  Scale comes to a very small number of apps.  There’s a ton of software left to be written that will never be used by enough people to be ad supported.

I want to offer the following: The free movement is completely wrong minded.  I speak from personal experience on this one.  The company I just sold has software+services that are completely free.  In just 14 months, we signed up 150K users, but the app didn’t have an engagement model that supported high numbers of page views.  We listened to one very loud board member who insisted that we be free and never charged for the product.  In the end, we sold the company (for a good result), but we were on fumes.  Developers need to be paid, and they don’t accept page views.  Had we started charging from the outset, I suspect we would not have sold so soon.

In the next few weeks, I plan to have some posts on the business models that are out there and what probably makes sense around cloud compute, but we, as an industry, have to refocus on solving real problems, and charging money for those things.  The penny-gap is getting harder and harder to cross with so much downward pressure on pricing from people who are willing to give stuff away for free.

So, I’ve been a bit MIA as of late.  Pretty bad actually.  There’s been a ton going on, and I can get to all of that later, but I’m back, and hopefully I will have plenty to share in the coming weeks.  I am at the Structure08 conference right now and heard a great one-liner from the co-founder of Salesforce.com:

 ”free pricing model”

Correct me if I am wrong, but how do you put the word “free” in with “pricing model?”  Presumably you need to have an actual price to have a pricing model.  At some point, people are going to come to the realization that you cannot give stuff away for free and expect to be in business.  You cannot expect that the services on which you base your business will be free simply because you think that is the “open” thing to do.  People got bills to pay.  Free leads to disaster.  Just ask the mortgage guys about all that “free” money they’ve been handing out, and what the end result has been.

I had a great conversation today with Kevin Merritt of blist.  He was nice enough to get together with me as I get reintroduced to the Seattle scene.  It’s a weird thing returning to a city which you left almost a decade ago, but made much easier when people welcome you with open arms.

During the course of our conversation, we were talking about the shifting needs of getting product to market, and the skill set required of your marketing team.  This of course could take many, many pages of text to work through, but I think he summed it up best when he broke down the shift by stating simply: “people need to think about the difference between product marketing and product management.”

When most people think about marketing, especially engineers, they think about marketing communications.  They think about advertisements.  They think about press releases.  They think about Gartner’s magic quadrant.  That used to be the right way to think about marketing, because the means by which you could reach your customer were quite constrained, and marketers relied on the gatekeepers to the customers.  Namely the press corp and the analysts.

Times they are a changing, and marketers now have unprecedented access to their customers.  Think about it: 10 years ago, it was almost a ridiculous thought to think that a CEO would have a public forum discussion with customers about product features, limitations or directions.  The idea that for several cents per click, you could have your ad in front of customers looking for information pertaining to your product, in a specific city, at a specific time period during the day was the stuff of advertising fairy tale, and yet now it’s a simple matter with Google AdWords.

Product management is about reaching the customer.  Delivering to them the product that solves a need for them in an exceptional way.  This requires close quarters conversations with your customers to really understand their pain points.  Assisting users in the product discovery continuum is a critical part of product management.  In a world with an increasing volume of products and features, how can you be heard?  Product management is about delivering the right message at the right time to the right person.  If you can’t assess those items, you’re in the wrong business.

I can speak personally about this because I was part of the team that built AskMe.  I was the very first employee and responsible for the consumer portal and our syndication business.  We grew the site to MediaMetrix top 150, and had a guy who isn’t credited (though should be) with inventing the sponsored link for search traffic.  My team was doing widgets with our content back in 2000.  The problem?  We had the right product with the right message at the wrong point in time.  We were Yahoo! Answers about six years too early.  Other examples include the Foleo (wrong product), Newton (wrong time) and the early days of the UFC (wrong message - no holds barred fighting vs. mixed martial arts).

Being a stellar product manager means adapting to the world around you, and using the new tools and communications channels to reach your customers, assess their needs and pain points, and construct the messaging for your product.  Yesteryear’s banner ad was yesterday’s AdWord is today’s social media portfolio will be tommorrow’s who knows what.  The key is to stay educated and stay close to your customer.

One of the common traps of any startup is hiring too many people too quickly.  When code is being cranked out and everyone is running around like they have had their heads cut off, there is a tendency to believe that every task needs to have a separate person assigned to it.  This is much more the case when you have engineers running the company.  They often make the mistake of thinking you need “lots of business guys.”  Trust me, as few of us as possible is all you need in a company.

This lends nicely to bringing up a conversation I was having the other day with a local entrepreneur who is trying to do a good old fashioned bootstrap.  Not only is he not going to raise any money (he has so far completely self funded), he didn’t hire out any of the development (he did it all himself over the past 12 months), and will be doing the cold calling once the product is ready.  When I asked him if he needed help, he said “yes,” but only so long as whomever comes on board works for equity and no cash.  That’s pretty hard core boot strapping.

His whole outlook on his approach is summed up in one statement.  “Watson, you are either selling or building.  Nothing else matters.”  His take on organizational development is that there is little need for anyone doing anything other than building the product or selling it.  He’s so hardcore that he would rather his demo be his slide deck - meaning no slides at all.  Product strategy means little to him unless it’s being dictated by people who are writing checks for revenue.  Search engine marketing is a wasted task unless the links are organic.  Like I said, he’s hardcore and going for the boot strap.

While I think his position is a little extreme, it does point to a very important success factor for startups - knowing that you should make do with less people, and the only thing that matters for your survival is either building the product or selling it.  In fact, when you ask anyone in a startup, from the receptionist to the CEO, what their job is, they should all say “selling.”  The selling culture is very rarely ingrained in startups, and this is a large contributor to the current mentality of thinking that business models either don’t matter, or can have an ad-supported model slapped on in the future.

I had a chance to get together with an old friend today.  It’s great to spend time with someone whom you haven’t seen in some time, but all the better when it’s someone with whom you went to war during the Internet bubble go go days.  We built a company together and watched our fortunes rise, and fall, together.  Good memories.

In any event, he said something interesting today with which I am not sure I completely agree, mostly because of his stringent application of the dictum, but I wanted to share.  In essence, he said:

Product feature ideas don’t matter.  The only place you should get product feature ideas is from someone who is giving you revenue.

That’s a very strong stance to take.  One that I think leaves little room for flexibility.  He’s in the process of building a nifty SaaS application, and showed it to me over coffee today.  Being the “product guy” that I am, I immediately started asking questions about the possibility of this or that.  He was quite quick to dismiss them by telling me the only product input he wanted was from people who were already paying him.

That leads to a tough development cycle.  How does one develop the initial product?  He’s had an iterative process of meeting with potential customers.  He shows them what he has in a demo, and then sits back and listens to what they have to say.  He processes the commentary and iterates through his development cycle.

While on some level this is the right way to go, there is the issue of  taking direction from the vocal minority.  Those most willing to share information, in some cases, may be in the minority, and therefore leading you down a path of development which doesn’t represent the mass market.  In this case, you may well find yourself with a great product for the first 15 people to whom you spoke. 

One of the things that I loved about being a program manager at Microsoft, AskMe and IMSafer was that I had the opportunity to design products that other people would use.  As part of the design process, you plan, mapping out what needs to be done, and setting a schedule.  The big challenge with any schedule is that you don’t know what you don’t know.

In and of itself, this is something of a tautology, and pretty much non-actionable.  In the instances, however, where you hit upon one of those things that you don’t know, well chaos can sometimes ensue.  The best you can hope for during one of these escapades is to contain the challenge and minimize the impact on the overall product and schedule.

These things that you don’t know can take many forms, but the ones that are the worst are the ones you don’t know how to solve, could not have prepared for, and basically throw up your hands and think bad thoughts.  I hit upon one of these challenges just a few weeks ago with IMSafer.

In dealing with people, especially close colleagues, you never know how they are going to react to adverse conditions.  There was a section from the Alex Garland book “The Beach” that applies here.  It’s called the “oh shit” moment.  You know that moment when you are playing a competitive video game…the one where you are about to die and there is nothing you can do about it?  How do you handle that moment?  Do you throw the controller?  Do you swear?  Do you get angry?  This somewhat simple, yet very primal, response tells a lot about a person.  The same holds true with venture investments.  How do people react when things start to go bad?  You don’t know what you don’t know, and this can really hurt you when you are dealing with delicate issues. 

Venture investments can be really stressful, and if you are going to get into bed with people, remember that you will see some pretty wild swings in your fortunes, so it’s best to really know how your partners are going to handle those “oh shit” moments.  We kept and XBox 360 in the office for just this reason.

It never ceases to amaze me how many smart people don’t seem to understand this one topic.  It’s basic MBA stuff, but even MBAs don’t get it.  Perhaps this is symptomatic of an era of easy financing and business models that make no sense, but I run into this issue even when speaking with colleagues seeking advice as to how to get their businesses charged up.

Cash flow is king.  If you learn nothing else during your adventures as a new venture owner, you must come to understand and appreciate just how important cash flow is to the health of your company.  There are many ways in which cash flow can and will impact your company, and I would like to lay a few of them out for you.

A question I get often from entrepreneurs goes something like this: “I am growing my revenues like crazy, but I just never seem to have any cash.  What is going on?”  Cash flow my friend, cash flow.  More specifically, as is usually the case with the folks that are asking these questions, operating cash flow.  Of the three financial statements that I look at when I consider investing in a business, cash flow is where I spend a lot of time when I see problems with a business.  As is often the case with a small business, managing the receivables and payables is critical to success.  The revenues that come in the door are only helping you, cash wise, if you are collecting your receivable.  If you aren’t, you have most probably already spent the cash to build your product for the customer.  In fact, you are probably getting called right now by your vendor looking for their money.

Your operating cash flow is chiefly governed by your current assets and current liabilities.  Any changes in these will impact your cash flow.  For example, if you are building up your inventory, it’s going to cost you money.  Sure, that inventory is available for sale, and it more or less represents money in the bank (in that you will - hopefully - sell it), but you still have to pay for it, and that uses cash.

As for your payables, one of the tactics that I tell my clients to explore is trying to take advantage of any early payment offers.  1% may not seem like a lot to you now, but when consider that on an annualized basis, that’s more than 12%, that’s not a bad use of capital.  This is because you were probably going to have to pay within 30 days anyway, maybe 45 if you stretch your payables.  By paying early, you are using cash, but you are also paying less.  Think of this as a free loan from your vendor at a very favorable rate.

It is also important to understand that a dollar today is worth more than a dollar tomorrow.  With that in mind, why would you allow the folks who owe you money to take their time paying you?  You wouldn’t.  Similarly, you would want to take as long as you can to pay your vendors, within reason of course.  This has to do with the time value of money, and the notion that you can invest that dollar you owe today and collect interest on it.  If you pay now, no interest.  If you can get the pre-payment option, that’s great, but if not, think about making sure money takes as long as possible to leave your accounts.

Cash is king.  Without it, you cannot operate.  Growing like a weed is great, but if you aren’t collecting your cash, you are going to hit a wall.  Knowing the number days it takes you, on average, to collect your receivables and pay your payables will give you a window into how your business is operating.  These tersm are usually called receivable days or days sales outstanding, and days payable.

One last note.  I bring this up only because I have seen this a few times and want to share.  If your receivables are going up faster than your revenues, then your customers aren’t paying their bills.  You see, if your revenues are flat, your receivables should be flat if you are collecting your cash from your customers.  If not, your receivables will grow, which is taking cash flow out of your pocket, and putting you in a position where you cannot have sustained growth.

Already I have posted about knowing whether or not you are starting your own gig for the right reasons, and knowing whether or not what you have is a product or a business.  Both of these items are critical to the success of any venture, but there is one factor that is at the top of my list of importance.  Talk to any other venture capitalist and they will tell you that the very first thing that they want to know about the investment opportunity is the management team.  I want to extend the axiom beyond simply those who are directly involved in the day to day operations of the business to the notion of the right team.

The right team is inclusive of your starters, your bench and your assistant coaches.  It’s important to understand that, from the first whistle, your starting team can get the points on the board, but the right team is what is going to get the points on the board during the fourth quarter.

Your management team (the starters) has to include folks that are also doing it for the right reason.  If they don’t share your passion for the product or service that you want to build your business around, then you have a problem.  In the early days of getting your company off the ground, you are no doubt going to be spending large amounts of time focused on the business, and without being surrounded by folks who can make decisions, and have the passion and drive to do the hours, you are going to hit a wall.  You simply can’t scale your available time.  Each of these folks should have complimentary skill sets to solve all of the problems that face a young company, but stack this team in favor of solving the problem of the actual product or service.

The worker bees (the bench) must also share your passion, but to a lesser extent.  You are going to need to surround yourself with people who can execute against your plan.  My experience has shown me that when you have too many people who are super passionate about a particular problem, you have a lot of “solutions” but not a lot of actual execution.  Worker bees tend to be a bit more steady and less volatile than passionate management.

The advisers (the assistant coaches) are some of the most important people that you probably didn’t think about asking to join your team.  My father once taught me one of the most important things I have ever learned.  He said, “son, you don’t need to always know the answer.  You just need to know where to look for the answer.”  Having industry veterans (where applicable and available) can certainly help shed some light on potential problems you may have with your business.  You should always think about how to approach people who might have relevant experience as potential advisers to your company.  Further, seeking individuals who have specific domain experience (lawyers, accountants, etc) will allow you to get your quick questions answered, most times for free, and save you a ton of time and frustration with issues that require professionals.

Key to hiring anyone who works with or for you is to seek those out who are smarter than you.  I have had the good fortune to have worked at Microsoft in its hay day, and was indoctrinated into their way of thinking as it pertained to hiring.  Always, ALWAYS, hire people smarter than you.  If you hire B team players, they will hire C team players, and you are in trouble.  In my experience as a board member and as senior management with startups, I have crossed paths with CEOs and managers who were more than happy to hire sycophantic workers who would yield to them.  It’s healthy to have employees push back on vision.  You, as the leader are there to provide it, but you must also know that you don’t know everything.  It’s OK to be the guy driving the bus, but don’t be afraid to accept directions.  That is why it is so important to hire people smarter than you.  You might actually learn something. 

The management team is very important.  Of that there is no doubt, but as an entrepreneur who is building a company, you cannot stop at just hiring the management team.  You have to think about the entire team that is going to get you through the fourth quarter, victorious.  The energy of your starters will electrify the crowds.  The rock solid play of your bench will keep you in the game when your starters get tired.  And the experience and training your assistant coaches bring to bear will provide the discipline to keep from making key fatal mistakes, especially at critical junctures.  Build the right team, and build it smart.