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Shop talk on "intricately managed miracles" and early-stage subculture edited by four professionals in the throes of growing and funding early-to-mid stage tech companies.  For bios and other goodness click here.

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The Five & Dime
Sunday
Dec192010

The EarlyStager Secret Santa

For our final post of 2010, we asked 20 friends from various corners of NYC tech to select virtual gifts for each other. As hoped, thoughtfulness, hilarity and randomonium ensued. Happy Holidays everybody!

-- Beth, Emily, Alexis, Sarah

P.S. Props to our awesome gifters for participating...a grateful shout out to the talented Krystle Mobayeni for rocking the design & layout...and much appreciation to NY Mag for continued inspiration.

Monday
Nov222010

Business Development - The Basics

In large companies, business development usually means establishing and managing strategic relationships and alliances  with other companies.  Despite whole departments focused on this, it often remains a mystery as to what they actually do.

In early stage companies, the definition is a lot more fluid, but in general is an opportunity to test products or theories, gain some customer traction and make some money.  It is often the early stage company that can be flexible and creative enough to get some of these deals done.

Early stage companies are often paralyzed on this front.  The team is so busy thinking about and building the product and getting adoption (both very important) it is easy to miss potentially big opportunities with partners, licensing or other arrangements that would allow the business to reach new customers or extend the product or brand into other areas.

Here are some thoughts on approaching business development:

Keep your company’s goal(s) in mind.  Examples include (and likely in this order): 

  1. Attracting new customers 
  2. Penetrating existing or new markets 
  3. Generating revenue

Be creative.  The best deals are the deals that haven’t been done before.  This is a huge competitive advantage for early stage companies and few take advantage of this.  Help your potential partner think about their business in a different way, show them opportunity, help the guy on the other side of the table look smart.

Find the decision maker Don’t start discussions until you know who makes the ultimate decision.  Although not a requirement, it is always better if this person is part of the discussions.  Limiting the number of people who can say “no” is not a bad tactic either.

Make a real connection.  Not unlike dating, you want to make a real connection.  Do your homework, find out everything about their background, if they have kids, and what their interests are.  Make the effort – visit the partner in their office and don’t make them come to you (or worse, if you are an early stage company, a random coffee shop).  Treat your potential partner with respect, address their needs and genuinely care if they are successful.

Focus on execution.  Don’t walk in to the meeting with grand ideas, but grand ideas and a way to get those ideas into reality.  The “how” will help keep the door open for further discussions. It will help to have a quick discussion with your tech team before entering into the conversation to get a sense of what you can and can’t offer and the level on investment or difficulty.

Create solutions.  Early stage companies are inevitably resource constrained and are not optimized for partnerships. Superstars don’t complain that they can’t get a particular feature created or partner highlighted.  Superstars figure out what they have at their disposal, what can and can’t get done within the team and create opportunities to optimize these strengths.

Always on the lookout.  I’ve seen this described as “sitting in the exit row” or “never eating alone.”  It is the idea that you should be creating opportunities to meet to people, get ideas, or find the next potential partner.  Sometimes you will be surprised where you will find them.

The best business development deals are the deals that bring value to both sides.  The more value you bring to your partner, the more leverage you ultimately have.  These are just a few tactics that I could think of this morning…

 



Thursday
Nov182010

Measuring User Engagement with Cohort Reports

Getting a reporting infastructure in place is always a challenge because it requires dev resources.

The good news for your beta period is that you can save your dev hours for features - you don't need a big dashboard report right now. Just focus on measuring user engagement.

Why? Because beta is all about nailing product/market fit and your on-boarding process – and user engagement is the metric that most directly reflects both.

There are 2 critical reports to measuring engagement. The first is a blunt instrument; the second more parsed out – and during beta, lots more useful.

Here’s how they work.

1.       Rolling % Active

The idea here is that you want to get some sense of what % of your overall user base is active in any given week or month. The calendar week or month is an artificial and rigid way to measure engagement activity. So instead of saying ‘50% of our users were active in November, vs. 45% in October’ – you generate a weekly report showing the rolling % of users active in the past 7 and 30 days. It gives you a smoother curve.

While overall % active is clearly a key stat, it has some shortcomings especially during the beta phase.

The primary shortcoming is that you can’t tell *which* of your users are active or inactive.

For example, are your active users mostly just new sign-ups who go nuts with rookie enthusiasm for a few days and then go silent, or are they your old powerhouse users who’ve been with you since the start -- or both?

Relatedly, an overall % active number doesn’t allow you to easily map engagement fluctuations to product changes. For example, have users who signed up after you implemented some new on-boarding technique engaged better than the users who signed up before that technique was implemented?

Also, I think it’s common during the first 12-24 months of a new product to have some subset of people sign up, go dormant, and then come back as real, engaged users x months later (it took me at least 9 months to actually start using Twitter, and I’m still dragging my feet on Evernote). An overall % Active metric won’t give you a sense of whether or not the initial sign-ups who did not convert to active users are coming back to you over time - or just staying dormant.

2.       Weekly Sign-Up Cohorts

Cohort reports are the best way to get behind the overall % Active stat and understand which users are active in any given time period.

The best way to understand cohorts is to look at an example.

Let’s say you launched your product on October 4th and have therefore been live in beta for 6 weeks. The following report shows for every week you’ve been live – how many people signed up each week, and how many of those users (per weekly sign-up cohort) remained active in each subsequent week:

(*these numbers are goofy btw, just trying to show the concept)



So if 30 people signed up in your first week of being live, then per this report, 14 of them were still active 6 weeks later.

Notice that of those first 30 sign-ups, lots of them went dormant in weeks 2-4, but came roaring back in week 5. Why did they come back? Maybe you implemented your weekly digest in that 5th week and reminded users you existed. Or maybe social proof kicked in and they realized how awesome you are.

Whatever the causes – cohorts let you map product or marketing activities to user engagement outcomes.

Note that you can run these *monthly* as well – so for all users who signed up in any given month, what number of those users are still active in each subsequent month.

There are lots of other helpful ‘flavors’ of cohort reports that you can easily churn out once you’ve got your basic queries in place. The most obvious of these is % of users active. This is really the same report as above, just showing % of each cohort active instead of absolute #, like this:

The cool thing about the % view is that you can benchmark engagement very easily week to week. So in the above report, look at the ‘Week 2’ column. The November 1st cohort is doing lots better in its second week than the October cohorts. Maybe you tested a new tutorial video that week – looks like it worked!

Although I won’t get into queries, one fundamental input to mention is your definition of ‘active user.’

As a product person, I always want to define ‘active’ very narrowly or stringently - but as big Rick Eaton always says, you don’t get points for ‘difficulty level’ in the active user contest :) Maybe more on this in another post.

At any rate – cohorts are helpful. Hope it makes sense! (Also interested what other folks are doing to measure engagement out there.)

Wednesday
Nov032010

The Curbed Chronicles: Don’t be a Jerk & Don’t Quit Your Day Job

The Curbed Chronicles are my attempt to share a few lessons learned from the early days of Curbed.com

To set the stage, I wrote a rather lengthy, navel-gazing first post about The Road Trip that Started it All, with the obvious but crucial observation: start a company with people you trust & admire.  I followed this up with Taking the Plunge.  I’ll conclude this rambling series with one obvious and one perhaps-not- so-obvious lesson learned (you decide which is which).  

5. Don’t be a Jerk 

File this one under Lessons Learned in Kindergarten that Could Bear Repeating.  Often.  The world is full of people who act like jerks in the office.  I’m sure you’ve worked with them before.  They made your day-to-day miserable.  Did you found or join a start up in hopes of working with more?  No and neither did your colleagues.  Can working at a startup be frustrating? Yes. Enough to drive you crazy at times and say things you regret? You bet.  Solution: figure out a way to treat people with respect while still having a backbone.  It can be done.  My colleagues remind me of this daily.  Love them.

6. Don’t Quit Your Day Job – Yet

For the first couple of years of Curbed, the founding team retained our day jobs, dedicating night and weekend hours to our so-called aggressive hobby (fully disclosed to employers). During that time, (although some of us may not have been dating much or going to the gym) we were able to build traffic and grow revenues, which helped us raise angel funding.  Importantly, we also strengthened our conviction in the viability of the business and our ability to work together, both of which have helped solidify our foundation ever since.   

As a result of this experience, I’m a big fan of keeping your day job at least through some viability proof point. As are others. In addition to a steady salary and benefits, often your day job can provide professional development opportunities, especially if you’re a younger entrepreneur. 

When Lock, Eliot and I started Curbed, there was an obvious a bucket for everyone: editorial, tech, operations.  Today Josh Albertson runs the operations side of the house as General Manager. While this is a role I could probably do if push came to shove, it’s a role I gave up by keeping my day job and not joining the company full time when we raised angel funding.  Thank goodness I did.  Josh is awe-some.  Having Josh there to ensure the theoretical trains run on time, on the right tracks, and with the right balance of fuel, cargo and liability insurance, allows me to focus on what’s going on away from the station.  I’ve never been happier professionally and I attribute that to my amazing colleagues and working with them to craft a role for me that suits my strengths, my intellectual interests, and the company’s needs.   

Read more about joining a startup in The Business of Tech.

 

Tuesday
Oct192010

The 6 "Cs" of E-Commerce

e-Commerce is red hot with trend-setting companies like Gilt Groupe, Rent the Runway, Groupon, and others leading the way.  To be successful in e-Commerce however, you need to be maniacally focused on the metrics of your business.  Here are 6 “Cs” that provide an unparalleled window into the health of your online retail business.

Company Net Promoter Score, or NPS, is a customer loyalty metric developed by Satmetrix, Bain & Company, and Fred Reichheld. This score is determined by posing a simple question to consumers; it’s a query designed to screen for customer loyalty. Consumers are asked, “On a scale of 0 to 10, how likely is it that you would recommend our company to a friend or colleague?” Consumers offering a rating of 9 or 10 are anointed “promoters”, implying they could heavily promote the company to others. Those who give a rating of 7-8 are “passives”—maybe they might not do anything. Those at the lower end of the scale, with ratings of 0-6, are dubbed “detractors,” since they might speak ill of a company and hurt its prospects with other potential customers. 

A company calculates its overall net-promoter score by subtracting its percentage of detractors from its percentage of promoters. So, if 65% of an e-commerce firm’s customers rank as promoters, and 15% as detractors, the firm’s overall NPS would be 50.  You should ask every customer this simple NPS question after they’ve received their shipment. 

Track and monitor your NPS every month and discuss it in your management and board meetings.  Slice and dice the metric to study specific people who have interacted with your customer-service team or who processed a product return.  You’ll be surprised by the insights that will jump out. Check out netpromoter.com to compare your score against the best brands on the planet, like Amazon, Apple and Google. Tracking NPS is invaluable. 

 

Customer lifetime contribution, or CLTC.  We define CLTC as the net present value (NPV) of the profit from a customer’s purchases.  Remember to include all the sales that result from a customer’s repeat visits, less any associated costs to service the resulting orders (include variable costs like COGS, credit-card processing fees, shipping, warehouse-order processing, etc).  A profitable customer will have a CLTC in excess of its customer acquisition cost (CAC).  Treat these profitable customers well.

Once you have a good handle on this metric, you shouldn’t be afraid to spend until the marginal CAC (your CAC to acquire the next customer) approaches the CLTC of your next incremental customer, even if it costs more to acquire that new customer than you recoup on his or her first purchase.  Note: This doesn’t mean you should spend until the average CAC approaches your CLTC.  Rather, you want to spend to acquire customers until your marginal contribution (CLTC – CAC for each new customer) equals zero. Anything less is under-investing in your business.  In the beginning stages when you’re not sure what your what your customers’ repeat purchasing behavior will be, track your customers Average Order Value (AOV).  In fact, AOV is a great leading indicator for CLTC regardless of the stage of your company.

 

Customer acquisition cost (CAC).  This is quite simply your fully-loaded average cost to acquire a new customer.  You should track this over time.  However, averages can be misleading; not all customers are created equal.  You’ll always have one group of customers that come back to your site multiple times and are profitable to you. Others may come once, perhaps pick up some of your lower-margin SKUs—and never return.  Remember: Your goal is to optimize CLTC minus CAC.  This means that trying to keep your CAC down is not always your best bet: Sometimes your better customers (those that return and/or buy higher margin SKUs) are a little more expensive to acquire.  But they’re worth it.  If your current average CLTC is at least 2.5X your average CAC, and most of that comes in year one, you’ve got enormous upside potential.  

 

Conversion rate.  For most e-tailers, the relevant conversion rate is the percentage of new visitors that convert to buyers.  Here, traditional blocking-and-tackling concepts like streamlined landing pages and fast page-load times are king.  If you want to take this metric to the next level, you should think of your conversion rate as a conversion of visitors to revenue producers (not necessarily to buyers)—or, better yet, to gross profit contributors.  Essentially, what you are trying to measure is how much money you make from each visit to your website.  It’s the equivalent of the eRPM (effective revenue per thousand impressions) most Web publishers use to measure their businesses. But here, we suggest eGPV (effective gross profit per visit).  Compare the eGPV for all of your visits, and tweak the site paths that are falling below the average.  Adding additional revenue streams such as on site advertising may help to optimize this metric.

 

Churn. Yes, e-commerce businesses have churn too!  This is the percentage of visitors to your site that don’t come back to buy anything else. You should also, of course, track the number of monthly visitors who are returning customers. 

 

Cash-conversion cycle and return on capital. Only the simple-minded focus on the P&L statement. No one cares what your profits are if you don’t generate any cash flow. Online retail can be tricky because there are lots of ways to burn cash even when you’re generating income-statement profits. Inventory and warehouse equipment can consume a lot of cash, particularly during periods of high growth. The best online retailers actually boast a negative cash-conversion cycle.  In other words, they get paid by their customers before they have to pay their suppliers. Amazon and Blue Nile have negative cash-conversion cycles, so it’s perhaps not surprising that these companies have the most attractive valuation metrics in the online retail industry.

Be aware of this, and make smart tradeoffs between vendor-discounts and stretching payables whenever you can.

 

This post is an excerpt from a 10-series post on my blog, BVP's Top Ten Laws of eCommerce.