Monthly Archives: April 2011

Vote for ‘shft’ for a Webby

We began a project with Adrian Grenier a couple of years ago, but it stalled out for a bunch of reasons (mainly because ShopSavvy took off so fast). Adrian’s got a new project to support sustainability thoughout pop culture called ‘shft’. He reached out to me earlier today and let me know his company was nominated for a Webby and asked that I ask you (i.e. my buddies) to take a minute (and it will take a few) to vote for ‘shft’. Here is the link: http://t.co/H0szH9S. There are only two days left to vote. Winning the Webby will help them open the doors they need to succeed. Thanks!

Screwed up incentives in the Valley

Connie Loizos wrote a piece a couple of days ago titled, “Concern Grows Over Founders Cashing Out Too Much, Too Early.” Evidently investors in the Valley are allowing founders to ‘cash out’ as they are making their first investments. Investors like Paul Kedrosky think the practice is insane suggesting, “It [isn't] just an alignment issue; it just shows terrible judgment.” I couldn’t agree more. I have heard all of the arguments on the other side, but I would never participate in a deal where the founder cashed out before I did. Of course I clearly don’t understand how to make it in the Valley and these are the deals investors are doing.

So what about the opposite type of deal? What if an employee of a startup wanted to buy MORE stock in the company he was helping to grow? If it was my company I would be pumped! Buy as much as you want in my opinion. How about in the Valley? You would fire him. That is exactly what happened to Michael Brown a former Facebook employee. After he joined the company he decided to ‘double-down’ on Facebook and invested $100,000 of his own money at a $50 billion valuation. Facebook’s response? First they suspended him and then terminated him. Evidently the company has a prohibition on buying company stock. Again, I understand all of the potential implications and reason you may not want this sort of activity to go unchecked, but come on. Surely Facebook could have figured out a way to forgive Michael Brown, right?

When should you raise money? NOW!

Garrett Camp, the co-founder of Stumbleupon, recommends, “Stay self-funded as long as possible.” I think I have been quoted saying the same thing, but over the past year I have come to realize that you can wait too long to raise outside capital.

When I founded LayerOne I raised money first and then built the company. Since then I have been starting companies using my own money including my latest company – ShopSavvy. Our investment strategy is to look at the company each month and determine if it makes sense to keep investing. While we have the resources to grow the business there is a limit to those resources and I think it might make sense to raise outside capital to increase the pace of growth. Ironically our success in user growth and engagement makes it more difficult to raise money from early stage investors. It is not uncommon to hear a VC suggest that he wishes he talked to us earlier.

We have grown a lot on a small amount of money ($1.7M to date), but sometimes I wonder if it would have been smart to raise outside capital a year ago. Raising outside capital provides credibility to your business giving you instant access to the blogosphere (TechCrunch, VentureBeat and so on) and access to potential employees who pay attention to what deals investors are betting on. Using your own money doesn’t win you any access, credibility or friends.

The upside to not raising outside money? You don’t have to raise money. Tim O’Reilly said, “Money is like gasoline during a road trip. You don’t want to run out of gas on your trip, but you’re not doing a tour of gas stations.” Raising money makes me feel like I am visiting LOTS of gas stations – usually not getting any gas.

If I had it to do all over again I would have raised a small amount of money (perhaps $500-700) from a few smart angels (several asked me to invest and I turned them down) right at the start. These early investors are valuable for a few reasons a) potentially great advice, b) potentially able to refer potential hires, c) potentially able to make referrals to VC firms and (perhaps most importantly) d) social proof that the deal is smart. Within a short period of time, perhaps 6 to 9 months I would have done a $5M series A investment from one tier one firm (perhaps with a co-investment from a strategic). Now we are all in the boat together until it makes sense to raise the huge round or do a strategic deal.

Startup Pressure = Ethical Dilemmas (Update)

Pascal said, “Things are always at their best in their beginning.” I think the reason they are ‘best’ is because they are simple. When you start a company everything is black and white. Over time things become more and more complex and the ‘right’ decisions are not always obvious. I would argue this makes doing the right thing from the start that much more important. Kirk O. Hanson from Santa Clara University wrote a piece titled, “A Good Start, New Ventures Can Make Ethics Part of Their Business Plan” where he argues that ethics play a critical role in the first months and years of a company’s existence and I agree. When a startup takes institutional money from Venture Capital firms these early, pre-funding, ethical decisions will guide the future of the company (think Google). Once a VC has invested millions in your startup there is enormous pressure to grow – pressure that tests an entrepreneur in many ways. When I was in my 20′s running my first venture-backed startup I can remember doing things I knew were wrong for the business because I was being pressured to go faster.

In the business I run today, the mobile app business, both Apple and Google have decided to penalize bad actors who ‘game’ their app store rankings. While these games aren’t illegal, some of them are clearly not ethical. Companies who engage in these games don’t think they are hurting anyone, but they might be surprised to hear they are hurting themselves as well as other companies/developers. For example, ShopKick, a well funded ($20M+ from Kleiner Perkins and Greylock) startup, has an extensive paid download program to help drive downloads on iOS and Android. I did a little research on the CEO of ShopKick, Cyriac Roeding, and got a chuckle when I learned the Times called him “Handsome, Perfect.” While they may have compared his looks with Cary Elwes in the Princess Bride I would argue his ethics are more inline with Prince Humperdinck.

You might be surprised to know that Cyriac and his team at ShopKick have engaged app-assassins to target popular shopping apps like our own ShopSavvy. These ‘app-assassins’ include comments in the app store that recommend downloading ShopKick and often give assassination target in question a negative rating. In the Android Market, until recently, every third or fourth comment on ShopSavvy was from a ShopKick app-assassin (read more about that here). For months we knew ShopKick was negatively impacting our comments, but didn’t think there was anything we could do about it. Eventually Google stepped in and began removing ShopKick’s comment spam from our comments, despite this ShopKick continues to add new comments each day.

I don’t think Cyriac ever assumed he would have to resort to hurting developers like us or tricking consumers into downloading his app, but I can’t imagine how much pressure he is under to deliver. I would argue that while these methods might produce results that appear to be positive in the short term, consumers (and investors) aren’t fooled for long. What sort of impact does this have on a startup’s future? What sort of people want to work for a startup built on these bad acts? I wonder if Enron and Worldcom started out like this – the founders making a few unethical compromises snowballing into massive frauds. Take it from someone who has made this mistake before, avoid the easy path – your company and your soul will thank you.

UPDATE: Cyriac commented, emailed and called me to explain that he had nothing to do with the ShopKick Comment Spam issue we (and other apps) have been dealing with. If ShopKick is not to blame who should we blame? He argues that his ‘app-assassins’ are acting on their own without the consent of ShopKick. Cyriac’s own explanation details how ShopKick has created an incentive system that rewards their users who engage in comment spam and yet he suggests there is nothing he can do about it. See how the lines get blurry? Cyriac and his team have designed a program that causes their users to damage their competitors apps and yet his hands are clean – ‘sorry, nothing we can do about that!’ I responded to Cyriac directly and have asked him to come up with a plan to stop this from happening in the future. If ShopKick cleans up its act I will be the first to one to congratulate him (and update this post a third time).

UPDATE 2: Cyriac and I exchanged a few more emails and the NET NET is that he is willing to discuss ideas to try to solve the issue ONLY if I remove this post. In the end he insisted that ShopKick has ZERO responsibility. Even if we take Cyriac at his word he admits providing compensation to those who engage in comment spam. He admits that his terms of service prohibit comment spam and that they have punished certain bad actors. Obviously they realized there was a causal link between their incentive system and the comment spam. I would argue that it was a foreseeable outcome, but the argument isn’t needed because Cyriac has been (and is currently) aware that his program is the DIRECT CAUSE of the comment spam. The answer is easy. STOP OFFERING THE INCENTIVE UNTIL YOU CAN STOP THE DAMAGE TO OTHERS. As Bob Newhart would say: STOP IT

Bob Newhart – STOP IT! from Kevin Kinchen on Vimeo.

Regulate and Tax Online Poker, Don’t Send it Underground

Today the Obama administration effectively shut down Internet poker in the United States by indicting 11 people including the founders of three of the largest sites. The crackdown makes almost no sense. Some form of gambling is allowed in all 50 states – many states like California allow poker rooms. I contend that two things are true about online poker: a) poker players will find a way to play poker online and b) the more the government cracks down on online poker sites the more corrupt the poker sites will become (only criminals will be left to run online poker sites).

Almost a decade ago I began watching, studying and playing poker. I read more than 15 poker books and half as many books on game theory. Mostly I played in LA and Vegas, but sometimes I would play in a card room here in Dallas and even once in the Aviation Club in Paris. I even tried my hand at online poker. I placed 74th in the Legends of Poker tournament at the Bicycle Casino in LA. Poker requires an enormous amount of concentration and attention to detail and I just didn’t have the stamina or the desire to play at the level I wanted to play at. By 2005 I decided I there were easier ways to make money – i.e. starting companies.

While I played around with online poker I was quite concerned that I might be a) playing against a bot or b) the online poker room was somehow cheating so I stayed away from the practice. I assumed that eventually the Federal government would get their act around to regulating and taxing online poker paving the way for recognized casino brands – like MGM to get into the business. Nevada does a great job regulating casinos and I figured that they would do similar job regulating online poker rooms. I was wrong. Instead of regulating online gambling the Federal government made it illegal to accept electronic payments for internet gambling in 2006.

Despite the law more than 15 million Americans play online poker for money. The current crackdown on PokerStars, Full Tilt Poker and Absolute Poker takes the three largest poker sites out of play. Major casinos like Wynn and Station Casinos have had to end their partnerships with these sites. The only guys left standing are the real crooks and as a result Americans are going to get cheated. Senator Alfonse D’Amato responded to the Obama administration’s decision by explaining, “Online poker is not a crime and should not be treated as such.”

I agree. The Federal government should get out of the regulation of online poker – leave it to the states to regulate.

 

Pitching the VC and not the Business

Many entrepreneurs spend a lot of time working on their ‘pitch’ only to fail miserably when they finally deliver it to a venture capital firm. I think many entrepreneurs are so fixated on their delivery they fail to pay attention to their audience.

In high school and college I spent a LOT of time participating in competitive cross examination debate. Very quickly it became apparent that being ‘right’ wasn’t as important as making the judge ‘right’. Many of my contemporaries spent a lot more time working on their affirmative and negative arguments on the debate topic than I did. In most cases their research was superior to mine, but I learned that if I watched the judge’s reactions to my arguments AND modified them on the fly I could beat them more often than not. Almost everyone reveals their feelings through large and small facial and body expressions.

In debate it is very important to start pairing down your arguments as quickly as possible. We used to call this ‘crystallizing’ the debate. Almost everyone reveals their opinion of what you are saying in real time and more often than not they reveal these opinions in very obvious ways. Start by watching the muscles around the eyes. Raised brows or tension between the brows can tell you he isn’t buying whatever you are selling. Some people purse their lips or roll their lips to signal disapproval. There are million facial clues to watch for. The same is true with overall body language. Most people, if they really pay attention, can easily determine what is working and what isn’t working – even if it doesn’t come naturally to you, you can buy a book on the topic and train yourself to look for the clues.

Figuring out whether or not a high school debate judge or a VC is buying what you are selling is pretty easy – the hard part is being able to pivot in real time. Sometimes a pivot is as easy as simply dropping an argument or proposition that isn’t working. In other cases makes sense to flip your position 180 degrees – of course it is risky and may cause your audience to assume you are an idiot. Acknowledging your audiences revealed bias is VERY powerful if you can pull it off. In most cases it is simply best to move on or ‘crystallize’ your position around the points your audience seems to be buying. Finally, there are some arguments or positions you HAVE to win and in those cases you need to let your audience know you know they don’t agree with you. Sometimes explaining that you used to share their opinion, but that somehow your understanding evolved as you began to understand the issue can help you win them over. Of course this tactic RARELY works as most people don’t want to be convinced. They believe what they want to believe – often times for very good reasons.

Entrepreneurs seem to have a VERY hard time altering their pitches in real time. If you have a hard to pivoting on the fly, the next best tactic is to alter your pitch between pitches. For example, most venture capital partners in the Valley read from a very similar playbook – literally they read each other’s blogs, Twitter and Facebook feeds. The facial and body ques you get from one VC will help you find the right way to pitch your business to the next VC. If your pitch isn’t changing between meetings (assuming the first VC didn’t fund your deal) it is unlikely you are going to get funded. Figure out the playbook and start pivoting.

Startup Myths: Twitter

Have you ever started a company? The who, why, what and where often become muddled the farther you get from the start. Over the course of a startup there are usually several course corrections. Each time a team makes a correction they often alter the ‘history’ of the startup to fit their new course. First of all, there is very little reason to go back through dirty laundry. What happened in the past can stay in the past, but partners, employees, reporters and investors all like to hear ‘a’ story about how you got started. There may be ten different stories before (if you are lucky) you finally make it to where ever you end up. It is very likely you can’t even remember how you got started or what crazy path it took to get there.

I began using Twitter four years ago (a pretty late start among my peers) and I even used Odeo (we built a company to leverage Odeo’s space). Nicholas Carlson wrote an interesting story about Twitter’s REAL history titled, “REVEALED: The Real History of Twitter” where he described how the official history of Twitter differed greatly from the actual history of Twitter. He also wrote a second piece titled, “Exclusive: An Interview With Twitter’s Forgotten Founder, Noah Glass“.

I don’t think Ev, Biz or Jack tried to exclude Noah from the history of the company, but from their perspective he really wasn’t part of THEIR history of the company. Over time as they told the story of the founding of Twitter over and over the narrative didn’t need to mention that early on Noah and Florian helped build parts of the company. Their names weren’t relevant – to anyone other than Noah and Florian. I guess that is just how it goes. History is written by those who remain – I like to think of them as ‘Startup Myths’.

Nicholas Carlson did some great reporting and after reading the articles Evan Williams tweeted:

“It’s true that @Noah never got enough credit for his early role at Twitter. Also, he came up with the name, which was brilliant.”

Ev didn’t respond to requests to be interviewed, but his Tweet was a perfect response. In the end he gave Noah the credit he deserved with just two sentences. The Twitter Startup Myth will be forever changed. Congrats Nicholas and Noah!

Erasing Houston from Space History

I was disappointed to hear that the Obama administration decided not to send one of the retired Shuttles to the home of Shuttle mission control – Houston. I was almost angry when I heard that the administration decided to dismantle almost ALL of the existing shuttle related installations in Houston to send them to New York and Los Angeles. Obama, when confronted by reporters indicated that some of the Shuttle artifacts would be sent to Houston – 2 seats from the flight deck of one of the shuttles.

When I was in Junior High School we lived just off of NASA Road 1 the home of the Johnson Space Center on the outskirts of Houston. Growing up everyone I knew had some connection to NASA and the Space Shuttle program. I recall cookouts at Pinky Nelson‘s house – Pinky was an astronaut who flew on the Challenger, Columbia and Discovery. Another friend’s father helped design space food for the shuttle and I can remember getting to test it out from time to time at lunch. From my perspective Houston was NASA and vice-versa. Every single Shuttle astronaut trained in Houston and 35 still live in the area.

Over the years I have returned to Houston to share NASA with my son. Touring mission control, the massive testing areas, enormous training pool and rocket displays inspired me as a child and have inspire my son. Ethan was so inspired he convinced his mother that he and I should attend Space Camp in Huntsville Alabama last summer. Sadly my three year old daughter won’t be able to visit the NASA I remember. Not only has this administration gutted the space program overall they have decided to erase its legacy on the community.

Members of Congress have indicated there will be an investigation into the decision, but at the end of the day it is Obama’s decision to make and he has made it. Houston is getting its own taste of Chicago politics and as a result will be erased from the history of the Shuttle program.

Several of the relatives of Challenger and Columbia astronauts who died in the service of their country offered Obama these thoughts:

“We are heartbroken to learn of the decision that the Space Shuttle will not be allowed to return home to Houston. Home is where the heart is, and Houston has served as the heart of the space shuttle program since its inception nearly four decades ago. All the astronauts lost were Houston’s residents. We again share a collective loss as a result of the political decision to send the space shuttle elsewhere. We had prayed that the incredible sacrifices this community has endured would have allowed the shuttle’s legacy to continue here. Although we disagree with this decision, we will persevere in our support of space exploration, just as we have done in the past.”

The statement was signed by Evelyn Husband Thompson, whose husband Rick commanded Columbia in 2003; Jonathan Clark, husband of Columbia astronaut Laurel Clark; Sandy Anderson, wife of Columbia’s payload commander, Michael Anderson; Lorna Onizuka, whose husband, Ellison, died on Challenger in 1986; and Cheryl McNair, wife of Challenger astronaut Ronald McNair.

UPDATE: Watch this video to see the Shuttle’s as they are awarded. The final award goes to NYC over Houston and the crowd is stunned – crying out in surprise:

Tears from from people who learned that Houston wouldn’t get the Shuttle:

CEO of Space Center Houston Response to the Shuttle Announcement:

Greater Houston Partnership Response to the Shuttle Snub:

Texas Senator John Cornyn said this decision not to give Houston a shuttle “is an affront to the thousands of dedicated men and women at Johnson Space Center, the greater Houston community and the State of Texas, and I’m deeply disappointed with the Administration’s misguided decision.”

Passive versus Active Check-ins

ReadWriteWeb has a post titled, “2011: The Year the Check-in Dead” that basically argues the check-ins for check-ins sake are dead. I would tend to agree. There was a time a year ago when check-in apps were hot and we began to talk about ShopSavvy as a retail check-in application. In essence each time a consumer scans a product they are also ‘checking in’ at a retailer’s location. ShopSavvy determines store location after each scan to be able to offer local prices from nearby retailers as well as special location specific deals and coupons. This check-in is transparent to the user and does not require him to remember to check-in – ShopSavvy does it for him so that he can get the best possible deal. If you look at our unique check-ins last quarter the number is approximately 23 million (7+ million per month). At the end of the day we believe check-ins can be VERY valuable to both the consumer and the retailer, but checking in isn’t a natural act. Consumers rarely remember to check-in while in retail. If you can connect their check-in to an activity – i.e. like scanning a barcode to find the best deal – we think you can make a positive impact.

Integrity is worth more than your career

Recently I started tweeting startup related quotes at the start of each day. This morning I read a quote by Ryan Freitas the founder of Second Verse. He is quoted as saying, “Your reputation is more important than you paycheck, and your integrity is worth more than your career.”

The quote reminded me of a situation I found myself in just after I started LayerOne (my first venture backed startup). I was working for a telecom company called IXC (now owned by Level3) selling circuits. More often than not at IXC I would put together a deal only to see it delayed or canceled because we lacked access to local circuits or colocation space in our POP. I talked to one of my peers whose brother-in-law happened to be our manager about the problem. I figured we had lost more than a million dollars in revenue that quarter due to the issue. I had an idea. There was an empty suite next to IXCs POP at 2323 Bryan Street in Dallas. What if we rented it and began offering interconnection and colocation to clients who we otherwise couldn’t sell to? Our manager explained the company would never do it for a hundred reasons. I then proposed that ‘we’ rent it – i.e. his son-in-law and me.

Shortly afterward, with the blessing of our manager, we formed a company and negotiated a deal to utilize the space. Fast forward a few months and I found myself in my boss’s boss’s office along with my business partner and a few of our other peers. He confronted us about the ‘side’ business asking who was involved. Unfortunately my manager was out of town so I’ll never know if he would have stepped forward to explain the situation. Instead I immediately stepped forward and admitted it was my idea. I tried to explain how it was helping us close more business, but he was fixated on how much additional money I was making on the side. I was caught flat footed and the points he was making were making a lot of sense.

He dropped the bomb that I was fired before I had a chance to finish my explanation. At the end of the day he was right. It was a conflict of interest and it wasn’t appropriate. I thought about saving my own ass by explaining I had the consent and approval of my manager. As I stood there listening to him drone on and on I wondered why my business partner wasn’t saying anything. Why didn’t he step forward and admit his part? It was at that moment that everything became clear.

Since I had not been directly asked I would not reveal the participation of my partner or the fact that I had the consent of my manager. I took the heat and accepted the fact that I was responsible for my own actions and my own decisions. As I packed my office my business partner stood in my office and thanked me for not revealing his involvement. When my manager finally returned and learned what happened he decided not to say anything, but explained his regret that he hadn’t been there to help. He never thanked me, but it was clear I had earned some of his respect. I later learned that one of the other salespeople had turned us/me in.

I decided to begin working on the side business full-time and bought out my partner. I couldn’t work with IXC anymore, but that was a blessing in the end because it forced me to begin working with other carriers. Five years later my little company had raised more than $30MM and was doing business with almost every carrier in the United States (even IXC). My old business partner left IXC and came to work for me as did my old manager – I even hired the salesperson that had reported me in the first place. In some strange way I figured I owed each of them for helping me take the leap that I may not have taken without their help.

At the end of the day I decided that my integrity was worth more than my job at IXC. The irony that it was an issue of integrity that caused me to lose my job in the first place is not lost on me.