New venture outsourcing blog

I was introduced to the CEO of Analog Analytics, Ken Kalb, through a mutual friend, Neil Senturia, late last year.  Ken had a great idea for a new company - he wanted to bring the improved accountability & optimization of online analytics to offline advertising.  What was even better, is that he already knew how to do it!

The value proposition is simple:

• Build and deliver a better ad with greater returns
• Measure the ad performance in real time
• Measure the mix of media spend to improve overall advertising returns

How it works

1. The advertiser creates a call-to-action in their ad to text a short-code or call a toll-free number.  For example: “Text COFFEE to 123456 and receive a free cup!”
2. Consumers who hear or see the ad (depending on whether it’s radio, TV, newspaper, magazine, etc.) respond by calling the toll free number or sending the SMS message.
3. Analog Analytics tracks, sorts, and presents the information to the advertiser in real time through an analytics dashboard (think something like Google Analytics).

Do people respond to SMS ads?

According to a September 2007 m:metrics report, the response rates to SMS ads in Europe are between 6%-9% depending on the country.  The response rates in the US are higher, 12%, but our penetration is only 17% vs. 35%-75% in Europe.  This shows that while the US market is still developing, even with significantly higher penetration rates, the response rates are still probably going to be at least 6%.

The people

One of the great things about working with startups is the people you get to interact with.  In addition to Ken, we’ve been working very closely with Tom Buscher and Scott Willson.  Tom worked with Ken at a previous company doing telephone stuff, so he knew just how to get the backend infrastructure up & running in no time flat.  Scott is a “Coder, bike racer, husband, father” who has a great command of both user interfaces and Rails.  Both guys are really smart and it’s been great working with them; we’ve learned a lot from them both.

The future

The product looks great and it’s continuing to get better and better every day.  We’re very excited about being able to help the Analog Analytics team implement the first version of the software behind this fantastic new company.  If you do a lot of advertising, you should definitely check out what they’re up to, look at their report samples, & let them know you’re interested in increasing your return on ad spend!

Daniel Weintraub at the Sacramento Bee wrote an opinion piece today, Silicon Valley Index shows sides of new economy, where he notes that, “Even as much of the rest of California braces for what looks like a slowdown, the state’s best known economic engine - Silicon Valley - is humming along…”  This “humming along” is being reported via the Joint Venture: Silicon Valley Network’s Index of Silicon Valley for 2008.  The economic report is quite interesting, if you’re into that sort of thing (as I am)!

The really fascinating aspect of Weintraub’s opinion piece to me though, was his acknowledgement of contrary economic indicators and how they can be resolved:

• The share of middle-income jobs in Silicon Valley is shrinking
• Share of households earning less than $35,000 has been declining since 2004
• The number of low-paying jobs is growing as a percentage of the work force 
• More households are reporting higher incomes
• Share of households earning more than $100,000 has been increasing since 2004
• The share of households earning between $35,000 and $100,000 has stayed roughly the same
• Nearly 4 in 10 households earn more than $100,000 / year!

How does Weintraub reconcile these?  He points to the increasing “free agency” of the workforce.  The Silicon Valley culture is now one of work for hire, specialists as consultants, which of course means companies are doing more outsourcing than ever before.

It’s interesting that the fraction of outsourcing has increased so dramatically in Silicon Valley and that it’s been so good to their economy.  As Silicon Valley’s bread and butter are high technology new ventures, the advantages of outsourcing for startups is apparently clear to them.  Hopefully other startups around the world will continue to follow suit!

In the December 2004 issue of HBR is an article by Jane C. Linder on transformational outsourcing.  Linder defines transformational outsourcing as, “partnering with another company to achieve a rapid, substantial, and sustainable improvement in enterprise-level performance.”  Moreover, Linder subdivides transformational outsourcing into four categories:

• Rapid start-up: Outsource to rapidly scale up a new business
• Pathway to growth: Outsource to fix a key process that stands in the way of growth
• Change catalyst: Outsource to signal broad change and focus on adding value
• Radical renewal: Outsource to improve core operating capability rapidly.

In the article, TiVo is described as a startup using outsourcing to ramp up to “enterprise-level performance” in no time flat.  TiVo partnered with Sony to manufacture one of their DVR designs, many affiliate partnerships to advance sales & marketing, and Metron North America for their CRM operations (which shocked their clients several years later by closing their office with only 48 hours notice!).

They began most of these relationships between 1998 and 1999 and have grown markedly into easily the best DVR offering available.  Their business model is suspect, but their time to market and product quality have been undisputed for almost a decade.  Outsourcing helped propel them from early stage startup to the top ranks of consumer electronics in just a few short years. 

Nice job TiVo.

Dan Bingham wrote me an email today, presumably in response to Why outsourcing to India works, that began:

I thought you might be interested in the results of a study Deloitte released yesterday which basically found that outsourcing vendors and customers are rushing into outsourcing relationships focused primarily on cost, and because of this the relationships are being structured in a way that prevents them from obtaining additional value from the relationship in other areas, resulting in a great deal of frustration on both sides.

The Deloitte Consulting Outsourcing Report 2008 surveyed over 300 businesses and IT executives who used Deloitte’s outsourcing services.  These businesses were of course not startups, but it raised an interesting issue that does appear when new ventures try to outsource as well:

How do the outsourcing company and provider get on the same team?

The traditional answer here is a legal one: the contract.  You specify in excruciating detail exactly what you expect to get, what you expect to pay, and when you expect to receive it.  You should also probably pay someone a hefty consulting fee to write you just such a contract by the way!

Contracts are important, I don’t want to minimize them, they are definitely a key item of last resort when settling disputes.  In fact, a lot (most) of the value of most contracts is just the exercise of forcing both parties to go through the motions of being very specific about what they want.

However, they tend to be very much prescriptive and thus cannot accomplish much in terms of really cementing a productive relationship. 

Imagine an employee agreement which specified exactly how much work the employee would do, by when, and for how much.  How effective do you think this would be?

Some of most recent innovations in pay packages are going in the other direction: commissions, profit sharing, stock based compensation, ESOPs, 401(k).  All of these promote shared incentives.  Even union contracts generally do not specify output requirements to the same level of specificity you’ll find in most outsourcing contracts.

Is it reasonable that the way you negotiate and manage employees and groups of employees is not the same way you expect to manage outsourcing partners?  Probably not.

Ironically, we’re lucky here at Inventure Global.  Our relationship with startups has helped us avoid this for the most part.  Anyone who joins a startup, including outsourcing partners, have to be willing to be a real part of the team.  This turns out to be a much better solution.  Creating shared goals, cultivating a shared vision, and having shared values creates shared success.  There’s not as much downside protection than a contract has, but the upside has much more potential.  For a startup it’s all about upside, the opportunity is what everyone is playing for.  Other businesses have something to learn from this, they should consider weighing the opportunity of shared success over the costs of disappointing results.

Even if you think you’ve decided already, the final decision may not be up to you!  Venture capital firms are continuing to push their portfolio companies to outsource, which just another indication of how important it can be to improving valuations, time to market, and productivity of a startup.

Ann Grimes, who now works at Standford, wrote Venture Firms Seek Start-Ups That Outsource in the Wall Street Journal about six venture backed startups in 2004 who were using outsourcing: Solidcore Systems Inc., July Systems Inc., 24/7 Customer, ServGate Technologies Inc. (acquired by Cirond Corp. in 2006), ReaMetrix Inc., and Open-Silicon Inc.

These companies and their investors were all quoted in the article saying that the additional value provided by globalization and outsourcing were on the rise.  They fully anticipated (correctly) that the outsourcing trend would gain momentum as communication & other infrastructure barriers were removed.

John Shinal wrote in VC firms push for outsourcing that the VCs are not just accepting this or monitoring it from the outside, they’re aggressively pushing it on their portfolio companies!

“There isn’t a board meeting that goes by that we don’t ask, ‘Why aren’t you being more aggressive (with software development) in India and China?’ ” said Jim Breyer, managing general partner of the Palo Alto venture firm Accel Partners, which has backed more than 200 companies.”

The majority of startups that receive investments from the Menlo Park venture firm Kleiner Perkins Caufield & Byers have operations in India, Kleiner partner John Doerr recently told a group of Indian entrepreneurs in Santa Clara.

Now, nearly all the business plans that [Peter] Barris and his colleagues evaluate for the firm’s new venture fund include an offshoring component. “It’s not an unusual event anymore,” said Barris.

It should go without saying that a VC who’s got any kind of agenda, including an outsourcing agenda, that the startup firm doesn’t want to explore is a bad fit.  There are very good reasons why outsourcing for startups isn’t appropriate, but for well prepared startups the list is getting shorter every day.

As we mentioned in our previous post about outsourcing providers moving up the value chain, the trend of improved focus on opportunity-oriented outsourcing is likely to continue.  I would urge startups that are inclined to keep everything local to ask themselves why the trend seems to be so strong?  Perhaps your business is different from all the others… but probably not.  Look at this chart from R&D magazine to see that the number of outsourced functions is pretty broad now.  It’s not just customer service and tech support.

More likely, you just haven’t found the right partner yet, and as you look be sure to keep your eye out for firms that specialize in helping startups like we do.  As we all know, startups are defnitely a different breed of company!

Obviously you know about Digg, the amazingly successful social networking website.  I bet you didn’t know that in 2003, in order to get Digg going, it’s founder decided that the only way to get moving fast enough was through outsourcing!

This is the first in a series of blog entries to profile the successful startups that outsourced some critical aspect of their business in order to succeed.

I’d like to take you back to 2003, when Kevin Rose outsourced some php work to a developer named Owen Byrne.  After an inspiring lunch with Apple founder Steve Wozniak, Kevin set about creating a site to “dig up” news stories burried in the deep recesses of the internet.  Not quite citizen journalism, more like citizen editing, providing users the ability to give a virtual “thumbs up” allows the higher quality content to bubble up to the surface for the benefit of everyone.

On December 7, 2004, Kevin & Owen took Digg out of beta on only one server (two years later, they were over 100)!  In the first week 578 people signed up, registering 923 stories.  The first story to hit the home page was the Google Cheat Sheet, page that lists of all of the esoteric commands available, but rarely used, on Google’s search engine.

There have been many sites that have come up since Digg first launched in 2004 - so do you think outsourcing made a difference? 

Since Digg started Kevin has received multiple funding offers, Yahoo made a $40M acquisition offer, AOL started bribing Digg’s top 50 contributors to switch to their own copycat site, and countless other also-rans have created a stupifying number of Digg look-a-likes.  With all this big money chasing his idea and not catching up - what’s the difference between Digg and all the others?  Digg got there first!

Time to market was critical for Kevin to make Digg a success.  Kevin has mentioned in previous interviews that he started Digg on $7,000 and a rented $99/mo hosted server!Thanks to a fantastic idea, viral marketing via blogs, and outsourcing - Kevin built Digg into an overnight success on a shoestring budget and hasn’t looked back.

Do you have a great idea and just need a jumpstart to get it going?  Contact Inventure Global about getting your idea online today!

I’ve recently had the pleasure on serving on a panel of judges evaluating business plans. This time the presenters were all social enterprises - business ventures with a double bottom line (societal and financial returns). Their ‘products’ ranged from new web portals to architectural goods and often subsidized or supported important causes like vocational training, reduction of disease, or caring for the environment.
Below are some of the common questions and feedback the presenters received:

-Who, exactly, in your customer?

-How much money are you asking for?

-What would you use this capital for?

-How does this money turn your enterprise into something lasting/sustainable?

-Who is missing on your team?

-Are you charging the right amount for your product/service (would customers pay more? do competitors charge less?)

-Who are your competitors?

-What keeps others from doing this / what is your intellectual property?

-Would it make sense to scale back operations to build a stronger business?

-How would you scale this business: geographically? number of offerings? franchise?

-How hard is it for someone else to do this?

-What is keeping you from getting started: funding? team? R&D?

-Have you talked to customers? What do you know about your customers?

-What is the minimum amount of funding you need to prove your concept or make your first sale?

-Who are potential partners?

-So what part of the supply chain / distribution network do you fit into?

-Are you selling to businesses or consumers?

-What is your exit strategy / plan for sustainability / way to repay investors?

-Are you looking for a loan, a grant, an investment for equity, or a set of donations?

-What are your next steps / milestones?

-How do you measure success? How do you know if what you are doing is making a difference?

Send us an e-mail or leave a comment with questions you’ve heard as you have pitched your venture.

Picture yourself walking into work and getting the worst email imaginable: Google announces they’re coming after your target market!

You want to be sure this doesn’t happen to your company and seventeen years of experience with entrepreneurs has taught us how.  The secret is to already have your product, customers, and strategy sewn up before they even think about it!

What were you doing in 1999?

Imagine yourself there.  Microsoft is still the top dog, everyone and their cousin is starting a company, and pitching VCs for money is as common as a job interview.

A good friend of mine joins a two person team and they’re sitting with one of the heavy-hitters at Sequoia.  Their idea is great - they’re going into a space that is a clear home run and very likely a perfect acquisition target for Microsoft.

Are you beginning to see yourself in his shoes?  You know what comes next - during the pitch that’s been rehearsed almost a hundred times they get to the “Why us?” slide.  The founder, who is a really smart engineer with a touch of naivete proudly proclaims, “I’ve been working on this for quite a while now, and we have a three man-year lead on any other competitors!”

Now I would like you to experience the feeling of looking into the VC partner’s squinted eyes as he says, “A three man-year lead?  That’s a Microsoft minute!”

I’m sure you are wondering whether they got the term sheet - but that’s not the moral of the story.

The point is: you don’t have time.

Little by little you’re building your team, find an office that’s not too big but not too small, put up your website, and inch your product along all the while.  Have you noticed that even as you accomplish these things (which is no small effort!) you’re starting to feel even more vulnerable to competition than when you first started?  The reason is because the reality is starting to sink in - the pace of building a company is not as fast as you need it to be. 

If someone, anyone really, with a decent engineering team heard about your idea and decided they wanted to - you’ve got a minute, maybe two - before you need a new idea.

That’s why we started Inventure Global.  You see, time-to-market isn’t just a VC catchphrase.  It’s reality.  It’s important.  It’s the only thing that can really put distance between you and your competitors.  As you already know, the sooner you get to market, the sooner you capture the mindshare of your customers, partners, and build real barriers to entry that can help you withstand a late entry from an existing team.

Our firm specializes in getting you from prototype to product as quickly as possible.  We already have the team you need.  You can build your own team alongside ours, use us to augment your current team, or use us until it makes sense to build your own team.

Why not start moving today?  You already know waiting isn’t the answer.

Contact us and see how we can get your company to market faster - today. 

In case you’re wondering - my friend’s company didn’t get the term sheet!

Starting up is hard work.  But is Edison’s 99% perspiration enough to grow and sustain your venture?

Our own tireless entrepreneur Chris Harris examines this at:

Inspiration Versus Perspiration

Wil Schroter’s Blog on the Go Big Network

Our involvement in the Venture Capital / Investment community is hardly a secret on this blog - our group partners with pre- and post-funding companies to help with excellent execution.

The folks at InsideCRM have compiled a list of The 20 Worst VC Investments of All Time, their commentary is insightful and an interesting look into the side of the industry that rarely makes headlines. Of course, high risk / high reward investing means that some companies will succeed spectacularly, some will yield small profits, small losses, or break even, and some will hemorrhage money. The difference between spending wisely on necessary parts of your business model and squandering a institutional money becomes obvious in these examples:

Think Ikea not Aeron if it doesn’t increase your sales:

“Webvan’s “major purchases included $1 billion for warehouses, enterprise servers and more than 100 Aeron chairs.”

Know your customer:

“…advertisers didn’t see the appeal of the low-pay demographic AllAdvantage offered. This company represents $135 million in venture capital down the drain.”

Raise enough to start making money:

“…promising solution simply didn’t have the cash to hang on until the software could be launched.”

More facts and insight at InsideCRM, thanks to them for a great entry!

* the cliche about 20/20 hindsight seems to apply particularly well - retrospectively these are bad investments, at the time of funding they obviously seemed like wise, profitable endeavors to many smart people. In my opinion, this emphasizes the importance of a relentless focus on execution while you meet milestones - or getting the partners and team to be able to!