The Holy Trinity of Product Development

By Stephen Forte,

Not only is it hard to attract talent to your startup (know any free developers in the Bay Area?), as a founder you also have to set the proper structure. A common saying is that you need a “Hacker, Hustler, and a Hipster” on the founding team. In the earliest days that makes sense, especially when you are MVPing and hustling for your first customers trying to find a product-market fit.

Sometime after you have product-market fit and raise a round of funding, you need to hire outside of the core founding team. A lot of founders struggle with the right roles to hire and what the proper structure should be. Some founders hire too many engineers (typically non-technical founders) and some founders hire too many “business” or “marketing” people (typically technical founders), leading to being lopsided in one area. Founders run the risk of being engineering centric or marketing centric in their product development. In reality they need to be customer centric and embrace the Holy Trinity of Product Development. 

The Holy Trinity of Product Development: Dev Lead, PM, PMM

When it comes to product development, you need three distinct roles. Those roles are what I call the Holy Trinity of Product Development: Developer Lead, Program Manager (PM), and Product Marketing Manager (PMM). These three roles work together to represent the customer and build the business, ensuring that you are not too engineering focused or too marketing focused. The role in the middle of that fine line is the Program Manager.

Program Manager (PM)

The program manager, sometimes called product manager, is the most important role in the trinity. The PM manages the product definition by talking with customers and potential customers. A PM owns the UX and functional specs and is the chief customer advocate. A PM not only owns the product definition, but also its strategy, position in the marketplace, and if it is a new product, its go to market strategy. Internally, the PM has to coordinate the teams to get the product out the door. This means working closely with the PMM and business teams on what makes sense for the business. The PM can’t set pricing (that is the PMM’s job) but surely can influence it. At the same time the PM has to work with the engineering team to get the product built on time and on budget. While a PM is not required to have any technical or coding skills, the more technical a PM is, the better. At Facebook for example, all PMs usually can write a little Javascript code. This allows the PM to talk to the engineering team in their own language. 

What is amazing about the PM is that they have no power or authority over the PMM or dev lead, all they can do is influence the engeneering and marketing teams. It takes a unique skill set to get this done. 

Developer Lead

The dev lead has a difficult role to play insofar as they have to represent the engineering team to the PM and PMM as well as work on all of the “tech stuff.” The tech stuff includes: setting the development architecture, get their DevOps game on by organizing the build (doing things like Continuous Integration and Continuous Deployment), coding, and choosing the right technology for the job (Rails or PhP anyone?)  The dev lead also needs to keep the engineering team together and motivated and make sure that the agile process is, well, agile.

The hardest part of the dev lead’s job is interfacing with the PM and PMM. The nature of startups is that they are resource constrained and always in a rush to get something shipped. That means an insane amount of pressure on the engineering team. It is the dev lead’s responsibility to work with the business (PM and PMM) in order to set realistic deadlines and proper expectations, all while not being the guy complaining about lack of resources. Not always an easy task..

Product Marketing Manager

While the dev lead represents the engineers and the PM represents the customer, the PMM represents the business. While the PMM is responsible for what all non-marketing people think of as marketing (ad campaigns, trade show booths, email blasts, product placement, media placement, etc), they are also responsible for the business model of the product and making sure that the product makes money (or reaches its broader goals if it is a loss leader.) This means setting pricing, and if this is a freemium product, that is far more complex than you can ever imagine. The PMM is ultimately accountable for the product making money.

The Right Balance

Some startups and companies are tempted to combine the PM and PMM role. This is bad! What happens when you combine these roles is that the focus usually becomes either too customer centric or too marketing centric; you need two people and two distinct roles to prevent this from happening. The right structure creates the right environment. The right people in the wrong structure is a waste of talent, they will not be able to use all of their talents, they will spend too much time fighting the incorrect structure. No amount of free massages, free lunches, and unlimited cookies will fix an improper structure. (Actually it is Google, Facebook, Linkedin, etc who have pioneered the Holy Trinity in Silicon Valley. They adapted it from the larger tech companies such as Microsoft in the 1990s.) 

The right people in the right structure/environment is where the magic happens. 

This may sound like a lot of overhead, however, you are probably doing this in some form already. Typically at the early stage, founders take on these roles and hire people to pass them off to. It’s a sign that your startup has matured and left the experimental phase. 

Now go and build awesome products!

  Category: People, Startup Tips
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The Startup Advisor Cheat Sheet

By Stephen Forte,

All startup teams need help. The good news is that there is no shortage of “startup mentors” out there. The bad news is that there is no shortage of “startup mentors” out there. How you recruit and work with your advisors is critical as the right advisors managed properly can really have a powerful impact on your business.

Many startups that I work with like to build as impressive a list of advisors as they can. When talking with founders about advisors, I usually focus on two things:

  • Making sure the advisors augment the skills lacking in the current team
  • Formalize the relationship with the advisor and compensate them according to an objective standard

The Team’s Needs

Look at the needs of your business over the next six months to a year and then look at the skills of your team. You will have a lot of gaps. Start to think how an advisor can fill some of those gaps. Some teams will need help figuring out BizDev or do pricing of their products. Some will need help with higher level technology decisions-or someone to interview a CTO candidate/co-founder. Some teams have all the necessary parts but lack a little “gray hair” or folks with the battle scars of doing business a long time. Some teams lack the network to raise money and some teams lack domain experience. (Which I question why are you in that business in the first place.) 

You need to find advisors who can augment your team with skills, experience, and connections. If you are all PhDs in astrophysics and are building a related startup, you don’t need the head of your University’s Physics department or even a Nobel winning Physics on your advisory team. You will need some people with business and fundraising experience. Also, don’t try to go get famous people to be an advisor; I know that Mark Zuckerberg is not meeting with you monthly and won’t add much value except for the coolness factor. 

The good news is that there are a ton of people out there willing to give you advice. The challenge is keeping the advisors engaged.

The Dreaded Conversation: How to Formalize and Compensate an Advisor 

Your advisors mean well and want to help, but they are busy people. You need to set the expectations up front as to what kind of advice you need and how often you will be asking for it. If you don’t have this conversation with your advisor, you run the risk of some very misaligned expectations, leading to a bad experience for both sides. Typically for companies that I advise, we usually have a call once month or every six weeks. But when something comes up that I am uniquely qualified for, the frequency is higher. 

You also need to formalize your relationship with you advisors! This is important for several reasons, but the first is legal liability. If overnight your company is worth billions and your advisors have been informally advising you without a contract, they may think that they are due a large stake in your company and sue. Another reason to formalize your advisor’s relationships is that by formalizing it, they will take the relationship more seriously. So many companies ask me to advise them, but the ones I say yes to and have a formal agreement with, I feel more obligated to make the time for. An easy way to lock down an advisor is to use one of the standard Advisor Contracts. I have used this one several times

Lastly, you need to compensate the advisors in order to keep them engaged. If your advisors want a huge chunk of your company or a salary or stipend, they are not the advisors for you. Use the following matrix to determine how much to compensate the advisor with. First determine what stage your company is at: idea, startup, or growth. Idea is usually pre-seed, startup is usually Seed stage, and Growth is typically a Series A or later. (I explain the stages of funding here.) This is important due to the amount of risk your advisor is taking. Then determine what kind of advisor you are signing up: Standard, Strategic, or Expert. I know that these are kind of vague, but they usually line up pretty easily. Make a proposal and then use the equity number in the box. This should be a standard and non-negotiable. If the advisor tries to negotiate away from these numbers, don’t have them as an advisor. They should not be in it for the money/equity, the compensation is more of a “nice to have.” They should be advising you because they want to.

Screen Shot 2015-04-21 at 7.44.56 PM

Lastly, have a vesting schedule and a way to easily remove the advisor. Typically you have an advisor for a year or two, depending on the need of your team. For example, if you lack a technical team at the idea stage and engage with an advisor who is very technical and expected to help you recruit and hire an CTO within a year, you probably only need to sign that advisor up for a year or two. Then make room for other advisors in other domain areas. 

Advisory Board vs Board of Directors 

What is the relationship between a Board of Directors (BOD) and your advisors? Nothing. More importantly,  your board members are responsible for the governance of the company and legally liable for its execution, while your advisors are responsible for nothing and legally liable for nothing. Your directors have high engagement, often meeting in person several times a year. Your advisors are less engaged and often engaged via email and Skype. 

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Communication 

You should update your advisors (and investors) with a bi-weekly or monthly email: explain the good, the bad, the ugly since the last email communication. At the end of the email put in the ask, or what you want your advirosrs to pay attention to or what you need from them. While your advisors may only skim over the updates as they come in, at your next call, the advisors can review those emails before the call and make the call more efficient. You won’t have to spend the first 10 minutes of the call updating the advisor on what happened over the past month. I love getting these emails, it shows me that the companies that I advise are organized and understand proper time management. 

 My Experiences Advising 

I’ve advised many companies over the years. I’ve been asked by many more than I’ve said yes to, I only say yes to companies that I can add value, are in an exciting space, and the founders are awesome people to work with. (Now that I am an investor, I say no to almost 100% of the asks to prevent a signaling issue. I did, however, recently agree to become an advisor to a company where my skills made me uniquely qualified to help.)

What was my experience like? Some companies rarely contacted me. Some contacted me randomly, usually when they needed some specific advice. Other’s scheduled a regular phone call. I’ve done it all: lots of general strategy, accelerator application advice, fundraising tips, team compensation, interviewing CTO candidates, make introductions, M&A advice, and sitting in-between founder breakups. I’ve even pretend to be Paul Graham and asked them YC interview questions. 

Some of my companies have had exits, sometimes the money from my shares was great; one exit was small and paid for an awesome dinner and night out with the team. One company I advise recently shut down and I helped the founder find a new gig. All my experiences were worth the time I put in and lots of fun.

Lastly, I learned a lot advising, as much as I taught the founders! 

  Category: Startup Tips
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Differences Between Raising Seed and Series A Rounds

By Stephen Forte,

Yesterday I was in a discussion on Twitter with Semil Shah and Marc Andreessen about the value of a pitch deck. Marc thinks that the pitch deck has to be well polished and Semil and I think that a bad pitch deck with an awesome presentation by a passionate founder is ok for a seed round. 

Tweet Storm

Tweet Storm

That was the critical differentiator:  the round. If you look at the conversation, Marc and I are in agreement on the need for a quality deck, we just disagree on the stage. This got me to thinking of the main difference between raising a Seed round and a Series A round.

As several Fresco Capital portfolio companies are currently raising a Series A or have just completed one, the difference between Seed and Series A is fresh on my mind (hence why I felt bold enough to challenge an icon like Marc yesterday..)

If you remember from my previous post, typically when you are raising a Seed round you don’t have your product-market fit figured out, nor do you have the exact facets of your business model ironed out. You typically figure this out during your Seed round and execute on your business model in a Series A.

Raising a Series A round is very different than raising a Seed round. Seed is about finding a business model, Series A is about executing that business model at scale. Marc is correct and you need polished deck for the Series A,  however, you also need to demonstrate two other important things in order to get funding: you need a repeatable business that scales. 

Repeatable Business

In order to demonstrate a repeatable business, you will have to show that you have customers, users, etc, coming back for more. You want to keep the customers you win engaged rather than churn them out.  Measuring engagement is not going to be the same for each business, but you need to figure out what it means for your business. Typically it has to with the Customer Lifetime Value (CLV) and how many customers your business can support. 

If you are building a consumer app similar to Instagram for example, you have to demonstrate the engagement of the users you have posted XX photos per week. How many comments they leave, etc.  If you are building an e-commerse mobile app, it may be defined by the transactions performed each month, a game can measure how often they play and level up, or in a B2B service, how often certain tasks are performed. Even in the Seed stage, you should be able to determine this number, even if you have to do small tests and experiments to do so.

Scalable Business

Having a repeatable business is not good enough, you also need a scalable business. I’m not talking about the techie versions of scalability where your app and site perform the same under load as they do under normal conditions, but rather the business model. Typically this has to do with customer acquisition costs (CAC). Specifically, you need to work through this formula: CLV – CAC = $some really big number

Where CLV is your Customer Lifetime Value or the amount of profit each customer brings to your business over the course of their entire experience with you. This is difficult to calculate at an early stage (as you hope to have customers for 10+ years and you may only be in business for a year), but with enough cohort analysis and other data analysis, you should get a good feel for this number by now. 

CAC is the Cost of Customer Acquisition. This is how much it costs you to get a person through the funnel and convert to actually buy something. This number may be easy to calculate if you get 100% of your customers from marketing campaigns, take the total cost of the marketing campaign divided by the number of people who converted into customers. (For example if you spent $100 on AdWords and 4 customers converted, your CAC would be $25.)

Let’s look at how important this formula is:

CLV ($45) – CAC ($45.01) = -$.01

Here you are losing one cent on each customer and will eventually go out of business. Not good, not even the best deck can save you here.

CLV ($1) – CAC ($0.99) = $0.01

Here you are earning one cent on each customer and will eventually build a profitable business. The difference of just two cents can make or break your business! 

Now in reality, I’d like to see something like this:

CLV ($6) – CAC ($1) = $5

Meaning, for every $1 you put into your customer acquisition/marketing campaign, $5 comes out. Very scalable. If you are raising a Series A of $5m and in your deck you show this formula and say that $2m of the $5m is earmarked for customer acquisition, the investor knows that $10 should come out- assuming that your formula is correct. (Actually as an investor, I would expect you to focus like a laser beam on the funnel optimization and get that CAC down while simultaneously increasing the CLV.)

As you move your business out of the seed stage and onto a Series A, make sure you make Marc happy and have an awesome deck. In addition, if you want his (or my) money,  demonstrate that you have a repeatable business that scales.

  Category: Fundraising, Investing
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Don’t Meet With an Investor Unless They Match These Three Criteria

By Stephen Forte,

Over the past few years I’ve had the opportunity to work with hundreds of early stage companies looking for funding. They all seem to approach fundraising the same way: make a big list of investors, ping their network for warm intros, and take every meeting with any VC that replies. Unfortunately this is not an efficient way of doing things.

Instead, I advise startups to filter the list of potential investors by three critical criteria and only meet with an investor that matches all three. If an investor meets only one or two of the criteria, you are wasting your (but potentially not the investor’s) time. So what are these three criteria?

Size of Check

Perhaps the most important criteria, and also the most overlooked by a founder, is the typical size of check written by the investor. For example, let’s say your startup is looking to raise a seed round of a $1.5m convertable note. The typical scenario is that you have 3-4 investors, one lead at half the round at $750k and the other 3 investors in at $200k – $300k each. If this is the amount of money you are looking for, don’t seek out Angels who are only going to put in $25k-50k at a time or don’t seek out VCs that typically invest $25m or $75m in a round. The size of the check that they typically write won’t match up with what you are looking for. 

Domain

Another common mistake is to hit up an investor who matches your check size, but doesn’t invest in your domain space. For example, let’s say you are a hard core B2B business and you approach an investor who only invests in consumer mobile apps, looking for the next Instagram. Big waste of time. What if you just finished your Kickstarter campaign on the next awesome IoT breakthrough and you approach an investor who has never made a hardware investment before. If they were even willing to invest, why would you want their money, they have no expertise in hardware? Instead filter only investors who actively invest in the space that you are in. They will add the most value since they understand your domain. In addition, they will have the most patience since by definition they are a believer in your space.

Location

Location is often is overlooked as a third matching criteria. I don’t mean your physical location, which is important to some investors-particually in Silicon Valley or a government backed fund, but rather the location of your target market and customers. If you are a startup targeting the Indian market, find an investor that is comfortable with that market and has an expertise there. You don’t necessarily have to find an Indian investor, but one where you are located that understands the Indian market and is not frightened by it and can connect you with the local ecosystem. 

After you have applied your three criteria filters to your list of investors, now it is time to reach out and get those warm intros. Only then will the meeting be productive. Often times I get pushback from founders saying that they are meeting with Investor XYZ that meets two of the three criteria. I tell them that the investor is wasting your time. What they are doing is taking the meeting to learn about your domain or target market without having to invest. For example if Investor XYZ never invested in Africa and your target market is Africa, they may take the meeting to see what is going on in Africa and report back to their partners. For them a one hour meeting in their office hearing your pitch is a worthwhile use of their time to get educated for free.

Same if an investor typically writes larger checks, say $25-50m average, but also has a new “seed” fund. Avoid those investors at the early stage. You get very little synergy from the brand name and will never meet the famous partners. In addition, if it really is a seed fund and there is no avenue for follow on pro-rata, you are back to square one when you are pitching the “main” fund. Also, in some instances the “seed” fund at a larger fund is typically the “B” team-young partners recently hired who are thrown into the seed fund without any real influence at the senior partner level.

  Category: Fundraising, Investing
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