aamir virani

Starting Up: What is the two-crime rule?

We went through a lot of iterations and tweaks while working on our pitch for Dropcam. One thing that friends, family, and investors liked is the initial market. At one point, though, we were trying to address concerns from an investor by discussing [our crazy new technology] and he stopped us immediately with:

Wait a sec. Now you’re breaking the two-crime rule. Do you know what that is?

No, we didn’t. What’s that?

Cops will often pull someone over for some minor offense like speeding or a headlight being out. That’s no big deal and you can usually work your way out of it… unless you’ve got some drugs in the car or are driving drunk. The second crime is the one that gets you locked up.

Huh?

Look – there’s enough uncertainty about your success in [market]. Now you want to add the complexity of [crazy new technology]? I know you guys are smart and can do a lot of stuff, but you just added to your degree of difficulty.

Obviously, this person didn’t invest… but it was some good feedback. Investors can deal with uncertainty surrounding your market or technology, but rarely both.

What are typical usage and pricing trends for an iPhone app?

Andrew Chen pointed out an awesome iPhone presentation by Pinch Media, which covers some really useful insights you should use if considering whether to make your app free or paid, as well as whether your app is doing well when compared to other apps. Here are some of the key points.

Whether you have a free or paid iPhone application, the users returning falls off exponentially. If you retain more than 5% of users after 60 days, you’re doing really well. Long term retention is about 1%; this is true for both paid and free applications.

You shouldn’t necessarily give away your application for free and make your money on advertising. Because current CPMs are around $2.00 and applications are usually run 12 times at most, you may be better off just charging $0.99 for an application. Charge first, and adjust as you see a trend (high usage per user, target demographic, or lots of users) indicating advertising makes you more money.

Starting Up: What type of funding should I look for?

One of the big questions we faced while going through a fundraising round is determining how much to raise.

During the 6 weeks we were looking for investors and advisers, we actually moved between a seed round in the hundreds of thousands to a series A for a couple of million to a “series A lite” around a million.

This movement between types is a siren call – as you get some interest you feel you should raise a little more. After all, more money is more runway. It’s more for hiring good people. It’s more for a nicer office. It’s more for marketing and business development opportunities. Right?

Elliott Dahan has a nice breakdown in a recent presentation of the difference between types of funding. Two things differentiating between a seed and funding stage?

• team vs. traction – if you have a product with users, a series A is much easier to attempt
• quick (< 1 week) vs slow turnaround – seed investors can move really fast if they are interested, while institutions will have lots of due diligence

My experience corroborated this. Angels would respond much more quickly than institutional investors. Usually the difference was one week vs about 3-4 weeks to go through the multiple presentations and interviews.

The current economic crisis, though, has made most investors more cautious. In fact, traction is now something even prominent angels want to see. One thing we heard: past small series A investments are now seed, while past seed investments are now going un-funded.

If you’re an entrepreneur looking for investment, realize that the road to financing is getting longer and more uncertain. It’s not necessarily that your idea needs work, it may also be that the investors you’re speaking to are scared.

What are the death magnets when building a business?

I finished Guy Kawasaki’s book Rules for Revolutionaries yesterday, and there is one chapter in the book I wanted to highlight because it summarizes some common mistakes when building a business.

Kawasaki calls these mistakes death magnets, the “traditional habits and patterns of thinking that seduce companies”. Here are his top ten:

1. picking low-hanging fruit – make sure your initial market focus fits not those most rabid for your product (the early adopters who will nitpick), but those who are strategically viable.
2. just sucking less – don’t be happy with just sucking less than your competitors, because you will remain open to a new market entrant.
3. overemphasizing budget – remember to take opportunities when they come even if it costs more than you wish.
4. overemphasizing consistency – don’t fall into cycles and patterns just because that’s they way it has been before.
5. attacking too many markets at once – this one is so awesome it gets a quote: “You have to pay your dues by knocking down barriers and dominating niche markets one at a time.”
6. diluting your brand – don’t waste any brand recognition by going in an odd direction.
7. outsourcing – don’t outsource core competencies.
8. mimicking the big guys – don’t copy processes and activities just because a big competitor does it.
9. lowering prices – gaining market share, killing competitors, increasing profits on volume… none of these are a guarantee.
10. assuming that “best product wins” – one of the greatest business lessons ever

The book was written in 1999, so it’s great to see how applicable these points are today. I wonder what Guy Kawasaki would say now about #9. The freemium model emphasizes the 0 price point as a way to gain market share (and mind share).

Naval Ravikant’s Things to Look For in a Startup

Startup2Startup hosted a talk by Naval Ravikant, one of the guys behind Venture Hacks and the original founder of Epinions, a precursor to the PowerReviews idea. Here’s a link to the video, filled with two minutes of great insight on what a startup needs.

Things to look for in a startup:

1. the team – some of the best in the field
2. the market – must be huge because the first idea rarely works and you need room to maneuver
3. proprietary / difficult technology – something that compounds over time into a distinct competitive advantage
4. proprietary distribution channel – some sort of viral marketing, search engine optimization (SEO), or partnerships
5. direct monetization model – not just joining an ad network

The technology description is important – most ideas I hear (and come up with) are pretty straight-forward. Anyone who knows Python or Ruby on Rails can come up with a basic database-backed site. Is there any real complexity to what you’re trying to do that two folks in an apartment can’t copy in three months?

Random Advice on Finding a College

A friend of a friend contacted me through email today asking some questions on college. In case this is helpful for others, I thought I’d put it up on the web. Any additional thoughts? Please feel free to put them in the comments.

When did you start applying?

The college deadlines are usually during your senior year in December and early January. I remember that UC-Berkeley was really early (November?).

How many colleges did you apply to?

I applied to four. I should have probably applied to seven, which I think is average. It’s a question of which schools you want to apply to and your certainty.

How did you choose Rice over the other schools?

The biggest piece of advice I can give is to go to the campuses, take the tours, and if possible, go to the Admit Days that they have (a weekend where they show prospective students around). You’ll make friends early and get some connections that usually prove useful… and it makes the first week of orientation and classes less awkward.

You should also talk to older classmates and friends who went off to school and get their opinions.

The usual points made up my decision: quality of school (private vs public), name recognition, size (smaller felt nicer to me), location.

How is the campus life at Rice?

Rice was phenomenal, but it depends on whether you want a big school or small. Rice is tiny, so you see the same people over and over again. This also means you have classes with people outside your major/concentration, and a good opportunity to interact with lots of different people. Like Princeton, Rice has a college system, so there are no fraternities or sororities. This means that a freshman gets assigned to one of nine colleges and that group becomes your hub for social activities, friendships, etc.

I was pretty quiet, so having the college system was a great crutch for building friendships. My closest friends all came from the same college and I still keep in touch with them today (10 years later).

How did you adjust to living by yourself?

You don’t live by yourself. Most universities force you to live with roommates during your first year. Some allow you to choose studios for one person, but you shouldn’t do it. You’ll miss out on so many friendships and learning about different lifestyles as well as the annoyances that make for good stories later in life.

In terms of things like food, laundry, taking care of yourself, etc. — that’s part of growing up; it’s awkward but everyone survives.

If you had to do something differently, what would it be?

Socially – get out a lot more. Make more friends who were not engineers.

Academically – find research. Beg, plead, etc., but go ahead and do it. The main reason is that it will help establish contacts, but it’s also important because it will help you determine whether or not you really want to attend graduate school when the time comes.

Grades don’t matter as much as you think they do. Connections and experiences are critical.

How did you write your personal statements?

I just wrote them. They were pretty normal questions. I know things are a lot more competitive nowadays, but if you write in your own voice you’ll get very far.

Tell a story. Have a few teachers and friends proofread for grammar. Don’t be verbose.

From whom did you obtain references / recommendation letters?

You want to have one from a teacher, one from an extracurricular activity, and a third from the community if possible. Mine were from a math teacher, my band director, and one from my physics teacher… which doesn’t follow the advice I just gave you.

One key point: make sure the people you ask have written letters before or are someone you trust. I know that my math teacher ended up writing a short, simplistic recommendation letter that probably cost me admission to one school. Find people who are going to rave about you and will take the time to do it right.