Brad Hargreaves | Building Things

I meet a lot of entrepreneurs and hear a lot of ideas and business plans from all across the board. Most have — at the very least — a kernel of a good idea in them. But many don’t know what kind of business they are. There are an unbelievable number of entrepreneurs focused on technology when their entire business model is predicated on the success or failure of a marketing campaign, for instance.

This isn’t to say that technology isn’t important for those businesses, but rather that it isn’t the core differentiator that interests investors and makes or breaks the company. If you are running a sweepstakes business, for instance, I don’t want to hear about your awesome Rails architecture. I want to hear about how you are going to acquire users for $1.50 and monetize each for $3.00. Sweepstakes (in most forms) is a marketing business, and that is really what a potential investor or partner wants to hear about.

I like to put startups in three categories as defined by the core factors driving their success:

Technology Businesses: The core differentiator of your business is your technology. Generally, your company either (a) has real intellectual property around your technology and/or (b) is founded by leading engineers in the field.

Marketing Businesses: Your business is driven by its ability to acquire and retain users/customers more effectively than your competitors.

Relationship Businesses: Your business’s success or failure will be determined by your ability to forge lasting relationships with customers and/or strategic partners.

I’ve rarely found businesses that are truly driven by some combination of those factors. In most, one factor greatly outweighs all the others. And there are patterns behind misconceptions — most commonly, first-time entrepreneurs overweight the importance of technology as opposed to marketing or relationships. This makes sense, as an entrepreneur’s first goal is often to get a product up. But products are hard to build real differentiation around unless you are doing really innovative stuff, like building new database backends or search algorithms. In most consumer internet businesses, marketing is the most critical component. In B2B plays, relationship-building tends to make the biggest impact. And in general, progress on the core differentiator is what VCs mean when they talk about needing to “see traction.”

Want to generate awesome startup ideas? An interesting trick is to identify immature industries where the leading players are focused on the wrong differentiators. My own LabApp is an example of this — while the existing (immature) players are focused on relationship-building, I happen to believe that software commercialization is a marketing-differentiated business. As with all startups, time will tell if LabApp is on the right track, but looking at “differentiation-based” pivot points can be a great way to generate innovative and revolutionary products in immature industries. Some off-the-cuff ideas:

1) Take a relationship-based approach to marketing-driven social games to piggyback off of major brands’ name recognition. This is similar to what Arkadium is doing to much success with the social advergaming concept.

2) Use a marketing-driven model to gain independent adoption to a new CRM software product from the bottom up. Almost all SaaS CRM providers are currently relationship-driven, which leaves open a massive long tail of independent salespeople.

3) Use technology differentiation to pry government IT contracts out of the hands of bloated, relationship-driven contractors. Easier said than done, but someone’s gonna make a lot of money from this in the next 15 years.

Happy differentiating.

I’ve always subscribed to the YCombinator / Paul Graham ideal that the best companies are built by founding teams of hackers, with perhaps a business guy or two (for example, someone with a strong business development, user flow or marketing background) thrown into the mix. But this often isn’t the way things turn out. Many capable founders aren’t developers, and I frequently meet with entrepreneurs that have taken a very different path. Most disturbingly, I’ve occasionally found myself agreeing with an entrepreneur’s decision to hire a development shop to build their product. Sometimes, it just makes sense.

But for every entrepreneur who has seriously considered the pluses and minuses of working with a dev shop in the context of the specificities of their business model, there are five who are hiring a dev shop because (a) they are lazy, (b) they don’t know any better, or (c) all of the above.

The reasons why I am not a big fan of development shops are too numerous to go into here. In brief, startups succeed because there is strong alignment of interests among all parties, especially with the people who are actually building the product. Development shops who work for $100+/hour and take no equity are poor partners in a startup. They have zero incentive to create a quality product or understand the nuances needed to capture a market and please end users. But all that is for another post.

For you entrepreneurs who are considering working with a dev shop to build your beta, I’ve written a handy guide to help you decide whether or not to pull the trigger. Read the scenarios and give yourself points accordingly:

3 Points: You actually do not know any software developers. I doubt this is the case for anyone who is reading this blog, but if you really can’t think of a single person to go to for introductions or advice, you may need to pay for it.

3 Points: You are pretty sure a LAMP stack is the pile of books on your coffee table, and Rails are what the Acela runs on. You probably aren’t the best person to hire and manage a developer.

4 Points: Money is no object. Don’t laugh. We’ve all seen projects like this.

4 Points: You are an exceptionally poor manager. As in you’ve been in management situations in the past, and you’ve been removed for being so incredibly bad.

4 Points: The development firm in question has some sort of special knowledge that is hard to find. Examples could be (a) experience building Facebook games under the new notification rules or (b) knowledge of how to build exceptionally secure e-commerce sites.

5 Points: You are developing software for government or major corporate clients. Being able to point at a specific development firm as “taking the responsibility” for the quality of the software is often reassuring to many government and corporate clients. I don’t necessarily agree with this bias, but from an entrepreneur’s perspective, it is what it is. Plus, most decent dev shops can point to at least a couple names of well-known previous clients.

5 Points: You have a development shop that will work for equity. This can be a good or a bad thing, and I should probably clarify it by adding “… and will actually get the job done in a timely fashion.” But equity-based work solves the misalignment of interests — there are just few dev shops willing to do it.

6 Points: You have a ridiculous project timeframe. For example, you need a beta built in four weeks. In this case, going through a hiring process is not an option. First, question why you need to get a beta out that fast. Then, really question why you need to get a beta out that fast. If your reasoning still makes sense, go hire a dev shop with the understanding that very little if any of the code that’s written can be re-used.

-4 Points: You don’t know exactly what you want. This doesn’t necessarily mean that your spec is vague; typically, it just means that a product will likely have to go through several major modifications before the dog food starts getting eaten. Unless there’s already a successful product out there that looks very similar to yours, you probably fit in this category. Iterating on a beta is a critical part of the startup lifecycle, and it is where the dev shop / entrepreneur relationship typically starts to sour.

Add all your points up. If you have more than 10 points, you can use a dev shop. If you don’t, you should go hire a team of hackers and build it the right way.

There have been a lot of words flying around recently about why the NY startup scene is starting to get real traction and attention. Today, Stowe Boyd at True/Slant launched Hotbed, a new blog covering the NY tech scene. In his inaugural post, he claims that smart early-stage investors were the missing ingredient in the NYC startup world until this point. I’m sure David Rose is thrilled about that.

Later today, Matt Mireles, who has been making a bit of a name for himself recently, fired back with a claim that entrepreneurs are at the core of NYC’s tech renaissance and investors are just along for the ride.

The emergence of industries in particular cities is a complex problem that has been studied at length by economists and policy experts, of which I am neither. But it still seems like a massive oversimplification to claim that a certain group of people showed up one day and decided to make things happen. If that were the case, it absolutely begs the question of why it didn’t happen sooner. It’s all related — money follows companies and companies follow money, and I don’t believe that one really gets too far out of balance with the other on a local scale.

But that doesn’t mean the volume of investors (or entrepreneurs) doesn’t matter. In fact, a large startup network is particularly important for New York, a city with notoriously siloed industries. In the past, media guys didn’t talk to finance guys, tech wonks didn’t talk to policy wonks, creatives didn’t talk to quants, et cetera. If you showed up at a startup event, finding someone you knew was tough — and it was even tougher to find someone who had a broad base of connections and could introduce you to someone helpful.

This is distinct from the Bay Area, where the volume and density of people interested in startups created a very tight social network. If you were a, say, entrepreneur in New York from Conde Nast working on a startup in the fashion industry, it was tricky to meet the right people in the tech world. There were few “connectors”, since there were simply fewer people to connect — entrepreneurs, investors, executives, engineers, service providers and such. The connectors that did exist — for example, guys in NY Angels — were fairly inaccessible, as angel investors are wont to be.

Thus, the emergence of “smart early-stage investors” is important. But it’s important because they are bringing social capital to the table, not financial capital. First Round Capital could do zero deals in New York over the next 12 months and they would still have a major impact on the NY startup scene because they’re paying Charlie O’Donnell to hang out in the Ace Hotel Lobby and chat with any entrepreneur who walks up to him. Charlie and the rest of the emerging investor class in NYC are guys who can and will connect the finance guys to the media guys, the tech wonks to the policy wonks and the creatives to the quants. And that’s huge.

And let’s not forget the entrepreneurs. As I wrote a week or so ago, the Celebutante Entrepreneur is a dying breed in New York City. And that’s a great thing for entrepreneurs, as celebrities are (almost by definition) inaccessible. I couldn’t go to Julia Allison for advice about getting my startup incorporated, nor would I want to. But guys like Chris Dixon, O’Donnell and Mireles are easier to track down.

The startup social network density has reached a tipping point in New York City. And that’s all that matters.

Entrepreneurship in New York City is evolving. Everyone is talking about it — at meetups, at conferences, at drinks with friends. While there’s a lot of (warranted) concern about the venture community as a whole, there is a feeling in New York of inevitability; when the dust clears, the City will no longer be playing second fiddle to Boston and Silicon Valley in the world of tech entrepreneurship. Having a NY office is the new hot thing for any east coast VC, and tech startups are increasingly looking at New York as a better place to set up shop for the long term. One could easily claim that NYC owns the hottest VC (Union Square Ventures) and the hottest tech company to launch in the past year (foursquare).

But there’s one symptom of the coming of age of the NY startup scene that people haven’t really been talking about. I was having a conversation with a friend at Gawker Media the other day, haranguing her about Gawker’s lack of coverage of the web celebrities that it lent such weight to just a year or two ago. The Julia Allisons, Jakob Lodwicks and David Karps of the world. Where are they? Yeah, I know, Gawker has been clawing its way into the mainstream; to do that, is has to cover mainstream celebrities rather than NY media darlings. But at the same time, no one has taken Gawker’s place. Even The Awl shies away from the kind of webutante-centric coverage that Gawker became known for.

Most may write this off as a simple shift in new media’s focus — or haven’t even noticed. But I think it is extremely relevant and symptomatic of deeper trends in New York. After all, bloggers write about the topics that get pageviews.

In other words, it is indicative of bigger things. It means that the NY startup scene is maturing. It means that we are focusing less on the media-crowned personalities driving “the tech scene” in New York City and (hopefully) more on the awesome things that tech startups are creating. It’s a democratization; It means that tech in NYC is coming out of media’s shadow. It means that Richard Blakeley’s Webutante Ball last summer wasn’t the debut of the NY web celebrity but its timely demise.

Two years ago, there were essentially no high-profile tech events in the city that weren’t dominated by “new media” (and even quite a few old media) brands and individuals. New media became synonymous with New York Tech. Even the well-known New York Tech Meetup was throwing events at IAC, in the belly of the media beast. Now there are too many tech events to count, headlined by the burgeoning Hackers and Founders — an event that came out of the Valley’s YCombinator and a refreshing alternative to NY Tech Meetup’s cliquish lecture class. New York Tech is growing up.

Of course, you still have celebrity entrepreneurs in California. But their coverage has been focused on — or at least cognizant of — what they’ve accomplished professionally. Even on Valleywag during its heyday. And I can’t really name any big California celebrity entrepreneurs without reasonably sized companies to their names. A year ago, the same could hardly be said about the NY scene.

Still, personalities are important, and it will be interesting to see which (if any) individuals emerge into the roles of successful celebrity entrepreneurs you find on the west coast. Some of the old guard, such as Karp (if you can possibly call a 23 year-old a member of the “old guard”), are good entrepreneurs in their own right. And I can see at least a few investors who are rising to take more prominent and vocal positions in the NY tech scene.

Then again, it is quite possible that I’m suffering from some sort of observer bias, as I’m reasonably integrated into the startup scene. What do people think?

We generally don’t think enough about how we should live as opposed to the minutiae of our lives. It’s like how many CEOs of startups get caught up in operational details and let their companies slide down a poor strategic path. But post this isn’t just about startups; it’s something I see in almost everyone (including myself).

Let me treat you to a story for a moment. I visited a friend today near Penn Station. I was heading from the 86th street area of Manhattan’s Upper East Side. There are two ways to get to Penn Station from there:

a) Take the M86 bus to Central Park West, then the C train to Penn Station

b) Take the 6 train to 51st Street, then the E train to Penn Station.

On a Sunday morning, either one will take about 35 to 40 minutes. But coming back is a different story — it’ll typically take 25 to 30 minutes. The actual trains and buses go just as fast. So why the difference? Option value.

Individually, C and E trains are fairly rare. But when I’m heading back uptown and waiting at Penn Station, I can take whichever train comes first. I don’t have to commit to a certain path until I have information about which train is coming first. I’ll just take the first one to show up and only then am I committed to a certain path — if a C train comes first, I’ll head across Central Park on the M86. If an E train comes first, I’ll take the 6 uptown.

When I’m heading downtown, I either go into the subway or wait for the bus. When I’m making that choice, I don’t have the same information I do when I’m heading uptown; I don’t know whether the train or bus will come first. I could very well go into the subway tunnel and wait 15 minutes before the next 6 train comes by.

Thus, the 10 minutes I save on average when heading uptown is the value of being able to retain that particular option.

So why am I rambling about the MTA? Because there are a lot of people who don’t understand the value of an option — when in reality, option value likely represents the single most precious asset we have. Especially while we’re under, say, 40.

I don’t know what our economy and culture is going to look like in 20 years any more than I know whether the C train is coming before the E train. I can gather hints — for example, if a lot of Indians and Pakistanis are on the platform, it probably means that we’re due for an E train, which goes through Jackson Heights, Queens — a major south Asian center. But that’s hardly a definitive analysis, and surely not one to base a career on.

Yet I see a bunch of people my age who can’t wait to commit to a path. And I’m not talking about people who have a passion for a particular field. I mean people who just want to have a have a nice job, make a lot of money and meet a nice husband/wife. And I’m possibly as guilty of this as anyone, what with being in the gaming industry since before I got a college degree. But it’s still something I think a lot about, especially when I see people my age self-deprecating their career paths as non-committal. “That’s great!”, I say. “Keep doing that as long as your budget and significant other allows!”

Let’s say born in 1960 wanted to have a high-paying job with limited risk (a common goal, if not among startup founders). The decision for that person would’ve been fairly obvious — become a doctor. At the time, finance was still the wild west, and doctors were at their peak profitability in the mid-80s. Yet had that person started practicing at, say, age 30 in 1990, they would have endured a lifetime of decreasing salaries, higher malpractice insurance and increased risk.

I think the same story can be told for a lot of people who have been sucked into finance over the last 15 years. Finance is hardly becoming a bad job. Neither, after all, is medicine. But it is definitely on the downward slope in terms of compensation, prestige and risk.

So what’s the point? You’ve got to make a decision at some point, right? Well, yes. But it’s probably worthwhile to spend the extra 5 or 10 years figuring out what you love to do rather than just jumping in to something because it is an “obvious” choice with good compensation. Of course, disregard this advice if you know what sectors will be hot when you reach your peak earning potential in 20 years — if you do, you should take the multi-million dollar offers you’re surely now getting from hedge funds. Maybe you’ll end up trading options.