"Feed a man a fish and you feed him for a
day; teach a man to fish and you feed him for a lifetime."

Customer self-service will play an increasingly important role in the software industry. One of the toughest parts in making a technology sale is changing customer behavior. The key to the battle is actually getting the technology into their hands, letting them kick the tires and then getting feedback. Under the old licensed software model, there was/is too much friction in the process…high ticket prices, long & expensive installations, extensive training and so on. The current generation of applications relies more on hosted solutions. They reduce the initial price tag and simplify the installation and maintenance processes.  While large enterprise applications are not likely to go away anytime soon, more and more companies are embracing software as a service. However, these still scale somewhat slowly due to market adoption challenges and revenue is spread over years versus upfront with a licensed solution.

The next generation approach…simplify it, host it, give tastes away for free and let them do it all by themselves. Let them get addicted and sell themselves. One of the amazing facts about Google is that a significant percentage of their ad sales come through without any human involvement. Feedburner has been growing at over 20% a month with a small staff because of the simplicity and self-service components of their offering. Everdream has launched one of the first corporate SaaS offerings from their self-service website. They will let corporate customers register, self-qualify, pay, provision and upload data.

Eliminate friction. Take everything out that could give customers pause about trying it such as requiring registration information, credit cards or personal information. Give them a lite version that hooks them but leaves them needing more (reporting, scale, features, etc). If they like it and use it, you will have plenty of opportunities to get the remaining information. The trick is getting the customer to use it and to change behavior.

This is not a panacea for all, but I expect that you will see more and more firms using self-service and the advantages of the web to scale their businesses while driving costs down.

I’ve written in the past about how future success in technology is going to be around execution and not necessarily about superior technology. I have been painfully reminded of this fact over the past 4 hours as I left my Mac Powerbook at home by accident and have been using my Dell this morning. In 4 short hours, it has frozen opening a PDF file, again printing another PDF file, yet again trying to play a Real Time clip and now Outlook is messing with me. Check out the new PC/Apple ads. They are hilarious. They are getting great reviews in the Ad press.
New Apple Ads.

With Apple’s new Intel chip, it will be interesting to see how much penetration in the Windows base it can go. Currently, you can set  your Mac to dual boot (either PC or Mac). Where things get better is when you can open Windows Applications natively from within OS X.

As an investor or an entrepreneur, it always makes sense to go out into the field and use your product or service as a customer. There is no better way to truly understand its short-comings or advantages. Also, buy a Mac!

I mispoke yesterday. Juergen Stark reminded me that his quote after one particular board meeting actually had some advice for VC’s as well:

"Yup, got it.  Higher revenues and lower costs.  Any more brilliant advice?  How about some advice for you guys…higher returns and lower writeoffs.”

About six weeks ago, I posted on 10 VC Euphemisms and had intended to post Guy Kawasaki’s corresponding Top Ten "Euphemisms" of Entrepreneurs. This slipped by mind until Steve Vivian from Prism Capital reminded me about it. It is hilarious yet should be taken seriously. I highly recommend you not fall victim to these claims. We have an informal policy that we will turn down any deal that has "conservative financials" and "no competition"… You’ll notice our fellow Chicagoan, Jason, is highlighted at the end.

The Top Ten Lies of Entrepreneurs
(Since I’ve antagonized the venture capital community with last week’s blog, I thought I would complete the picture and “out” entrepreneurs to begin this week. The hard part about writing this blog was narrowing down these lies to ten.)

I get pitched dozens of times every year, and every pitch contains at least three or four of these lies. I provide them not because I believe I can increase the level of honesty of entrepreneurs as much as to help entrepreneurs come up with new lies. At least new lies indicate a modicum of creativity!

1. “Our projections are conservative.” An entrepreneur’s projections are never conservative. If they were, they would be $0. I have never seen an entrepreneur achieve even her most conservative projections. Generally, an entrepreneur has no idea what sales will be, so she guesses: “Too little will make my deal uninteresting; too big, and I’ll look hallucinogenic.” The result is that everyone’s projections are $50 million in year four. As a rule of thumb, when I see a projection, I add one year to delivery time and multiply by .1.
2. “(Big name research firm) says our market will be $50 billion in 2010.” Every entrepreneur has a few slides about how the market potential for his segment is tens of billions. It doesn’t matter if the product is bar mitzah planning software or 802.11 chip sets. Venture capitalists don’t believe this type of forecast because it’s the fifth one of this magnitude that they’ve heard that day. Entrepreneurs would do themselves a favor by simply removing any reference to market size estimates from consulting firms.
3. “(Big name company) is going to sign our purchase order next week.” This is the “I heard I have to show traction at a conference” lie of entrepreneurs. The funny thing is that next week, the purchase order still isn’t signed. Nor the week after. The decision maker gets laid off, the CEO gets fired, there’s a natural disaster, whatever. The only way to play this card if AFTER the purchase order is signed because no investor whose money you’d want will fall for this one.
4. “Key employees are set to join us as soon as we get funded.” More often than not when a venture capitalist calls these key employees who are VPs are Microsoft, Oracle, and Sun, he gets the following response, “Who said that? I recall meeting him at a Churchill Club meeting, but I certainly didn’t say I would leave my cush $250,000/year job at Adobe to join his startup.” If it’s true that key employees are ready to rock and roll, have them call the venture capitalist after the meeting and testify to this effect.
5. “No one is doing what we’re doing.” This is a bummer of a lie because there are only two logical conclusions. First, no one else is doing this because there is no market for it. Second, the entrepreneur is so clueless that he can’t even use Google to figure out he has competition. Suffice it to say that the lack of a market and cluelessness is not conducive to securing an investment. As a rule of thumb, if you have a good idea, five companies are going the same thing. If you have a great idea, fifteen companies are doing the same thing.
6. “No one can do what we’re doing.” If there’s anything worse than the lack of a market and cluelessness, it’s arrogance. No one else can do this until the first company does it, and ten others spring up in the next ninety days. Let’s see, no one else ran a sub four-minute mile after Roger Bannister. (It took only a month before John Landy did). The world is a big place. There are lots of smart people in it. Entrepreneurs are kidding themselves if they think they have any kind of monopoly on knowledge. And, sure as I’m a Macintosh user, on the same day that an entrepreneur tells this lie, the venture capitalist will have met with another company that’s doing the same thing.
7. “Hurry because several other venture capital firms are interested.” The good news: There are maybe one hundred entrepreneurs in the world who can make this claim. The bad news: The fact that you are reading a blog about venture capital means you’re not one of them. As my mother used to say, “Never play Russian roulette with an Uzi.” For the absolute cream of the crop, there is competition for a deal, and an entrepreneur can scare other investors to make a decision. For the rest of us, don’t think one can create a sense of scarcity when it’s not true. Re-read the previous blog about the lies of venture capitalists, to learn how entrepreneurs are hearing “maybe” when venture capitalists are saying “no.”
8. “Oracle is too big/dumb/slow to be a threat.” Larry Ellison has his own jet. He can keep the San Jose Airport open for his late night landings. His boat is so big that it can barely get under the Golden Gate Bridge. Meanwhile, entrepreneurs are flying on Southwest out of Oakland and stealing the free peanuts. There’s a reason why Larry is where he is, and entrepreneurs are where they are, and it’s not that he’s big, dumb, and slow. Competing with Oracle, Microsoft, and other large companies is a very difficult task. Entrepreneurs who utter this lie look at best naive. You think it’s bravado, but venture capitalists think it’s stupidity.
9. “We have a proven management team.” Says who? Because the founder worked at Morgan Stanley for a summer? Or McKinsey for two years? Or he made sure that John Sculley’s Macintosh could power on? Truly “proven” in a venture capitalist’s eyes is founder of a company that returned billions to its investors. But if the entrepreneur were that proven, that he (a) probably wouldn’t have to ask for money; (b) wouldn’t be claiming that he’s proven. (Do you think Wayne Gretzky went around saying, “I am a good hockey player”?) A better strategy is for the entrepreneur to state that (a) she has relevant industry experience; (b) she is going to do whatever it takes to succeed; (c) she is going to surround herself with directors and advisors who are proven; and (d) she’ll step aside whenever it becomes necessary. This is good enough for a venture capitalist that believes in what the entrepreneur is doing.
10. “Patents make our product defensible.” The optimal number of times to use the P word in a presentation is one. Just once, say, “We have filed patents for what we are doing.” Done. The second time you say it, venture capitalists begin to suspect that you are depending too much on patents for defensibility. The third time you say it, you are holding a sign above your head that says, “I am clueless.” Sure, you should patent what you’re doing–if for no other reason than to say it once in your presentation. But at the end of the patents are mostly good for impressing your parents. You won’t have the time or money to sue anyone with a pocket deep enough to be worth suing.
11. “All we have to do is get 1% of the market.” (Here’s a bonus since I still have battery power.) This lie is the flip side of “the market will be $50 billion.” There are two problems with this lie. First, no venture capitalist is interested in a company that is looking to get 1% or so of a market. Frankly, we want our companies to face the wrath of the anti-trust division of the Department of Justice. Second, it’s also not that easy to get 1% of any market, so you look silly pretending that it is. Generally, it’s much better for entrepreneurs to show a realistic appreciation of the difficulty of building a successful company.

PS: here is an interesting commentary on this blog by Jason Fried.

 "When a milestone is conquered, the subtle erosion called entitlement begins its consuming grind. The team regards its greatness as a trait and a right. Half hearted effort becomes habit and saps a champion."                    — Pat Riley (MIami Heat/LA Lakers coach)

One thing you learn early on in the venture business (both as a VC and an entrepreneur) is that Darwin says you are not entitled to anything. You have to earn everything you get (and occasionally get lucky). Often, however, entrepreneurs feel they are entitled to a variety of things and take exception when they don’t get them. Two of the more prominent areas are around ownership and market reception. (note: VC entitlement post to come as well…)

Entitlement 1…the "Option Fairy": I believe that an entrepreneur should, at the end of the day, have a healthy chunk of the business. He/she has spent considerable time, blood, sweat and tears building the firm. However, if the entrepreneur decides to take a capital intensive approach to building the business, then he/she should also expect to suffer significant dilution. Most successful entrepreneurs with large ownership stakes (a la Gates & Ellison) get this idea. There is nothing more disruptive to an investor/management relationship than when the CEO burns through considerable amounts of cash, fails to hit his/her goals and then demands refresher option grants to make up for the dilution they are about to take from the new financing. There is no "Option Fairy" who can painlessly sprinkle options onto companies that miss plan or take the easier, capital intensive approach. Cash does not solve most problems, and, I would argue, causes a significant number of major ones.

Entrepreneurs can fail to understand why VC’s are not sympathetic to their "Option Fairy" plea. The company has the VC’s money. The management team missed numbers, let burn get out of control and now the company needs more money. On top of that, management wants to dilute the investors even more by carving out a chunk of equity for options. Entrepreneurs, either keep your burn under control until such point as you are confident you can deliver results, or realize that if you miss, Darwin gets to visit everyone…we all get diluted together. Also, don’t use the financing (bringing in a new sympathetic investor) to gain leverage with your old investors as it will cause serious bad blood at the board level (especially if the old investors have dry powder). You will win the battle but lose that war. I don’t know of many CEO’s who survive more than one or two years after doing this to their original prom date.

Entitlement 2…I’m Right: I think that one of the leading attributes of a great entrepreneur is the ability to listen (same for a VC BTW). I don’t mean the usual "let’s flatter the VC and nod our heads" style of listening, but really taking in differing opinions. If those around you (VC’s, customers, etc) are not getting your value proposition, it might be time to rethink how you are positioning and/or designing your product or service.

I often come across entrepreneurs who are so wed to their views and ideas that they take great offense when others don’t get it. "I have a great idea and these dumb people around me just don’t get it". These dumb people (customers) have very specific needs and it is your job to figure them out. The other dumb people (VC’s), have seen a lot of companies over the years and a lot of mistakes. Take your mouth off the cool-aid straw long enough to really understand if there is merit in the "opposition’s" comments. Of course, we are all wrong (I am on a daily, if not hourly, basis) and an entrepreneur has to maintain conviction during feast and famine. So, this is a delicate balance.

In the end, Darwin has the final say. As Jack Nicholson said in Prizzi’s Honor, "If Charlie is so f*#@#n smart, then why is Charlie so f#@$@n dead."

Resilience is a key theme you will hear about time and time again in the entrepreneurial world. The ability to persevere and bounce back from adversity is part of the DNA of a successful entrepreneur (and VC Sith Lord). During the 1999-2002 period, nearly everyone in the venture and entrepreneurial world went through an historic resilience test. No business model seemed to work, corporations and consumers weren’t buying and Darwin was taking company after company into the grave. While I hope we never see times like these again, I do believe that we will have a downturn in the next two years. With many companies relying on advertising models to support their firms, they will learn how quickly a recession can dent this model.

I remember this period all too well. I remember seriously questioning what I was doing in the venture business where all I seemed to be doing was going to board meetings to discuss why our companies were missing budget, yet again, and how many staff could we lay off. I was working long hours, thinking that if I spent enough time at it, things had to get better…right? I lost 15 pounds from stress and lack of sleep.

During this period, I read a great article by Roger McNamee, one of the awesome investors in the business (he is currently partnered with Bono and the former CEO of EA on a media fund, Elevation Partners).  He said that in times of massive macro change, there is little you can do as an individual to change your environment. You can respond by, like Homer, lashing yourself to the mast, and screaming at the on-coming storm. Or, you can use the time to truly understand what is important in your life…family and friends. In fact, he advocated that you will have limited influence on outcomes during macro setbacks, and that these are prime times to increase the amount of time you spend with your spouse and kids.

In short, his framework seemed to be: there are things that you have limited control over and that are fleeting (success at work, social standing, etc) and there are things you have considerable control over (your friendships, your relationships with your kids and wife, etc). Which do you want to tie your image of self and your happiness to? What do you want to look back at and remember that you did?

My response was to start having weekly lunches with my son at his elementary school and taking my daughter to school in the morning. I signed up to coach baseball with them. I spent more effort trying to have dinner with my family and to keep in touch with my friends. Not only did it significantly increase my resilience, but it instilled a different set of operating principles that I still use today. So, my advice to all entrepreneurs is to figure out what is your core foundation, that which is essential to you and which you have some degree of control over. Once you have, connect with it, protect it and use it to keep the rest of your life in perspective. Unleash the mast…

In yet another indication of how global the entrepreneurial world is becoming, our portfolio company, Imago, just acquired its primary competitor, an English company, while selling nearly half of its machines in Asia and Europe. Imago sells a mulit-million dollar 3-D atomic probe (atomic microscope).  (Congratulations Tim & team!)

Following up on yesterday’s post, when the day ended, people from over 80 cites had hit various posts with well over half coming from Europe and Asia.  You see this in online gaming where kids in Winnetka are playing against counterparts in Korea and China. Exciting times.

In the 1980’s, you could be the best regional company, selling your software, service or infrastructure into your area like the Midwest or California. In the 1990’s, the business became much more national in scope and now, it truly is a global marketplace. While this opens up large markets, it also adds complexity in managing your business. Clearly, as has been written extensively, the internet is only going to make this more so going forward. It will be interesting see if our friends in Washington push for a solution that drives the US to be a more competitive country (school reform, infrastructure, etc) or more towards protectionism. We will see…

No venture blog is complete without at least one post on the debate about what legal structure to use in launching your business. However, I have a little help (and will cheat a little) since I am attaching Jack Levin’s presentation on the subject to this post. I was on a panel this Saturday at Northwestern’s Law School with Jack and Randy Kaplan, co-founder of Akamai. Jack  is the senior Private Equity partner at Kirkland & Ellis and the dean of corporate law in this space. I highly recommend getting a chance to listen to him if you ever get the chance. At a very high level (and doing a disservice to the topics), here are some quick takeaways. I would recommend looking at the attached presentation for more detail Download nwu_entre_conf_406.ppt

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1) In forming a company, make certain that you have formed it sufficiently before any capital comes into the company. If not, the new capital will place a value on the firm and, by definition, on your share of the business. In a worst case scenario, if you form the company in conjunction with a financing, you will owe tax (section 83) on the value of your share of the business. New investors can leverage preferred securities to take some of the bite out of this valuation, but the longer the time between formation and funding, the better.

2) Entrepreneurs generally have three primary choices for the legal entity of their firm: S Corporation, C Corporation or LLC (each is hyperlinked to their Wikipedia definitions below).
— C Corp is the structure of choice from an institutional investor perspective. If you are are going to be taking professional capital, you will most likely be "encouraged" to convert to a C Corp. Institutional investors often have tax-exempt investors. UBTI (unrelated business taxable income), which can often be triggered in a business, will flow through pass-thru entities like an LLC or Sub S Corp to these investors, requiring them to file a tax return on this income. There are many articles on UBTI such as the Drinker Biddle post for more information. The primary issue with C Corps is that you incur double taxation on both income and at sale. As a result, you only want to use this structure if you are considering near-term institutional capital.
— S Corp is a pass-through entity that enjoys the liability protection of a C Corp while avoiding the double taxation issue. However, it is limited to 100 shareholders, does not allow for different classes of equity (e.g. preferred stock) and does not allow corporate or partnership entities to be shareholders. Jack’s main criticism of S Corp’s is that they are fragile in the sense that they can be blown (often converting automatically to a C Corp often) by a multitude of issues. S Corps also have various burdens that LLC’s do not including by-laws, boards, minutes, etc.
— LLC is a pass-through entity (limited liability entity) that also enjoys liability protection while enjoying single taxation. It allows for multiple classes of stock and has a more flexible management structure. However, few institutional investors will invest in an LLC and converting them to a C Corp requires more effort than an S Corp. People are least familiar with this entity, including employees (stock versus membership units).

In short, if you are not expecting to raise institutional capital, you are best off using an LLC or S Corp (preferably the former). If you are looking, in the near-term to raise PE money, then you should consider coming out of the blocks with a C Corp. Some firms have raised PE capital from an LLC structure, but it makes your fundraising efforts significantly more difficult due to PE investors’ biases against it.

Many internet plays died off in the 1999-2001 time frame because they made one erroneous assumption.  They assumed that users would change their daily routine and behavior in order to use their service or product. Many had phrases in their pitches like “all a user needs to do is take 30 seconds a day to…”. Guess what? People don’t like change, even if for only 30 seconds. I posted recently about Carl Ledbetter’s speech that defined successful technology as being technology that was invisible and simple for the user.

Consumers want solutions that allow them to maintain their daily routines while working seamlessly in the background. Voice over IP is a classic example. Initially, the technology failed to take off because voice quality was poor. Latency issues along with dropped packets resulted in broken or tinny conversations. Improved compression technologies along with greater bandwidth solved the quality issues. However, it still did not take off in the mainstream. People were not used to using their computers to make calls. They viewed computers for data and phones for voice. Vonage (and the other leading VoIP service providers) saw this and rolled out a model where users plugged a voice gateway into their internet hub and then plugged their phones in the gateway. Suddenly, the technology became a) simple to install and b) invisible to the user. They can continue to make calls like they always have with their phones, and Vonage has over 1 million customers.

Consumer plays often fail because they assume the consumer will change behavior if the benefit is large enough. The problem is that few consumer technologies address large enough issues to warrant mass behavior change. People also get uneasy when you make them interact with their technologies in new ways. Don’t make someone use a computer, for example, when they can still use a phone to make a VoIP call. Don’t try to change their mental construct about how they use technology.

Enterprise plays often fail because they try to not only change behavior, but to disintermediate users from their established routines and relationships. People have come to trust and rely on their friendly brokers and don’t look kindly on “automating” them away. Internal parties view new solutions suspiciously. These technologies often have “soft” benefits such as increased productivity or reduced headcount. This often means, to IT or procurement, that they will have fewer people in their empire. The discomfort of change is real and hard while the benefits are TBD.

Simple suggestions:
1) hide behind common interfaces and routines
2) find similar, accepted analogs and draft behind them
3) don’t dramatically change how people view the role of technology in their lives
4) listen to your gut about adoption issues…make it pass the grandmother test
5) KISS: keep it as simple as possible

Tim Draper recently sent me this great post from Marc Hedlund at O’Reilly on Entrepreneurial Proverbs.   Lot of great advice summarized here (including from Chicago’s own Jason Fried).

Starting

• It’s good to be king — being an entrepreneur is the best
  job I’ve had. Every day your job is new and different; you constantly
  have to push yourself in new directions. You no longer have to say,
  "Well, I’m just an engineer, but…" — you have a great excuse to take
  an interest in everything. Working in an environment you shaped to your
  own beliefs about how a company should be run is incredible (and
  humbling!). And of course there are sometimes financial rewards,
  although it’s still a great job regardless.
• Losing sucks — shutting down a company is unbelievably
  difficult. It affects your home life, your health, your job prospects,
  your financial stability. Professional investors are grown-ups, but
  it’s still extremely disheartening to lose the money people invested
  based on belief in you. If your backers include friends or family, it’s
  extremely difficult to have to tell them the company is closing and
  their money is gone. Most entrepreneurs fail several times before
  succeeding, too, so losing is both terrible and nearly inevitable.
  Fight as hard as you can against it.
• Building to flip is building to flop — this is taken from Jason Fried,
  and he’s right. People who start out with only one goal, to sell to a
  big portal, will find their options are too limited. Plan as many paths
  to success as possible for your company, and always have a Plan B when
  acquisition (or whatever path you choose first) doesn’t work.
• Prudence becomes procrastination — it’s great to research
  your market and talk to potential buyers about your ideas. It’s
  terrible to let an excess of this become a impediment to getting
  started. Too much prudence edges away from research and into
  procrastination.
• Momentum builds on itself — just start. Do whatever you
  can. Draw a user interface. Write a spec. Make something, anything,
  that people can see and touch and try. A prototype is worth ten
  thousand words. Once you start moving, you will find that people start
  to carry you along.
• Jump when you are more excited than afraid — lack of fear
  is irrational, and too much fear is debilitating. Make the jump into
  your business when you have considered the fear, and come out more
  excited than afraid.

The Idea

• Pay attention to the idea that won’t leave you alone — this is taken from Paul Hawken’s Growing a Business.
  Sometimes an idea catches hold of you and you find you can’t put it
  down. Pay attention to that! Just start working on it. Can’t get
  yourself to do anything on it? Move on. Find yourself waking up out of
  bed to write down new ideas about it? That’s a good one to choose.
• If you keep your secrets from the market, the market will keep its secrets from you
  — entrepreneurs too often worry about keeping their brilliant secrets
  locked away; we should all worry much more about springing a surprise
  on a disinterested market (anyone remember the Segway?). To quote Howard Aiken: "Don’t worry about people stealing an idea. If it’s original, you will have to ram it down their throats."
• Immediate yes is immediate no — does everyone immediately
  tell you your idea is great? Run away from it. If the idea is that
  obvious, the market will be filled with competitors, and you’ll find
  yourself scrambling. One good test: when the New York Times Magazine
  puts out its annual "Year in Ideas" issue, is your idea in it?  Then don’t do it.  You’re already too late.
• Build what you know — this is the most basic advice of idea
  generation: scratch an itch you have yourself. To make a great company,
  stop and ensure that your need is broadly felt, and that your solution
  is broadly applicable — not everyone spends their life in front of a
  computer, remember.
• Give people what they need, not what they say they need —
  interviews are tricky. People will swear up and down that they would
  buy a product you describe if only it were available, and then fail to
  do so as soon as it is. Likewise, in conversation an idea can sound
  terrible, but in actualization the idea can become a compelling
  product. You have to sherlock out the truth of the interest people
  express, and "yes/no" questions are usually less useful than "how much"
  or "how bad" questions.
• Your ideas will get better the more you know about business — engineers hate to hear this, but you can generalize up quite far from here: the more you know about everything, the better all
  of your ideas will get! If you want to start a business and your
  strength is in development, learning about pricing, sales, marketing,
  finance, and yes, even HR, all of it will make your product ideas
  stronger and better.

People

• Three is fine; two, divine — having too many co-founders
  makes decisions hard to reach; if you’re on your own, you have to bear
  all of the stress and worry about the success of the company. In my
  judgment, three people can do well together, but having two founders is
  best.
• Work only with people you like and believe in — I once heard Eric Schmidt
  say something along the lines of, "The older I get, the more I think
  all that matters is working with people you like." If you’re smart and
  talented, you’re probably going to like a lot of smart and talented
  people. Working with people you like is so much more fun, and often
  more productive, than fighting against someone who may be smart and
  talented but just isn’t a great fit for you.
• Work with people who like and believe in you, just naturally
  — maybe you are very persuasive, and can talk people into working with
  you against their better instincts. Especially for co-founders and
  early employees, don’t try that hard. Find the people that naturally
  want to work with you, and nudge them into the roles where you need
  them. You’ll have more fun and get more done.
• Great things are made by people who share a passion, not by those who have been talked into one — a corollary of the last; you can spark a passion in someone, but you can’t do it without some
  fuel to catch. Better to wait, and find the person who is already
  inclined to believe in your cause. You may talk someone into
  co-founding a company with you, but will they stick with it through ups
  and downs if they had to be persuaded that hard?

Product

• Cool ideas are useless without great needs — this is the
  classic engineers’ entrepreneurial mistake (or at least I’d like to
  think so, since I’ve made it). Techies love tech, and a new technology
  can produce a lot of companies that don’t really meet a need. Better to
  start with the need, and then see how what you know can produce a
  better answer to that need. (Marketers tend to have the opposite
  problem: real, pressing needs with completely unworkable solutions.)
• Build the simplest thing possible — engineers have the
  hardest time with this, with not overdesigning for the need they’re
  addressing. Make the simplest possible product that makes a significant
  dent in that need, and you’ll do far better than you would addressing
  two or three needs at once. Simplicity leads to clarity in everything
  you do.
• Solve problems, not potential problems — you can waste a
  lot of money implementing solutions for problems you don’t have yet,
  and may never have. Work on the biggest, most pressing problems today,
  and put aside everything else.
• Test everything with real people — it’s unbelievable how
  helpful this is. Go find civilians, real people who use computers
  because they have to and not because they love to. Find them in
  Starbucks, or at the library, or in a college computer lab. Give them
  $20 for 20 minutes, and you’ll be paid back a hundred times over.

Money

• Start with nothing, and have nothing for as long as possible
  — small budgets give big focus (probably another line I’m stealing
  from Jason Fried: it sounds like something he’d say…) Don’t go out
  and raise a ton of money right away. Instead, give yourself just enough
  to get going, and use the limits that imposes to motivate yourself.
• The best investor pitches are plainspoken and entertaining (not in that order)
  — think about what this implies. A plainspoken pitch is the surface of
  a very solid business. If you have to fudge and lie to get investors
  interested, why is that? If you’re running a great business, it is not
  hard at all to lure investors into it; the worse your business, the
  bigger (and more odious) your fundraising task is. Entertaining implies
  a fun person to work with, and VCs like working with people they like
  as much as the rest of us do. If you don’t bring the funny, bring the
  person who brings the funny.
• Never let on that you’re keeping a secret — telling an
  investor "I don’t want to talk about that" is terrible. It’s the
  natural converse of being plainspoken. It’s good to be aware, though,
  that some potential investors will listen to you and then share your
  information with your direct comptitors, and not always because they’re
  invested in those comptetitors. Knowing that, you have to keep some
  secrets — but be as diplomatic about that as possible. Respond to the
  idea behind the question, without giving away more than you feel
  comfortable discussing. Learn to steer the conversation in the way you
  want it to go. And then give up more information as you become more
  comfortable with the potential investor.
• No means maybe and yes means maybe — you should never take
  a "no" from someone you want to work with. Accept the no, ask for
  feedback, and then just keep sending them updates on how much butt
  you’re kicking in the market. During one company, three of the five
  term sheets I collected came from VC firms that told me "no"
  originally. Conversely, though, the only money in the bank is actual
  money actually in the bank. Everything else is just a possibility, and
  you have to treat it as such. Don’t stop fundraising until you have a
  firm commitment for the funding you need, and don’t accept halfway
  promises like, "We’ll fund you if another firm comes in." Keep on
  driving until the wire transfer is complete.
• For investors, the product is nothing — the classic
  engineer’s VC pitch has ten slides about the product and two about the
  academic achievements of the founders. That’s a terrible pitch. One
  slide should be about the product, while the rest cover the market,
  competitors, financials, funding history, and the relevant experience
  of the team. The product matters far less to most investors than the
  reactions of customers, the properties of the market, and the
  credibility of the team. Obsess about the product on your own time;
  present your business in all of its parts.
• The best way to get investment is not to need it*
  — if you have a running business with real customers and you’re paying
  all your bills, you are much more likely to get a funding round than if
  you need the round in order to survive or succeed. The pitch that goes,
  "We could accelerate our growth with more money" is much more
  compelling than, "I need your money or our doors will close."