Archive for February 9th, 2008|Daily archive page

Sometimes, You Gotta Ignore the Experts


Sometimes, You Gotta Ignore the Experts

Found|READ contributor Aruni Gunasegaram is preparing to seek angel funding for her current startup, Babble Soft, which builds Web and mobile communication software products that help simplify parents’ lives. This is Aruni’s second company. Her first, Isochron, was a bubble-era dotcom founded in 1997 — out of a business plan competition, of course. Isochron wasn’t a home run, but it wasn’t a total failure either. The company was sold off in 2002, a year after Aruni left as chief strategy officer. As she wrote recently on her personal blog, entrepreneurMusings:

The Founders/employees were washed out (i.e., got nothing) and the Investors got only a small fraction of their invested capital back. At that time many companies were just disappearing all together. When it was sold, Isochron was on its 4th CEO with me being the first. Now it’s on its 5th, is still operating and as I understand it doing reasonably well, but not the high growth trajectory we had hoped for back when we started.

In preparing to raise money now for Babble Soft, Aruni has been reconsidering her experiences with Isochron, and has written a nice essay about this entitled The Entrepreneurial 7 Year Itch. There are several useful lessons here… but I suggest you pay special attention to the following:

Looking back, if we (and our investors) had truly understood Porter’s 5 Forces we would have approached the business differently or maybe even run the other way because with a customer like Coca-Cola you don’t have much negotiating power! But hey, we were young entrepreneurs (I was 27 – what did I know? ) who felt we could conquer the world of distribution to and maintenance of vending machines and other equipment after that.


You’ve probably been schooled in Porter, and his “forces.” They’re important, but Aruni’s point here is an important one, too: had she known then what she knows now, she might not have ventured into business with Isochron in the first place. Meaning she wouldn’t likely be doing Babble Soft now, either.Ignorance has its advantages, and there is no real way to leverage it (how would you leverage the absence of awareness of something?) But, Aruni proves that sometimes it’s OK to ignore the experts. In fact, sometimes you’ve got to ignore them, or nothing will happen.

This is entrepreneurship, after all. And rules are made to be broken. See more of Aruni’s recommended reading on Found|READ, here, and for more academic sources, see this source pace on her blog. It’s all good stuff.

How NOT to handle a layoff, via Tesla


How NOT to handle a layoff, via Tesla

We’ve followed the ups and downs at electric car company, Tesla Motors, over the last year. We got hyped like everyone as the startup’s celebrity line-up and fattening coffers was chronicled across the blogosphere. (It’s $140 million in funding with a current “internal” round.) Tesla was the first alt-fuel company sexy enough to warrant coverage in Vanity Fair!But things haven’t gone well, at all, at Tesla. Product delays, 3 CEOs, turmoil. We have friends who’ve worked for, been fired from, or invested in the company. None of them has ever seemed very happy. This may explain why, when Inc. magazine named founder Elon Musk Entrepreneur of the Year in December, Elon let it slip in the interview that, at moments, he longs for the days at PayPal.

Today we caught up to Tesla’s current round of layoffs — and it’s a brilliant opportunity to study how NOT to handle such a developement.

The key information first leaked in this post, Stealth Bloodbath on ex-CEO Martin Eberhard’s Tesla Founders Blog. The departures list is a foreboding one: 15 new names, some of them senior, plus 11 (apparently) previous exits, bringing the total to 26 — about 10% of Tesla’s staff.

Eberhard gripes that the firings are high-level, random, come without severance for many, and have gone unreported in the press. He also criticizes the wisdom of Tesla’s current management in cutting back right before a product release, and when clean tech is so hot.

No one says a company must publicize a downsizing. The Found|READ lesson here is in Tesla’s response to media inquiries immediately following Eberhard’s leak of the news.

In an unfortunate lapse of good judgment, Tesla’s spokesperson Darryl Siry told VentureBeat there was no reason to worry and added, rather defensively, it seems:

“We’re letting go of people who are either not the best on the team, or are working on something that is not a priority,” he said in an interview.

‘eh hem.


Don’t ever publicly diminish your outgoing staffers. Ever. You might think they’re not “the best” but don’t say so. Say nothing about those you’ve fired. Use the little time/space you have on the record with the press to focus on the positive forward movement that whatever change you’re making will have on your company.

For example: “We’re very enthusiastic about the upcoming release of [our product]. We’re grateful for the hard work of everyone who has helped [the company] come this far, including those leaving the company today. With this streamlined team we are better-organized to deliver [our product] successfully, and on time. Everyone at [the company] is reinvigorated for this challenge.”

TWO: Be proactive, especially when layoffs include key employees (or employees who could be perceived as such). ‘Not the best on the team?’ ‘Not working on priority projects?’ According to Eberhard, Tesla’s layoffs include “the world’s foremost EV motor engineer, trimming down the service organization before the job of opening the first service center is done, [and] ripping through the firmware team [which] are all hard to explain,” when Roadster isn’t done and Whitestar is about to launch.

The company’s new CEO is “holding people accountable at all levels, and that starts at the top,” Siry said of the executive departures. OK, but making changes ‘at the top’ is different from a downsizing. That is strategic and merits being proactive — this means a press release if you’re as high profile as Tesla (mandatory if you’re public). If you’re making the change for the right reasons, you’ve nothing to hide. Tell people why you’re doing what you’re doing.

THREE: When you don’t handle such developments in a straightforward manner, you end up with ex-employees with axes to grind, and who, like Eberhard, are only too willing to share their views with the world. Eberhard published the sentiments of several newly-fired Tesla workers under “what it feels like on the inside”. And this will create a whole new dimension of problems for you.

For more on Tesla’s state of affairs, definitely read Katie Fehrenbacher’s exclusive interview with Musk and current CEO Ze’ev Drori, at Earth2Tech, published Dec. 21: Tesla’s Chairman and New CEO Talk Transmission Snags and Raising Another $40M

My Funding Toolkit


My Funding Toolkit

Editor’s Note: Serial founder Aruni Gunasegaram has written for Found|READ about the virtues of ignoring “the experts” (like Michael Porter) and the things no one tells you about VCs. Aruni also wrote about her plans to seek angel funding for her current company, BabbleSoft, which builds Web and mobile software tools for parents. Aruni has now amassed what she calls her funding “tool kit,” and she shares it with us here.

sears-toolkit1.jpgFollowing on my post, Other People’s Money – The Hunt Begins, I thought it might be interesting to share what I will be putting in my Fundraising Toolkit. I plan to raise seed financing from angel investors for Babble Soft, and here’s what I have in my toolkit.

Executive Summary. Thankfully people have moved away from the 35 to 40 page business plans that used to be required when I raised money for my first company. Now it’s easier to get your foot in the door with a 5 to 7 page summary. If they are interested, they will ask for additional information. In a typical Executive Summary you will see sections on:

  • The Company
  • The Problem
  • The Solution (i.e., Your Products)
  • The Market (including Competitors)
  • The People
  • The Numbers (i.e., the Financial Projections).

Financial Projections. In my opinion, creating Financial Projections for an Internet startup is often an exercise in futility that shows you have an idea of how you will make money. Most experienced technology investors know that predicting the future is a crazy process at best especially when you are starting from ground zero and success primarily depends on many viral factors. Financial projections for IBM are much different than financial projections for an Internet start-up. The assumptions you make are the most important part of the model as they give the investor an idea of the homework you have done on the market.

Some venture capitalists like high profile Fred Wilson of Union Square Ventures go as far to say that sometimes you can wait to scale before figuring out and executing your business model when describing his stance on Twitter’s lack of a current business model.

Since Babble Soft is not Twitter, I’m not already a gazillionaire, and I have a million things to do, I have a sharp MBA student, Anand Balasubramanian, helping me create an Advertising and Subscription based model. I love energetic, rock star, cheap, student help! He has done a great job so far building a simple, easy to understand financial model for me.

Visuals. Since I’ll be raising funds for products that do not exist yet, I have engaged a great local design, user experience, and information architecture firm, Projekt202, to create a few mock-up pages illustrating both the web and mobile components of our new applications. They seem as excited about the vision as I am and are taking on some of the financial risk with me. It makes me so happy when I find people who get what I’m trying to do! I’ll also have a demo account of Baby Insights and Baby Say Cheese ready to log in to demonstrate our existing applications.

Investor Leads List. However you choose to keep track of your calls, meetings, and referrals it’s important to do so. I have met entrepreneurs who want to raise funds who aren’t organized about the process and end up looking a bit flighty. Unfortunately the investors are allowed to be flighty but they usually don’t tolerate too much flightiness in entrepreneurs. Remember: “She who has the gold makes the rules.” After a while it’s easy to forget what you promised to get to whom and who referred you to whom. It’s important to remember at what stage of the investing dance you are in with each potential investor. On this spreadsheet I plan to keep track of:

  • Name
  • Contact Information
  • Professional Background
  • Who Referred Them to Me
  • Investment History
  • Typical Investment Size
  • What Items They Need From Me, and
  • Personal Assessment on the likelihood they will invest.

I would be downright ecstatic to put someone on the list referred to me by a reader of my blog. � :-)

Passion Tempered With Wits. I think that often the big thing that can swing an investor, especially an angel investor who has been in your shoes before when building his/her company, is your passion.

  • Why are you doing this when there are much easier ways to make a buck?
  • What will keep you going?
  • What excites you about the business?

I am passionate about helping new parents and caregivers connect and find answers. I am passionate about building a business. I am passionate about finding great people to work with. If that passion is tempered with some logical thinking, that’s a big huge ‘ole plus! All of us entrepreneurs are a bit crazy at times so I just hope I don’t lose my wits in the middle of an investor pitch!

Since I am still working on everything above except for my passion which has recently been reignited, I’ve got a lot to do before the meetings I already have set up with potential investors in the next couple of months. If you have suggestions on other things I should have in my fundraising toolkit, let me know by leaving a comment below. It’s been a while since I have raised money and I’m always open to learning new things.

Join me for the journey. Subscribe to my blog and hold on to your stomachs, it’s bound to be a scary roller coaster ride at times!

aruni.jpgAruni Gunasegaram is the founder, with her husband, of Babble Soft. Previously, she founded Isochron, a dotcom founded in 1997 that was sold in 2002. Read Aruni’s previous Found|READ contributions on the virtues of ignoring experts like Michael Porter) and a few things no one tells you about VCs. For even more, see her blog, entrepreMusings.

Founder Burnout and How to Avoid It.


Founder Burnout and How to Avoid It.
Courtesy of Brad Feld’s blog, we found a terrific set of posts today on the topic of burnout, an affliction that nearly all startup founders experience at some point in their careers. While it appeals to our entrepreneurial romanticism to “burn the candle at both ends,” burnout from working too hard can be far more destructive, personally and professionally, than all that excessive working was worth in the first place. (Just ask Om.)

Writes Feld:

Burning out is a chronic problem with entrepreneurs. In the early 1990’s – for a year before and after I sold my first company – I went through a tough period where I got very depressed. I held it together and got through it, but the memory of how I felt is never far away. I was completely burned out. I’ll be forever grateful to Amy and my business partner Dave for putting up with me during this time period since they were the ones that had to deal with the brunt of my depression.

Sound familiar? Are you suffering from burnout yet? Here’s a great post that outlines The Four Stages of Burnout. They are…

1. Physical, Mental and Emotional Exhaustion
2. Shame and Doubt
3. Cynicism and Callousness
4. Failure, Helplessness and Crisis.

Founder Andrew Hyde, the creator of Startup Weekend, succumbed to burnout and wound up having to take a month-long hiatus to recover. It took “a full month to be able to really recover, complete tasks, find neglected projects and really get excited about the project again,” he writes his recent post about what the experience taught him. Four whole weeks without working!

Hyde adds:

I am still trying to figure out why this is really important. Today I looked back at the pages of notes and figure out lessons and trends I would have forgotten about.

Lesson: Burnout = Distraction = Lost Opportunities

Burnout can also create unnecessary conflict: business conflicts due to lost opportunities; as well as personal/personnel conflicts, because it always affects those around you when you’re suffering from it.

So do what Andrew Hyde didn’t do: listen the people who caution you to slow down. This means your friends, your parents, or the parents of your friends (it might not be your investors!).

And, as Feld suggests, sleep more. Scientific studies prove more sleep makes your brain function better. Feld recently started to feel anxious again, he writes, but this time he spent 14 hours in bed. The next day, “whatever vestiges of my cold, fatigue, or anxiety were completely gone.” And so we close with Feld’s parting counsel …

HOW TO AVOID BURNOUTI have simple advice for all entrepreneurs – listen to your body. Remember the quote from Dune “Fear is the mindkiller” and remember that most fears and anxiety are born of fatigue…Don’t worry about “pacing yourself” – that’s probably not possible – but when you see signs of burn out, take it easy for a little while.

How to Optimize the Founder’s Mind


How to Optimize the Founder’s Mind
Research shows that your brain function is both broadened and improved by “interdisciplinary exercise.” What does this mean? Be eccentric. Use your brain to think about lots of different things, even things that have nothing to do with one another. This builds new synapses, exercises existing ones, and simply makes you smarter.

OK, you’re thinking, but I’m founding a company. I don’t have time to think about anything other than cash flow and customer acquisition, much less take up new hobbies. But here’s one quick way to do become interdisciplinary: When you read, read stuff that has nothing to do with what your company does. (You can make time to read.)

Life Optimizer had a great post last week that explained three reasons why diversifying your reading is a shortcut to brains-building.

1. Avoid boredom
I don’t know about you, but reading the same topics again and again makes me bored. Even for topics I’m passionate about, I will be more refreshed if I also read other topics once in a while.2. Arbitrage knowledge
The art of arbitrage is important for living smart, and diversifying your reading allows you to do knowledge arbitrage. Knowledge arbitrage means taking ideas from one field to be applied to another field. If you read only one or two topics, it’s difficult to do that.
3. Cross-pollinate ideas
Continuing the idea of arbitrage, not only can you borrow ideas from other fields, you can also combine ideas from different fields. Often it will give you “original” ideas since nobody has seen such combination before. Of course, you can only cross-pollinate idea if you have different kinds of idea to begin with, and that’s why you should diversify your reading.

It turns out this is a tried and true method, used by some of your business icons — like VC Michael Moritz and Apple founder Steve Jobs.

Last July,
the New York Times revealed what several hyper-successful business leaders read — and it ain’t business books.

For example, Moritz, the Sequoia VC who funded Google, Yahoo!, PayPal, and others, said:

“I try to vary my reading diet and ensure that I read more fiction than nonfiction,” Mr. Moritz said. “I rarely read business books, except for Andy Grove’s ‘Swimming Across,’ which has nothing to do with business but describes the emotional foundation of a remarkable man. I re-read from time to time T. E. Lawrence’s ‘Seven Pillars of Wisdom,’ an exquisite lyric of derring-do, the navigation of strange places and the imaginative ruses of a peculiar character. It has to be the best book ever written about leading people from atop a camel.”

The Times also reports that Apple founder Steve Jobs once had “an ‘inexhaustible interest’ in the books of William Blake — the mad visionary 18th-century mystic poet and artist.”

We wrote yesterday about burnout, and the risks associated with it for overworked entrepreneurs. Our authors recommended sleep to avoid burnout. But diversifying your reading list with recreational (or at least non-business) books, may be an even more flexible way of forcing yourself to take time out from the day job because you can do it in the waking hours that might already take you away from proper work: e.g., while you’re in transit, on the train, plane or bus; while working out; or over your lunch break.

Whenever you do it, reading is just another means of resting, while at the same time a means of sharpening those mental tools. So try a novel!

What do you do to sharpen your mind, or to avoid burnout?

Are founders significantly richer than most people?


Are founders significantly richer than most people?

Harvard thinks so.

“Entrepreneurs are, on average, significantly wealthier than people who work in paid employment. Research shows that entrepreneurs comprise fewer than 9 percent of households in the United States but they hold 38 percent of household assets and 39 percent of the total net worth.”

So writes Ramana Nanda, an assistant professor at Harvard Business School, in his new paper called the Cost of External Finance and Selection into Entrepreneurship, published today in HBS’s Working Knowledge.

It sounds encouraging, but don’t get too excited. What the study really confirms is a long-held suspicion that the rich are more likely to become founders in the first place.

It ought not to surprise you that when market forces make funding more difficult, founders without their own “human capital” (Prof. Nanda means “means”) are more likely to be discouraged, while the very well-heeled benefit from a narrowed field of competition. But apparently, this trend holds even with founders who are above average in wealth — a socio-economic class that is highly-represented in business schools and, therefore, perceived to be potentially very enterprising (i.e.: rich enough to want more; smart enough and well-connected enough to make it happen.)

The greatest relative decline in entry [to entrepreneurship] came from individuals with lower human capital, many of whom were above median wealth. This finding suggests that an important part of the positive relationship between personal wealth and entrepreneurship may be driven by the fact that wealthy individuals with lower ability can start new businesses because they are less likely to face the disciplining effect of external finance.

Worse, he argues, tax incentives or other initiatives intended to motivate the not-so-rich into entrepreneurship don’t really even things out, because even people with deep pockets can to reap the benefits of such programs.

Anyway, you should read the paper. It’s just one more reason to bootstrap your butt off.

Thought of the Day: When in doubt borrow $$$


Thought of the Day: When in doubt borrow $$$

The other day I had coffee with an entrepreneur whom we’ll call Shai. Shai was entertaining me with good, and not-so-good, stories about his experiences learning the ropes in the new media business in the U.K.

One pearl of wisdom stuck out.
Shai recalled a period at his last venture where he had grown panicked about his debt-level. You’ve probably been there: already in hock for a few grand more than he was comfortable with; not yet cash flow positive; yet Shai’s company was at a critical inflection, where he needed to ramp things fast to get to cash flow positive.

Shai figured his choices were few. He could: sell equity to raise money; take on a partner and change his b-model entirely (which he didn’t want to do because he “still believed” in it); sell out; or, shut it down. He sought out a mentor to help him choose.

And this is when his mentor tells him:

“Don’t be stupid. Borrow more. At $20,000 in debt, if your business model doesn’t work, you are in trouble. At $2,000,000, if your business doesn’t work, the bank is in trouble.

I just love this advice. Shai says sit was one of the best bits of wisdom he received. Why? Because it helped him see his venture outside of the bounds of his own attachment to it. Think about it. Bankers are responsible for their decision to lend to you!. So, it’s not all about you. The sooner you stop personalizing things the easier your decisions, especially the very hard ones, will be.What a great perspective to have.

A Founder’s Tale: Angels vs. VCs


A Founder’s Tale: Angels vs. VCs

Editor’s Note: Founder Aruni Gunasegaram has written about the virtues of ignoring “the experts” , things no one tells you about VCs, and her preparations for “shaking the can” for her current startup, BabbleSoft, in My Funding Toolkit. On her blog today, Aruni shares some insights from her funding experience. We offer the highlights.

Several readers asked me to write my experience raising funds from angels and VCs for my first entrepreneurial endeavor. We raised about $15 million of which $3.5 million was from angels or what I would call boutique VC firms (i.e. a group of angels under one investment roof). Keep in mind that was all before the bubble burst back in 2001. Here are some of my observations based on my experience and from stories I’ve heard from other entrepreneurs.


They tend to invest their own money and reputation in earlier stage companies …
The really good ones (yes, there are bad ones) have built their own businesses from the ground up…

They tend to get their ‘hands dirty.’ Our lead angel investor for my first company wasMarc Seriff founding CTO of America Online… Marc actually manned a career fair booth that we had at The University of Texas at Austin [and] participated in the interviews [of our] developers! … Since Marc was our lead for our first round, he even assured our vendors that he would make sure (i.e. personally guarantee) they got paid if for some reason we couldn’t close the round!

Angles tend to bring their friends along for the ride.
Another of our angel investors, Jack Baum also introduced us to the owners of our very first big paying customer who ended up doing a nationwide rollout with us. I remember framing the check!

He and his partner Steve Winter (late of SAP) brought in two of our three venture investors (from SAP Ventures). Steve even served as our interim-CEO when we parted ways with the first one who had replaced me.

They don’t necessarily have to invest money to be an angel.
Richard Benkendorf an advisor, introduced us to our first key customer in the Coca-Cola bottling system that helped us achieve our first $1 million in revenue!

When the dollars need [to] get big for future financing rounds, angel investors usually voluntarily step back …

Some of them may not have sat on a Board or been involved in building their own businesses making some board meetings interesting to say the least…

Venture Capitalists

They tend to invest in later stage companies with some revenue, product completed, and market traction…. after an initial angel round has been done.

The really good ones (yes there are bad VCs – in case you haven’t heard) … come with a big rolodex of contacts and partners to help you cross some of the early hurdles.

Jeff Nolan of SAP Ventures introduced us to departments within SAP who were targeting the same customers that we were. He also gave me a copy of The Monk and The Riddle by KPCB’sRandy Komisar, a great read at a time when I think he sensed I was no longer enjoying the journey.

They tend to be more bankers/financiers than operating people…

They tend to look at a business with a black/white eye on financial numbers [Returns!]…

The good ones will often bring along investment partners in a syndicate.

They seem to apply a formula
…. If something has worked for them with a portfolio company in the past, they’ll apply the same logic to future companies. [Study their portfolio!]

They are investing other people’s money
… and if they perform well those people will give them more money to invest. [Motive!]

Who To Choose?

  • Personally, I think… it’s definitely better to have people who have built businesses on your side.
  • It’s also good to have people who have backed high-growth businesses if you plan to IPO or sell to an established business in the near future.
  • … it is more than OK to start a good profitable business that provides value to your local community. [But] if you want to play with venture capitalists, then you need to aim for the ‘household name’ category like Google or Yahoo! …

My biggest lesson: how important it was to be able to communicate with your investors openly and honestly… it will be much easier to weather the inevitable storms…

As Ben Yoskovitz says in his Startup CEO School of Hard Knocks post, you must have fun! When you are no longer enjoying the journey, take a break [to] make sure you are doing what you should be doing. If you find you’re not — don’t be afraid to make changes!!

How to Prepare Your Startup for the Downturn


How to Prepare Your Startup for the Downturn

McKinsey blasted us again yesterday, this time with its foreboding “Special Collection: Coping with a downturn.” Every day the signs of our coming recession grow clearer, so it’s time to start rationing and stockpiling — or diversifying, depending on your business type. Only you can make the call about what strategy is best for your startup, but one thing is sure: find a way to build flexibility into your b-model.

McKinsey offers specific guidance on how to do this in Preparing for the next downturn. Having studied 1,300 companies, the article details the winning strategies used to survive the last economic lull by Starbucks, Verizon and Talbots, and highights others in this handy chart.


I know what you’re thinking: Verizon, Starbucks and Talbots are all far larger than your company, and you’re neither an industrial shop nor a bank. It’s true that “balance sheet adjustments” might not apply to you, but the “operational flexibility” tips sure do.

We’ll break it down. Start by thinking about 3 things:

  • do cut SG&A by hiring more part-time staff
  • so you don’t need to cut R&D
  • so that you can continue to invest in diversifying your product offerings

Here’s how it works:

Talbots, for example, increased the flexibility of its workforce in the years before the recession, adding part-time workers during the growth period of the 1990s at almost double the pace at which it added salaried workers … Then, as the recession took hold in 2000 and 2001, Talbots also radically shifted its advertising mix away from TV and catalog operations and toward focused activities targeting customer groups with the highest sales potential. Although this strategy somewhat reduced the company’s ratio of advertising expenses to revenues (from 5.5 percent of revenues in 2000 to 4.3 percent in 2001), Talbots maintained advertising levels far above the sector in general [and] helped Talbots emerge from the recession as a leader in its sector, though it entered the recession as a challenger.


… less successful companies cut their R&D and advertising more deeply [than SG&A overhead], putting them at a disadvantage for tapping the opportunities these expenditures might create. Before the recession, their productivity per employee was lower than that of the leaders, and so they had to lay off more employees during the downturn, perhaps damaging their ability to attract and retain talent in the future.

There’s plenty more the in the McKinsey piece to help you “succeed in the face of decline.” Read and learn. Several months on, we’ll bet this is knowledge you’ll be very glad to have. “Preparing for the next downturn” was authored in April by McKinsey partners Richard Dobbs (London) and Tomas Karakolev (Prague), and consultant Rishi Raj (Delhi).


My Favorite Business Model

Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium priced value added services or an enhanced version of your service to your customer base.


Skype – basic in network voice is free, out of network calling is a premium service

Flickr – a handful of pictures a month is free, heavy users convert to Pro

Trillian – the basic service is free, but there is paid version that is full featured

Newsgator – the web reader is free. If you want to synch with outlook and your mobile phone, that’s a paid service – you get 1gb of virtual storage for free, but you have to pay for more than that

Webroot – you can get a free spyware scan, but for full protection you need to pay

This business model has been around for a long time.  Shareware always used a model like this and there are many successful software companies that have been built with this model.

It works even better with web native services.  A customer is only a click away and if you can convert them without forcing them into a price/value decision you can build a customer base fairly rapidly and efficiently.  It is important that you require as little as possible in the initial customer acquisition process.  Asking for a credit card even though you won’t charge anything to it is not a good idea. Even forced registration is a bad idea.  You’ll want to do some of this sort of thing once you’ve acquired the customer but not in the initial interaction.

Don’t require any downloads to start.  Don’t require plugins.  Support every browser with any material market share. Make sure your service works on various flavors of Windows, OSX, and Linux.  In short, eliminate all barriers to the initial customer acquisition.

And make sure that whatever the customer gets day one for free, they are always going to get for free.  Nothing is more irritating to a potential customer than a “bait and switch” or a retrade of the value proposition.

The best examples of this business model are when the customer implicitly understands why the paid service has to cost money.  More storage costs for photos or virtual storage are good examples. Termination costs on other carriers networks in the Skype model are another.  When it is just additional features that don’t carry an incremental cost to offer, it may be harder to convert free users to paid users. But if your free service is loved and you do a good job articulating the value that comes with the paid service, you can convert to paying users with good results.

I would like to have a name for this business model.  We’ve got words like subscription, ad supported, license, and ASP, that are well understood.  Do we have a word for this business model?  If so, I don’t know it.
The Freemium Business Model

I wrote a post last weekend called My Favorite Business Model.  I posted it earlier today. Here is how I described the business model:

Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium priced value added services or an enhanced version of your service to your customer base.

At the end of the post I asked for some suggestions of what I should call this business model. I’ve gotten 33 comments already which may make this the most commented post I’ve ever written, surely its the most commented post in the first day I’ve ever written.

And at the risk of calling the game before it’s over, I have to go with Freemium.  I love the name, suggested by Jarid Lukin of the Flatiron portfolio company Alacra.

So from here on in, I will refer to this business model as the freemium business model.  I hope the name sticks because I love it.


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