The first thing to say is be careful. There are a lot of sales people who turn out to be better at selling themselves to startups than they are at selling product. They will join your company on a high salary, insist on a quarter or two of guaranteed commission and delay you by up to twelve months.

That said, there are some killer sales people out there who can really make a difference. If you do find one of those, then hire them, but heed the following advice, which is from a guest post by Phil Sugar on AVC:

[As CEO] I go on as many sales calls and customer visits as I can.  I’ve been told that once I hire a Head of Sales, I should stay out of the process.  I totally disagree.  I am not going to be the one managing the process, but I want to hear what the market is saying directly.  A salesperson can’t be objectively assess the market, they are too close, their livelihood depends on the sale, same for the VP.  They have to be optimistic, they have to try and make the fit whether it’s pushing the company to do something or pushing the customer to accept something.  The best information you are getting from them on your market is second-hand hearsay.  I’ve sat on boards and watched as projections get trashed as sales get pushed from one quarter to the next and the CEO sits by helplessly, not knowing why as they weren’t on the calls.  I am not going to be that guy.

On half a dozen occasions now I’ve seen a new Head of Sales come in and push everyone else out of the sales process. All of those situations ended badly. Worse, when only sales have a line to the customer and the deals aren’t closing you have an interested party controlling information and it is often hard to know whether the culprit is sales execution, the product, or the market.

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VCs evaluate products by looking at demos and having a play themselves, by soliciting third party opinion and by looking at whether and how customers are using and paying for the product. The balance between these three methods of evaluation, lets call them ‘direct’, ‘third party’ and ‘customer’, depends on the stage of the company, the nature of the product and the experience of the VC.

Starting with ‘customer’, unsurprisingly, the more customers and revenues a company has the more a VC will look to what they are doing to tell him or her whether the product is good. If the product is great customer numbers will be increasing, per customer usage (often termed engagement) will generally be increasing, customers will be expressing their love for the company on blogs and in reference calls, analysts will be saying good things, and the price point will often by higher than for competing products. Two caveats are appropriate here. Firstly, some products are great precisely because they are cheap, often because they have simpler than the competition (e.g. Skype). And secondly, it is possible to build a profitable company with a product that people hate but buy because it is cheap (e.g. RyanAir), although in that case I would say you have a good business, and probably a strong capability elsewhere in your organisation (e.g. supply chain management, marketing), but not a good product.

With earlier stage companies investors generally don’t have the luxury of being able to rely on hard metrics and instead have to rely on gut feel – i.e. ‘direct’ evaluation. If they have relevant experience and the product is consumer focused, or a business product that can be demonstrated, then a large part of the opinion on the product will be formed based on what they see and feel when viewing or using the product. VCs without experience (which can come from either investing or operating) often struggle to differentiate between a good product and a bad one.

Finally, investors often ask ‘third party’ experts for an opinion. This is most common when the product is deeply technical and there isn’t much to be learnt from direct observation. In this situation the expert will generally be giving a view on the technology risk as well as the product. VCs often use executives in relevant portfolio companies to do this expert review. Sometimes they use third party consultants. The expert’s opinion will most likely have a big impact on whether the VC decides to invest, and it is advisable to work with the VC to ensure the person conducting the review has the right background to understand your company and give a good opinion.

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(Nic) At companies like Path and Flipboard they believe that high design values are a key part of the value they provide to consumers.  According to lean principles they should test that hypothesis as quickly and cheaply as they can, but delivering a high quality well designed user experience takes time and fast learning may not be possible.  How should companies like this approach product development?

(Eric) It’s a great question, the two things are not necessarily mutually exclusive. Even great design can be tested. Often, customers care less about the things that you think they will. At IMVU for example, we set out with some very high expectations about the quality of what we wanted to deliver but using Lean Startup principles we discovered something very interesting. We wanted our avatars to move around virtual environments in a very ‘real’ way. We wanted to build physics engines into the system that offered a very high degree of realism. This was really, really, hard to do. We tried a very clunky, simple approach to the problem instead. Our avatars moved instantaneously from where they were, to where they wanted to go. Inelegant and simple. Customers loved our ‘Teleport’ feature. The cost of delivering the solution we wanted to just didn’t make sense after that.

(Nic) Short iteration cycles and rapidly validating learning are key tenets of the lean approach.  These can be challenging on mobile given the time it takes to get new versions of apps approved and live in stores.  Is ‘lean’ therefore less applicable on mobile?

(Eric) It certainly makes it harder to do continuous deployment! The feedback that you can get from even a relatively small set of customers/testers though is always going to be helpful in focusing your development activity on the things that matter. The feedback you can get, even from a relatively small number of test users should be enough to give you real insights into what is valuable to people if you know what questions to ask and are honest about what you learn. Releasing a version of an App with new features that then becomes more popular, does not necessarily mean that those features are the reason that the app has become more useful. You need find ways to understand what customers are actually doing. Given the constraints of App Store approval, you also need to be able to see what customers are doing with the new app. Find some users that you can observe in the wild. Sometimes, the qualitative information that you can get from observing 10 or even 20 users will be as valuable to you as a bigger dataset of 1,000s.

(Nic) Does producing a minimum viable product in advance of a company having a commercially viable product just tip competitors off to what we are doing?

(Eric) This is a question I am always asked. People always overvalue their ideas and it is natural for people to want to protect their IP. Entrepreneurs should always try to find a way of socializing their ideas and getting feedback from real people – your friends are always going to be encouraging! Try this experiment to see how unlikely it is that someone will steal your idea. Take your second best idea for a business and try to get someone to steal it. Even if you sat down the lead product management people in the biggest company in the world and offer them a solution to a problem they have had forever, it is almost inconceivable that the idea will be ‘stolen’. (Note – Eric seems to have answered a different question here – i.e. will launching an MVP get my idea stolen?, rather than will launching an MVP damage my brand?)

(Nic) Most of the discussion around lean relates to consumer services where the cost of failure is minimal. Are lean principles equally applicable to startups with who are building products their customers will rely on for mission critical systems (e.g. banking systems, security software, some healthcare services) or which require significant capital investment (e.g. semiconductors, some cleantech)?

(Eric) There are always situations where lean startup ideas will be less important – frankly, if you know you can develop a successful cure for cancer, you don’t need to spend too much time validating the idea. In this situation the risk is in technology development and execution, not in the addressable market. For large scale, long term projects however, there is almost always a case for a company to remain focused on the important stuff. Organisations should not be afraid to change direction in the light of market feedback and that can come from iteration between the business and technology people. Let’s say you are building a piece of hardware that enables simple, high quality video conferencing and it will take two years to go from idea to market ready product. If you are not constantly aware of what the market is doing, you could easily end up with a product that is well designed and beautifully coded, but is just redundant as other products are bought to market. I think one of the most important things for the organization to understand is that just because someone has spent hours building something, it doesn’t make it right. If an engineering team has invested 5 person years to develop a solution that still requires 2 more years of work to finish, and the problem is solved elsewhere, how responsible is it to continue that development?

You can also find ways to test and prioritize your development on long term projects. That video conferencing startup for example could build web sites or landing pages that offer elements of their solution to the market and then observe which ones get the most interest. This might not be perfect data, but it is likely to be more useful than no data  at all and a long list of unprioritized features.

The authors arrived at their thesis empirically, after interviewing dozens of “inventors of revolutionary products and services as well as founders and CEOs of game-changing companies build on innovative ideas." They also include what they learned from Steve Jobs, Richard Branson, and Howard Schultz (whom they did not interview) whose innovative thinking has transformed entire industries.

I think the study alone was pretty robust, but, as further evidence that innovation is a learnt skill the authors cite research by Reznikoff, Domino, Bridges and Honeymon which studied creative ability in 117 pairs of identical twins and found that only 30% of performance in creative tests could be explained by genetics. The corresponding figure in intelligence tests was 85%. The takeaway: geniuses are born, innovators are made.

The authors list the five skills of innovation as:

• Associative thinking
• Questioning
• Observing
• Networking
• Experimenting

I nearly titled this post ‘Anyone can learn to innovate’, but I don’t think that is quite true, as to me it seems that one can learn to be questioning, be observant, network effectively and experiment well, but associative thinking is maybe more akin to intelligence, i.e. an ability you either have or you don’t. What Christensen and his co-authors do make clear, however, is that much of innovation can be learnt, and they show us the skills we should focus on if we want to become more innovative.

This work also shows the characteristics startups should look for in new hires if they want to remain innovative, and the behaviours that should be encouraged to maximise the innovative potential of existing staff.

The two biggest takeaways for me were:

1. Leading companies are increasingly putting corporate culture at the centre of their efforts to build a sustainable business. Jenn Kim shared more of the inspiring Zappos story.
2. The meme of abundance and scarcity. Technological progress is all about creating abundance where previously there was scarcity. Peter Diamandis shared a story about how in Napoleonic times aluminium was the scarcest metal known to man to the extent that Napoleon gave a banquet in honour of a foreign emperor where the foreign emperor ate with aluminium cutlery and everyone else ate with silver or gold cutlery. Since then the invention of electrolysis has unlocked all the aluminium that was previously unavailable because it was tied up in silicates and a scarcity has become an abundance. When we find a cost effective process for desalination the scarcity of fresh water will similarly turn to an abundance. JP Rangaswami also touched on this meme in his talk about the social enterprise. We now have an abundance of data which is creating opportunity in all sorts of areas, but with that abundance a new scarcity is created – privacy – and we are still figuring out how to deal with that.

Finally, I want to share a video that we saw yesterday. Regular readers will know that I’m a fan of Ray Kurzweil’s work, and in particular his predictions about the evolution of technology. I’m posting this short by Jason Silva because of the brilliant way it makes Kurzweil’s thinking accessible. The money shot comes around 1.45 when Jason describes how the cellphones in our pockets are a million times smaller, a million times cheaper and a thousand times more powerful than a $60m super computer was forty years ago. Think about that for a second and then imagine that progress in miniaturisation continuing. Hopefully it is now much easier to believe that twenty five years from now we will have computers the size of blood cells (running inside our bodies). Enjoy.

IMAGINATION from jason silva on Vimeo.

To me predictions are most interesting when they are controversial the more people who believe them the harder it is to make money out of them.  I think that this is one where Roger and Mike’s confidence level will be higher in twelve months and hence now is a good time to make investments in startups that help traditional companies to leverage the social web.  That is part of the reason we invested in Conversocial last year.

The future of the web has been the topic of much debate since Forrester CEO George Colony predicted the end of the web and an era of the ‘app internet’ in his talk at Le Web earlier this month.  Fred Wilson, Mark Suster and others came out in defence of the web, but it seems to me that the commentary has been largely one sided.  Perhaps that is unsurprising given that as VCs and bloggers most of us have benefited hugely in the past from the open web and stand to continue to benefit into the future.

However, even though the open web is better, it won’t necessarily prevail.  In a great post last September Joe Hewitt set out why.

Firstly, at the most basic level the web is just a collection of protocols and languages.  It has no unique characteristics that assure it a permanent place in our information architectures:

The HTML, CSS, and JavaScript triumvirate are just another platform, like Windows and Android and iOS

Secondly, there are plausible non-web visions of the future:

I can easily see a world in which Web usage falls to insignificant levels compared to Android, iOS, and Windows …. The Web will be just another app that you use when you want to find some information, like Wikipedia, but it will no longer be your primary window. The Web will no longer be the place for social networks, games, forums, photo sharing, music players, video players, word processors, calendaring, or anything interactive. Newspapers and blogs will be replaced by Facebook and Twitter and you will access them only through native apps. HTTP will live on as the data backbone used by native applications, but it will no longer serve those applications through HTML.

An alternative non-open web vision of the future is one in which access to services is controlled by an oligopoly consisting of Apple, Amazon, Google and Facebook.

I don’t come with any solutions, but rather with a request that we all remain open to a full consideration of the strengths and weaknesses of the open web, and of alternative models – there can be no sacred cows.  That way we will have a better chance of preserving what is really important – and that is open and even access to content and distribution for consumers, and by extension for startups.

In this situation it is imperative that there is a proper debate and everyone takes the time to properly understand everyone else’s position (and I stress properly), and that everyone feels that they have and respected.  However, if there is still disagreement, then the CEO must do what he or she thinks is right, even if the investor board members disagree.  In a recent post on his Information Arbitrage blog Roger Ehrenberg put it like this:

the buck ultimately has to stop with the CEO, and if the CEO cedes effective leadership to the Board it will create both an unhealthy dynamic and an untenable situation as more real-time decisions need to be made

This can be tough for investors who have some real skin in the game and care passionately about the success of the company.  They don’t want to see it go wrong and they are being asked to stand by and let the company take a decision that they don’t agree with that might make it go wrong.  However, none of us became investors because we want an easy life, and tough as it may be we should learn to live with it, as the alternative is worse.  I say that as an investor who in the past has definitely found it tough to stand by as companies take what I thought were the wrong decisions.

However, if there are too many disagreements and the board and CEO lose faith in each other then the situation becomes untenable.  Brad Feld wrote about this back in July, saying:

the board – and individual board members – are often involved in many operational decisions, but the ultimate decision is (and should be) the CEO’s. If the CEO is not in a position to be the ultimate decision maker, he shouldn’t be the CEO. And if board members don’t trust the CEO to make the decision, they should take one of two actions available to them – leave the board or replace the CEO.

This last sentence is the rub.  Ultimately if there isn’t a meeting of minds most of the time on most issues between any two people then they shouldn’t be on the same board together.  That said, it can be difficult for some investors to resign as directors, particularly in situations where the number of VCs is limited.  In that situation if the CEO is going to stay then the investor director should, whilst still being helpful where possible, take a back seat and not let their disagreement with the CEO get in the way of the functioning of the company.

The good news is that In a period of widespread macro-economic gloom (the Euro crisis persists, warning signs in the US are mounting, and on Wednesday this week up to 2m public sector workers will be on strike) there are sub-sectors that are continuing to grow fast.  Data from IBM Coremetrics shows that:

• US online sales last Friday were up 24.3% on Black Friday 2010
• mobile market share rose rapidly – largely driven by the iPad sales rose from 3.8% of the total in 2010 to 9.2% this year, and browsing share grew from 5.6% to 14.3%
• social media discussion volume increased 110% over 2010 – topics included out-of-stock concerns, waiting times, and parking

There is some significant growth in these statistics and it follows that there is good money to be made in the companies that are driving the sales directly – i.e. etailers, and also in the companies that provide them with technology and marketing/advertising services.

The existence of large pockets of growth like this are what has kept interest and valuations in the tech sector on a different trajectory to the rest of the economy.  Moreover, with the pace of innovation continuing to increase I think we will see more exciting new pockets of growth over time.  Given that the overall economy is not growing the quid pro quo is, of course, that other markets are being destroyed just as quickly.

The existence of pockets of growth like this is enough to build great businesses with strong profits.  It doesn’t necessarily follow that these businesses will command high valuations in the way that they have for most of this year.  On the subject of valuations I stand by my comments of the last couple of weeks – i.e. that the key driver will be public market sentiment towards technology, and that will be guided by the performance of recent tech IPOs, including Groupon (see While the exits keep coming the party will keep rolling and Groupon’s bull run is over).