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The perils of carrot and stick based management

This is a list of what Dan Pink, author of Drive: The surprising truth about what motivates us, calls the ‘seven deadly flaws of carrot and stick based motivation:

  • They can extinguish intrinsic motivation.
  • They can diminish performance.
  • They can crush creativity.
  • They can crowd out good behavior.
  • They can encourage cheating, shortcuts, and unethical behavior.
  • They can become addictive.
  • They can foster short-term thinking.

A couple of these are obvious, but many of them are counter-intuitive. A few years ago I would have rejected the notion that rewarding explicit behaviour (carrots) can diminish performance but in the case of creative work I have come to see that it is true, and I think similarly about the other ‘flaws’ listed. Most of the work we do in startups is of a creative nature one way or another so this is a very important point.

The takeaway is that the best performing teams will come to the managers who reject carrots and sticks and embrace the more complicated and tricky notion of motivating by giving their people autonomy, mastery, and purpose. If you are a manager, and this post resonates with you in any way I strongly suggest reading the book.

Balancing entrepreneurial drive and instinct with lean and other methodologies

On Tuesday night Michael Breidenbruecker, founder of Last.fm, RJDJ and all round nice guy gave a talk for around 50 of our friends and portfolio company staff (thanks again Michael). One of the interesting things about the Last.fm story is that success took a while to come. There were, I think, 2-3 years of little growth before market changes pushed music streaming into the mainstream, user numbers rocketed and the company was acquired by CBS for $280m.

In his new startup Michael is rigorously applying lean principles. These principles weren’t around when he founded Last.fm in 2002, so they built what they thought the industry needed and people would want. They quickly found a small group of passionate users which he says is what kept them going until the market turned, but looking back Michael thinks that if they applied lean principles they might have made some different decisions.

That observation prompted an interesting discussion about how to strike the right balance between entrepreneurial drive and instinct on the one hand and modern startup methodologies like ‘lean’ on the other. Someone from the audience made the good point that you sometimes see entrepreneurs over-focusing on doing everything by the ‘lean book’ and missing the big picture requirement of doing something meaningful.

I have three observations:

  • startups still need a great idea at their core – without that no amount of lean discipline will bring success, but once the great idea is there disciplined application of lean and other methodologies reduces the requirement for further moments of inspiration and/or luck down the line
  • it is easy to picture entrepreneurial drive and instinct as polar opposites to startup methodologies but that misses the point – they are in fact compliments – the methodologies help with the execution of the entrepreneurial ideas, in particular they make it quicker and cheaper to find out what works
  • for big and long-ranging decisions on issues like strategy, product quality, brand and market evolution it is often best to rely on instinct, but for shorter term and smaller impact matters like choosing between competing site designs and predicting customer behaviour methodologies and data are often more useful (see here for a good discussion of this point in the context of design)

As regular readers of this blog will know I’m a big fan of methodologies like lean, design thinking, and customer development. That’s because they increase the speed of learning, reduce the cost of failure and will ultimately increase the success rate of startups. My point here is that they are not a substitute for good old-fashioned entrepreneurial flair.

Looking for a Talent Manager to join Forward Partners

We’re hiring again! If you’re interested in joining us as a Talent Manager or knows somebody who might be then read on.

At Forward Partners we set out our stall to do much more for companies than just provide capital. I like to think of us as offering resources to entrepreneurs in four areas:

  • Help to make sure the product is aligned with customer needs
  • Help to make sure the product is of high quality (code, design, UX)
  • Help finding the first XXX customers
  • Help building a great team

All of this is in addition to strategic advice and access to our networks.

The Talent Manager will take the lead on the fourth item, helping our companies build a great team, and will also help with our own recruitment needs. The most common hires are co-founders, developers, marketers, and designers. Responsibilities will include helping companies build out a talent plan, building and maintaining a database of London’s best candidates, and managing recruitment processes. You can see more detail and apply on LinkedIn.

This is a great chance to play a key role in the success of Forward Partners and next wave of hot ecommerce companies and to learn the secrets of venture capital :).

Contribute to mindfulness research

I’m a big believer in the power of meditation and mindfulness to bring about a big improvement in people’s lives. It’s made a big difference to mine over the last twelve months and I’m meeting an increasing number of people who have experienced something similar. I think there’s a very good chance that much as fifty years ago nobody much exercised and now most people do in fifty years time most people will be meditating.

For that to happen we need more research into the benefits of mindfulness and meditation and on how to make practice easy and accessible. Professor Mark Williams from Oxford University is one of the leaders in this area. I’m part way through reading his excellent book Mindfulness: Finding peace in a frantic world so when I was emailed about his fundraising campaign on Crowdcube I clicked straight through and watched the video embedded below. He is raising £500,000 to further his research into how mindfulness based cognitive therapy can help the billion people around the world who suffer from depression. I’ve contributed and it would be cool if you did too.

European seed fund explosion – what does it mean?

BrightSun have just published research on the number of seed funds in Europe. As you can see from the graphs below the number of seed funds is growing very fast whilst the number of later stage funds is flat.

numberseedfundsChart 1: number of European funds investing in rounds of $1m and less (blue line) and number of countries receiving investment (green bars)

largefundsChart 2: number of European funds investing in rounds of over $1m (blue line) and number of countries receiving investment (green bars)

There are two obvious take aways here. I’m going to deal with the country point first. The number of countries where small funds invest is double the number of countries where large funds invest. If I was a ambitious startup with large capital requirements I would make sure I was in a geography where large funds invest regularly. Even if that meant moving the company. The chances of success on any other path are too low. If I was passionate about my country’s startup ecosystem I would aim to make good money out of my startup and then come home and invest the proceeds locally.

The second point is that the ratio of early stage funds to later stage funds has shifted from around 1:1 to 2:1, implying that the number of seed funded companies is growing much faster than the number of Series A funded companies and that we will have a Series A crunch here in Europe at some point. When you consider that a large number of the new early stage funds are accelerator programmes making 20+ investments each year then it seems almost inevitable that an increasing proportion of companies funded at the seed level will fail to raise Series A.

For anyone running an early stage fund or accelerator programme that means you have to work like crazy to be the very best of the 278 funds investing in rounds of $1m and less. That includes us at Forward Partners where we focus on two things – being attractive to entrepreneurs by being the best at helping them get to the next stage and on making great investment decisions by having a deep understanding of our target markets and companies.

For entrepreneurs raising money it means that if you have the luxury of choosing between investors you should select based on which one is going to give you the best chance of getting your next round away. At the risk of talking our own book, I think that comes from a combination of focus on making sure the fundamentals of the business are strong and connections with investors at larger funds.

 

 

Turning visitors into users: initiate the habit loop

The goal of most consumer focused startups is to become an automatic habit for their customers and I’ve written before about Nir Eyal’s powerful Desire Engine framework for building habit forming services (tl;dr: take users round and round a four step habit loop – trigger, action, reward, investment). Yesterday Nir wrote about applying this framework to turning users into visitors, advocating that companies should use the onboarding process to take users round the habit loop for the first time.

In practice that means:

  • The trigger to click through to the site should anticipate the reward the user will get – e.g. advertising copy should describe what users will get out of Screen Shot 2014-03-07 at 10.25.30the service, the Instagram Facebook inserted to the right is a great example.
  • The action should be low effort – BJ Fogg has shown that people are much more likely to complete an easy step with a low reward than a more complex step with a high reward. Site designers everywhere have seen the benefits of reducing the amount of info collected on sign-up – this is why.
  • Then there should be an instant reward – maybe telling the user something about herself, or something from their social graph. Research has shown that users respond better to rewards that are variable and carry a bit of surprise – e.g. what’s in this photo of me that’s been posted (we all click on those…)
  • Finally, and perhaps counter-intuitively, comes the investment stage – it’s better to invest a bit of time in the service than finish the onboarding process as quickly as possible . When users do a bit of work to improve how a service works for them – e.g. fill out more detail on a profile, follow some friends, customise an avatar – then they are more likely to come back. They feel more invested and they have an expectation that the next reward will be better.

I love Nir’s work and I’m pleased to see him building a brand for himself and running the HabitSummit conferences. Hopefully he will hold one in London soon. Amsterdam just isn’t the same…

Apple’s new product process is a long checklist

Yesterday I wrote about how building a startup is increasingly an exercise in disciplined application of process. Creativity and flair will always be important, but whereas that used to be most everything and charismatic sales driven entrepreneurs with huge personalities were common, these days implementation of processes like ‘lean’ and ‘customer development’ are increasingly important and the personality profile of entrepreneurs is changing. We used to get lots of Larry Ellison’s and these days we get more Mark Zuckerberg’s.

The reason for this is that many processes formerly regarded as the preserve of creatives have been broken down into process steps that non-creatives can follow. It turns out that Apple’s new product process is one of those. This is a quote from Leander Kahney’s recently published book on Apple design chief Jony Ive:

“In the world according to Steve Jobs, the ANPP would rapidly evolve into a well-defined process for bringing new products to market by laying out in extreme detail every stage of product development.

Embodied in a program that runs on the company’s internal network, the ANPP resembled a giant checklist. It detailed exactly what everyone was to do at every stage for every product, with instructions for every department ranging from hardware to software, and on to operations, finance, marketing, even the support teams that troubleshoot and repair the product after it goes to market.”

I remain in awe of Jobs’ ability to come up with products that hundreds of millions of people coveted – that was his genius, his magic spark – the point here is not to take anything away from that, but rather to point out that as far as possible everything downstream from the idea is engineered. The beauty of this is that it improves reliability and predictability of execution.

I’m thinking now that the venture capital could be similarly broken down into checklists and good process.

Science not art

Yesterday Kissmetrics blogged A recipe of viral features used by the fastest growing startups. It’s a good read for anybody who wants to increase the number of free customers they are getting. Who wouldn’t want that? The list is written for software companies, but there’s something for everyone.

However, the paragraph that caught my eye though was about the nature of virality rather than how to generate it:

Virality is not a single feature. It’s a design principle. It’s not a result of good luck. It’s engineered. Forget about forcing users to use random share buttons. You must understand your audience and design a user flow that leads to sharing.

In other words virality is science not art. It comes by virtue of intelligence and hard work, not from luck (at least not usually).

Increasingly this is true for all areas of building a startup.  The lean startup movement laid out an iterative process which uses customer feedback to minimise the role of chance in building a product people want, design thinking breaks down innovation into process steps, SEO is now well understood, as is enterprise software, and so on. Just on Monday I blogged about The Mom Test a book which makes it easy for anyone with discipline and a bit of get up and go to do great customer development.

My hope is that all great work I’ve listed will enable entrepreneurs (and their investors) to have lower failure rates, or at least lower the cost when failing. Here at Forward Partners we aim to be in the vanguard of that change, working with our entrepreneurs to bring practices to their companies which reduce the need for magic and luck and increase the chances of success.

Should new companies build an app before a website?

140227104442-mobile-time-spent-620xa

As you can see from the chart above time spent accessing the web from mobile apps has now passed time spent accessing the web for PCs. Moreover, the trends are only going one way, which begs the question of when it will become the norm for startups to build an app before they build a website.

Up until now there have been a few ‘mobile first’ startups, but they have been the exception rather than the norm. I see that balance shifting. We are close to backing our first (maybe the first) ‘mobile first’ ecommerce business.

Remember also that the action is increasingly phones now rather than tablets.

 

 

The Mom Test: doing great customer development

Screen Shot 2014-03-03 at 12.54.20

I read The Mom Test this weekend. What a great book! When I started with Forward Partners I went out to speak with a bunch of our target customers, entrepreneurs, and I learned a bunch of stuff which helped shape our strategy of empowering great entrepreneurs with minority stake investments and real-world useful help – but I’d have learned much more if I’d read this book first.

It’s surprising how easy it is to ask bad questions during customer development. The Message of The Mom Test is simple, questions that ask for an opinion or (worse) solicits approval for an idea is dangerous. Most people are a) eager to please, and b) pretty useless at predicting what they will do in the future and these sorts of questions yield bad information which can offer false encouragement.

Much better are questions about what people do and how they have done things. Questions like these ask for facts and yield the unvarnished truth. Going back to my conversations with entrepreneurs, I would have been much better asking people for  the story of how their companies got started, what problems they encountered and how they solved them (more on that in a second). Instead I explained what we do and asked whether that would have been of interest and questions about pricing. We did learn a lot from those conversations, but even at the time I felt I often felt I was questions that people didn’t really know the answers to. In Mom Test language, the answers I was getting were ‘fluff’.

I’ve given the very short version of the book (ask for facts about what people do, not opinions) but the whole book is well worth a read. As well as extra detail it provides a host of practical examples that make it easier to do high quality customer development. Many founders don’t read business books because they don’t have the time. This one is humorously written with 130 small pages with widely spaced type. If you’re one of the non-readers, this book is worth making an exception for.

One of the practical tips is to always know the ‘three big questions’ that you would ask potential customers. I think the three questions for us at the moment are:

  • How are you making sure you are building something people want?
  • How are you making sure you build something of quality (code/design/UX)?
  • How will you find your next/first set of customers?

They are focused on the three major areas in which we offer operational help and will reveal if people need help at all, and if they do what sort of help they require. I elected not to go with questions about startup problems generally and fundraising specifically because our knowledge in these areas is already much stronger than in the three areas above.

One of the other practical tips in the book is to do your customer development work casually in chance encounters. If you run into me at a conference or networking event you may just hear me ask the questions above. I plan to be asking them a lot.