As I’ve started to tell people, I’ve had plenty of Seattle folks tell me that I don’t need to go to the Valley to succeed.  Empirically, they are right.  There are obviously successes in Seattle both big and small.  But here’s how I look at it.  Startups are like a big formula.   Maybe it’s “(10 * market) + (7 * product) + (5 * team) + (3 * distribution) + (3 * fundraising) + (10 * blind-ass luck)”.  I suspect that it’s different for each startup.  But I firmly believe that having strong relationships in the Valley adds a meaningful multiplier to important parts of that formula (especially on the fundraising side of things– more on that in a minute).

There are some great investors in Seattle.  We’ll be working with a few (hi guys!).  But as I look forward in my company’s future, I know we’ll be raising more money.  I believe (I hope!) that we’ll be raising based on a “line“.  Whatever trajectory we’re on, it’s nigh-impossible to argue with this fact– any fundraising effort is easier, faster, and more likely to close with better terms in the Valley.  The key there for me is faster.  Fundraising is expensive.  It saps attention from your product and it takes time/money.  The other key is “more likely”.  I’m pretty confident that I can raise money anywhere in today’s market.  But I don’t know where the market is going to be in 12-24 months.  I *DO* know, that if the market goes south, my odds will be strongest in the Valley.  And, while I don’t want to be a “douchey deal optimizer”, the best Seattle terms I’ve heard of are merely adequate in the Valley…  And terms that are good in the Valley are virtually unheard of in Seattle.

Of course, you can raise remotely.  A flight south is a few hundred bucks and kills the better part of a day.  But it’s hard to build relationships when you only fly down once every month or two.

Blind-ass luck is worth talking about, too.  While you can’t force luck, you can increase your “luck surface area”– do low-cost things that increase your shot at something fortuitous happening.  The obvious example here is: be nice.  Help other people and you increase the chance that they run across an opportunity that they drop in your lap.

While it’s not entirely low-cost to move to the Valley, I think it dramatically increases our luck surface-area.  Reporters and bloggers are constantly sniffing around in the Valley.  Well-armed/high-imagination bizdev folks wander around looking for creative deals to strike.  There are investors and portfolio companies wandering around at every event/party.  There are world-class startup geeks in the Valley on every corner (of course, there are a thousand startups all vying for the same talent, too).

A final consideration is optimism.  I’ve often said that startups only die from 1 thing.  They run out of optimism. They no longer believe in the opportunity (or they believe in a different one).  You can run out of money, but if you believe, you’ll find a way to soldier on.  You’ll raise money, max your credit cards, eat ramen, or otherwise do whatever it takes.  Strangely, I think it’s easier to keep your optimism tank full in the Valley…  In the church of startups (with miracles on display for every sermon), you can’t help but believe.

It’s going to be an interesting ride.  Some of my favorite entrepreneurs from Seattle have blazed a trail southward and, despite their apparent love for Seattle, they haven’t felt compelled to return.  I’m going to head south with an open mind and see how it goes.

Enter: Apple. Proposing to categorize and organize all of the world’s apps. You can see the cracks forming. So what will Google do?

Mark my words, Google will onebox mobile app results. Hell, it might (should?) add an “Apps” vertical. If it did, it’d almost instant eclipse the App store in importance for most developers.

I know, I know.  It’s a bold prediction.  Hear me out.

Google has been working on search innovation for a decade and they’re getting damn good at ferreting out intent from your search queries.  In recent years, they’ve done what’s called oneboxing.  If they can confidently guess what information you want (or at least what search vertical you’re interested in), they tack it onto the top of the search results.  You’ve seen it thousands of time now.  Search for “weather seattle”, a stock ticker symbol like AAPL, or append the word “video” to any search.  Despite their brutal campaign against the folks in the world of SEO, Google is still better at search than anybody.

If you’re searching in a mobile browser for “Angry Birds”, there’s a pretty good chance that you’re looking to download it– and Google can trivially know what platform you’re searching on and which version might be best for you.  If you search for “currency converter” from your mobile phone are you well-served with a JavaScript-driven converter on an ad-infested web page (or worse yet, a non-functioning Flash/Java applet)?  Or would you be better served with a link to the best native app for the job?

You’re probably as disgusted with App Store search as I am– it’s fine for brand searches (like “Angry Birds”) but painfully bad for category searches.  The App Store is using ridiculous algorithms, forcing developers to stuff keywords into titles and giving us the equivalent of meta-keywords to help our cause.  Hell, the App Store even uses the developer’s company name as a meaningful factor (congratulations, Currency Converter, Inc., your shot at ranking for that search term just went up!).

What it should do (which would require a Google-sized index of the web) is the same thing that Google does– rank based on number of links (to the app store page), the quality of those links, and the anchor text used for those links.  It could also layer in social data, ratings, active usage data, and other things that only Apple has at their fingertips.  But they probably won’t– Apple is not a search company.

But Google is.  They could be a better way to find/buy apps almost overnight.  And it’d be a huge boon to app developers for all platforms.

The Rub

The big problem here, of course, is that Google will be helping Apple sell more apps (at least when people are viewing onebox results on an iPhone).  And Apple will still be hauling in their rapacious 30% (a fair fee if Apple is bringing the customer to the table– less so if all they are doing is handling the purchase/update process).  So even if Google includes a paid spot or two in their onebox, is there enough revenue room for Google make a buck?  With game developers paying $3-5 per install on the marketing front, I think so.  Outside of games, it’s a little less clear.

So what do you think.  Will Google do this?  If they do, would it be the right move? If Apple manages to do something productive with their Chomp acquisition, will it matter?

First off– let me say that the paid side of the App Store is not where the real money is being made.  While you can churn out paid apps and make a handsome living, it’s not where you want to be if you want to impact the highest number of people and it’s (paradoxically) not where you want to be if you want to build a big business.  Let me explain with a handy screenshot of the top grossing apps in the App Store today (courtesy of App Annie).

Apps with a blue-ish background are free apps.  Apps with a green dollar sign have in-app purchases.  So there are *3* paid apps in the Top 20 Grossing List.  Things are only going to get worse for the world of paid apps.  Here’s a snip from a really awesome infographic from App Annie:

So why are free apps outperforming paid apps?  That deserves its own post.  In brief, it comes down to ARPU (average revenue per user).  Farmville-style games can pull in an ARPU $5 or more per month.  In fact, there are reports of $13 ARPUs.   Per month!  Per user!  Average!

How is this possible?  Virtual goods elegantly fill up the demand curve for an offering.  In other words, they accommodate customers who can happily spend hundreds or thousands of dollars (“Whales”, in Vegas parlance) without having to give up mainstream users (who can still be valuable as evangelists beyond the fact that they give the whales someone to play with).

With all of this revenue comes tremendous marketing power.  If you’re pulling in $5-10 per user, you can afford to “buy” a download via CPA or CPM marketing campaigns (which can cost $2-5 for a free user and a helluva lot more for a paid user).  With more users comes higher rankings in the app store, which brings more organic users.  All of the pros in this world buy their way up the Top 25 Lists until the next rank gets a bit too expensive and then float back down slowly, milking the free downloads while they are there.  Rinse, repeat.

It’s no wonder paid apps can’t compete.  How many users do you think you can buy at a $1.99 price point after Apple’s 30% cut? (hint: the answer is zero).

Okay, okay– back to paid apps, which is what this post is supposed to be about.

Sizing a Paid Market

Apple makes ranking numbers available, and a few great services (like App Annie) make it easy to look at historical performance of competitors on the app store…  But only in terms of rankings, not in terms of revenue.  Even though our first app was meant to be a part-time “fire and forget / learn the ropes” effort, we didn’t want to waste our time.   In short, we didn’t want to limit ourselves to pennies by picking a crappy market.  So we set out to understand the relationship between Top Grossing ranks and revenue.

First off, some category analysis.   Let’s take the #5 Top Grossing App in each category and see how they fare in the overall Top Grossing list (note: I’m grabbing the #5 somewhat arbitrarily because it’s a better reflection of the category– #1 might be a mega-outlier like Camera+).

So, yeah.  The App Store is really mostly a game store.  And a free game store at that.  But you still want to build paid apps?  So did we!  We had a nice tractable project we could build in our spare time, but we still wanted to be sure that it was worth our while.

Connecting the Dots – Ranks to Dollars

Our app was firmly in the Productivity category (good news– it sucks less than most of the other non-game categories).  But it probably makes sense to dig a bit deeper than just category (Apple is notoriously lax about policing categories, by the way– expect to compete with “OMG FREE MUSIC DOWNLOADS” apps, whatever category you end up competing in).  Our app was a calendar replacement app with a bit of a twist, so here was the big question.  If we had a hit and were the mack-daddy of calendar replacement apps, what’s in the pot of gold at the end of the rainbow?  We can see that Week Calendar is the top ranked calendar app in our category, with an overall grossing rank of #200 or so at the time (it’s more like 500 now).  We all know that hanging around the #1 spot on the Top Grossing list can get you about $7M in revenue in one Christmas month (ho ho ho!), but how could we get a sense of what a rank of #200 or so means in terms of dollars?  Google didn’t help much, so we started doing good old fashioned investigation.  We combed the web for blog posts where people where transparent about their numbers (like this one).  We asked friends and mailing lists for revenue/rank correlations for their apps.  We got about 15 good data points, which allowed us to create a rough power curve that looks a bit like this.

(Y Axis is gross revenue from App store only, X axis is rank on the Top Overall Grossing List)

Big fat disclaimers on this graph.  Many of these data points were received second-hand, were from old blog posts, etc.  Also, consider that some apps could have alternative sources of revenue (ads, notably).  And we’re correlating US App Store rankings with overall revenue– some of these folks might do well internationally and others might not translate so well.  But it got us in the ballpark of understanding just how steep the power curve was and how long the tail of app success really was.  Armed with our handy power curve, we drew a vertical line at Rank #200 and saw that we could, perhaps gross ~$70k/month in a best-case-scenario.  Not a big enough opportunity for a protracted/full-time effort, and certainly it was unlikely that we’d “win” the market, but fine for a part-time project to learn the iOS ropes.

So, should you launch a paid app?

Maybe.

Every entrepreneur is different.  If you want to build a big/impactful business, it’s not the right path (I explain why with a mess of data when I announced my newest venture to launch free travel apps for the iPhone).  If what you want is a bootstrapped freedom-from-employment effort or are passionate about an idea that’s a lousy fit for in-app purchases, paid apps are a great path.

In the nearly 1.5 years since leaving RescueTime (still growing and profitable– woot!), it could reasonably be said that I’ve flailed about with my career.  I’ve done a few gigs at existing startups, ranging from discreet projects to try-before-you-buy gigs that could’ve led to leadership positions.  I helped build Cubeduel.com (read about it on GeekWire or TechCrunch) with the eminent Adam Doppelt (it was a blast) and helped build TouchBase Calendar, a part-time effort to learn iOS development.  As far as flailing goes, I suppose I’ve been pretty effective (in terms of learning and effective hourly rate), but I failed at what I was really shooting for: To find my muse.  To find something BIG to really sink my teeth into.

I wanted to find my next startup mission– something I think that gets more difficult the smarter you get about startups (and the smarter you get about what drives you).  I’ve learned that I’m mostly driven by “give-a-fuckness”– I get excited by software that I’m going to use, that’s going to make people happy, and that’s going to make the world (in some small way) a better place.  If you think about it, that’s a pretty limiting litmus test by itself.  But as a guy who has been around the startup block a few times, I have a few other tests that I care about.  Here’s a quick list:

• Tractability – I blogged about this years ago– I like business ideas where you run meaningful experiments in the first 6 months.  There are great ideas out there that require 2 years of deep geekery before you can come in contact with the market.  Not for me.
• A Big idea – This is a new one for me.  I’ve built and sold a mess of companies and projects.  I’m pretty confident I can get a business off the ground and profitable.  I want to aim bigger now.
• Early & clear monetization – pure-consumer startups where you have to rely on ads (or “we’ll figure it out”) aren’t for me.
• Cult-able – Besides me, are there a subset of people who dream of working in this market?  If you can imagine a truly passionate core of users, it makes it easier to find users and employees (see Justin Kan’s epic TechCrunch post: Trouble Hiring?  Create a Cult!)
• Fundability – While I’m generally wary of early funding (I like to prove a thing or two first), I do believe that raising money makes sense for big opportunities.  I’m honored to have a mess of people who have already expressed a desire to bet on me, but they wouldn’t if I was going to open a bakery or taxi company.

So what makes the cut?  First, it’s got to be Mobile.

We started with the “Mobile First” assumption.  The mobile internet is going to make the old Internet look tiny by comparison– as Amir says, you’ve probably underestimated how big this is.  If you’re a free-floating entrepreneur who is still flexible enough to learn new skills, throw yourself into the mobile maelstrom.  Skate to where the puck is going to be.

But as you start sizing mobile markets, you learn a few ugly truths.

1. First, the App Store is dominated by games.  Absolutely dominated.  I have a post written about this that I’ll post in the next week, but here’s a tidbit of data:  The #150 ranked top grossing game makes more money than the #5 top grossing app in any other category (if you want to catch the post when it comes out, subscribe via RSS or follow me on Twitter).
2. Second, the App Store is dominated by free apps.  I’m not just saying that people prefer to download free apps.  I’m saying that free apps are dominating the Top Grossing Charts (yep– free apps make more money!).  As of this writing, 16 of the top 20 grossing apps on the App Store are free (19 of the top 20 are games).
3. Third, single-app strategies are extremely high risk.  The best bet seems to be a “portfolio” strategy– plan on having a stable of apps.  I’ve watched extremely high profile, venture-backed apps that were lauded by critics fall down the rankings charts into oblivion.  The Top 25 charts are dominated by incumbents (who’ve spent months or years getting the marketing flywheel turning), web giants (who have massive traffic they can push towards their mobile apps), featured apps (Apple tries very hard to get new folks visibility, but that only gets you in the spotlight for a week or two), and “Unicorns” (new apps that catch fire entirely on a combination of merit and luck).
4. Winners have solid ARPUs (avg. revenue/user) to bolster customer acquisition.  In almost any category, you are competing with people who are making real money from their users (again, with free apps) and are spending that money to buy more users (which artificially drives them up the charts).  Unlike the web, you don’t have much in the way of SEO opportunities, viral channels are less open and users are more reticent to create most content (typing on the phone is a pain in the ass, right?).  So unless you have an amazing customer acquisition hack that no one has thought of on mobile, you should expect to supplement your organic downloads with paid acquisition.
5. There are a few great apps that are making great revenue driving offline revenue.  Look at Uber, Hotel Tonight, or Postagram.  Their ARPUs can support paid acquisition (they are also all great apps who’ve earned organic downloads).

So, after a lot of hand-wringing, we settled into a belief that our mobile ideas should be limited to either games or driving offline revenue.  We should have a credible story how our users could result in a sustainable ARPU.  If possible, we should be able to imagine a stable of complementary apps.  And most of all, we needed to actually give a fuck about what we were building.

Where did we land?  Mobile Apps for On-the-ground Travelers!

Strangely, we landed on an idea that’s been bouncing around in my head for years.  Like a lot of good ideas, it wasn’t really that good until it collided with our mobile thesis (bonus footage: I love the idea that great ideas come from the collision of lesser ideas– check out this video).

For more than a decade, I’ve been a voracious traveler.  And I’ve watched startups grow up to help travelers with their efforts.  But if you look at where startups have focused, it’s always on the holy trinity of pre-trip decisions– airfare, hotels, and rental cars.  This actually makes a lot of sense.  The internet actually sucks for helping you with decisions you have to make while on your trip– largely because you don’t have the internet with you.  Normal people don’t, anyways.  So we all dutifully buy a Lonely Planet guide ($20 for a book– which is probably the worst form factor I could imagine for what is largely a curated catalog and a series of maps).  Or we rely in digging up local wisdom at our destinations.  Or we sift through the SEO’d muck looking for credible information and print it out.  We’re still printing web pages in 2012?

With the growing ubiquity of smartphones, there is a new opportunity for software to help the on-the-ground traveler (where, incidentally, more than 50% of travel spending occurs).  And, while our focus is on being an awesome resource for travelers, we believe that mobile allows for elegant monetization beyond simply selling that content or slapping an ad on it.  More on that soon.  So here it is– a public declaration of intent.  I haven’t been this excited about work in, well, forever.  World, meet Tomo.  Tomo, meet world.

Post #1: Genesis & Backstory (note: a little light on data/techniques)
Post #2: Evaluating a (Paid) Mobile App Idea: How Much Could it Make? (coming soon)
Post #3: Launch Strategy & Sales #s (coming soon)
Post #4: Ongoing Marketing (coming soon, if we learn anything interesting)

Genesis and Backstory
(note: post 2-4 will be a little heavier on data/techniques, if you’d like to hear when those posts go up, follow me on Twitter Got questions you’d like addressed in upcoming posts? Please let me know in the comments.)

When I stepped down as CEO of RescueTime (now profitable, still growing like gangbusters, yay!) I entered a weird time in my life. I didn’t know what I wanted to do next or who I wanted to do it with (I obviously couldn’t recruit co-founders out of RescueTime), so I started having lots of “coffee dates”. It was exhausting stacking up half a dozen meetings a day with a broad assortment of folks.

It was a big transition from being a “maker” (on a maker schedule) to a guy who would meet with anybody. One thing that I came to realize (like a lot of people) that calendars suck– mobile calendars especially.

Mobile calendars fail to take advantage of the fact that they are on an amazing communication and mapping device.

Say I’m in the car driving to a meeting and realize that I don’t recall the exact address of the place I’m going. No problem! I’ll just pull up the event. It turns out that even if you’ve taken the trouble to add location to the event, your calendar doesn’t give you any way to get a map for that. Here’s what you see:

Even if I did go to the trouble of inviting Paul to the event when I created it (which I rarely do), I’m still 4 taps away from being able to compose an SMS.

And typing a coherent message on a touchscreen (often in a hurry or at a red light) ranges from painful to downright dangerous (texting and driving is a killer). Which is silly, when you think about it– communication around your calendar is generally limited to some very common messages, like:

• I’m here, where are you?
• I’m running X minutes late.
• Hey, I just wanted to confirm our X o’clock meeting at Y
• I need to postpone our meeting a little bit because I’m behind schedule.

When I looked at my SMS logs, I realize just how many of my messages were (usually typo-ridden) variations on those messages.

After almost a year of coffee meetings (and a few fun projects like CubeDuel), I found a co-founder close to home. Montana Low (who I’d worked with a bit at Jobster and RescueTime) had been freelancing for a few months and was looking to jump in as a founder. We both had some commitments to wrap up but wanted to get our feet wet with a tractable mobile idea.

We wanted to build it, but the big question lingering in our mind was “would it be worth it?”. If we did build it and “won” the category we were shooting for, would it be worth spending a few months of our free time? We’ll explain how we answered that question in post #2 of this series!

I saw this on a mailing list I occasionally read, in a post where a company was looking to hire their first design employee/contractor. I think it’s a big part of why hiring designers is a process that often ends in failure: because most people who aren’t UI experts (heck, most UI experts fall into this camp as well), don’t know when they see a good design.

The challenge, of course, partially lies in the definition of “good design”. Let’s run through a few, in increasing order of importance.

Good Design = Beautiful/Cool Design

In this arena, we might actually know when we see a good design. We often have pretty good instincts on beauty and have a lifetime of training in understanding what other people find beautiful. Beautiful design can be important– but on the web it doesn’t seem to be a necessary element to success. Take the top 50 sites on the web. For a designer who primary considered themselves an artist, how many of those sites would be a source of pride if they were in their portfolio? Designers who primarily seek beauty/coolness often get lost in their own sense of beauty and engage in what I like to call “design guitar solos“– the visual equivalent of the talent-intensive squeeling that guitar pros engage in which only another guitar pro appreciates (or even understands). In the web design world this can range from a nuanced photoshop manifesto with dozens of layers to an incomprehensible JavaScript-powered UI. With great power comes great responsibility– and oftentimes a simple melody is the most effective song.

(note: grabbed from a 1994(!) article post by Peter Morville)

Good Design = Elicits the Desired “Feeling/Motivation”

This brings us closer to a good definition of effective visual design. While it’s not a web site, take a look at Apple’s FaceTime commercial. It’s simple. It doesn’t have the cyborg eyes and spinning globe of apps that Android’s recent commercials do. The design lead on that commercial didn’t get to do the metaphorical equivalent of playing a 12-minute solo behind his head in front of a sold out crowd. No epic visual effects. Just an emphasis on generating emotion– and pretty damn effective as Apple keeps trying to battle their way to the other side of the chasm. (Side note: I think Android’s robot craziness isn’t all that bad– they are currently aiming at early adopter geek-types. Remains to be seen if that’s brand they can pivot away from when the time comes to court “normals”. It wouldn’t be the path I’d choose, though!).

Good Design = Measurably Gets the Job Done

(note: Dave McClure is putting on the WarmGun Conference on October 8th that’s centered around conversion-centric design – Check it out)

THIS is the kind of design that very few people shop for– and indeed, don’t know how to shop for because they can’t “know it when they see it”. As I’d asked in a post WAY back in 2007 (“Do Designers Deserve a Seat at the Strategy Table“), when was the last time you saw a web portfolio that talked about metrics and goals? That talked about how the new design kicked the old design’s ass as far as the numbers were concerned? That talk about an X% SEO lift over Y months? On multiple occasions, I’ve seen uglier designs tromp prettier ones, and we can look at the aforementioned top sites on the web and see that it’s chock full of ugly.

One thing that’s important to note– the experts are wrong just about as often as they are right. As a self-proclaimed expert (!), this is hard for me to stomach, but it’s true. Check out this (somewhat murky) video of the head of Microsoft’s experimentation efforts. There’s plenty of gold here. First, he runs through a couple of design variations and asks the audience (chock full of startup geeks) to guess which performed better. By and large, the audience was wrong as often as they were right. Taking this further, Ronny tells is that the internal experts at Microsoft had similar luck. Said another way, the smartest people about UX and conversion made educated guesses, tested those guesses, and found that their efforts improved their target metric only SLIGHTLY more often than they made it worse.

Good Design = An unseemly mashup of Usability, Marketing, Credibility, and Usefulness

The problem gets worse, because “getting the job done” isn’t just about pure conversion mechanics and A/B testing.

• There’s design STRATEGY (most of the above is about tactical design). Is your designer the type of person who wants to have stategy handed down to him? Or is he the kind of person who is going to agitate for a 2-sided referral program? Or something clever like UrbanSpoon’s Spoonback effort?
• Are they thinking about marketing? Do they think like a user? Do they understand your market? Do they want to? Marketing isn’t just about outreach– there’s a whole discipline around understanding a market, getting their feedback (from user studies to poring through support/feedback email), etc.
• How do you deal with the conflicts between what your business wants the user to do and what THEY want to do? In my opinion, the best businesses have those goals perfectly aligned– but any ad supported site knows that their job is to find exactly how aggressive they can be with ads and pumping page views.
• What about SEO? Content sites need to optimize for SEO. Yes, the first rule of good SEO is quality and linkworthiness. But there are design/markup considerations, anchor text concessions to consider, and more.
• Load time. There are breathtaking studies about the effects of page load time and conversion. How many designers obsess about speed? Not enough, given that adding 2 seconds to page load showed a 4.3% reduction in revenue/user.
• Considerations vary wildly based on the type of offering. Sites that you use every day clearly need to be faster/leaner. Are there sites out there that can afford to be slower? Apple, for example, serves up enormous (and gorgeous) photography on their home page.
• Does the designer love writing headlines? Writing is one of the biggest parts of design– if they’d rather you do all the writing and prefer to work with Lorem Ipsum text, they have a big hole in their skillset.
• How much do they like saying no? At any company larger than a few people, designers meet the “too many cooks” problem fairly quickly. Good design is not only a bizarre blend of graphical, technical, marketing, strategic, and writing expertise– it also requires a healthy dose of political acumen and salesmanship. What are they going to say when Alice swings by their desk and says, “You know what? I think it’d be awesome if we had a block showing our twitter feed on the home page. Maybe with one of those cute blue birds at the top?”

The problem with hiring designers (and the reason that they so often don’t work out as contractors or employees) lies squarely on the shoulders of the people doing the hiring. They’re still looking at screenshots in portfolios and saying, “Beautiful! Wow! This must be our guy/gal,” when they should be looking deeper.

While I’ll generally happily go on about how the influence of the valley is waning (a combination of cheaper-to-get-traction startups and investors who are happy to look outside of their fertile valley), I still agree with Paul Graham– if you’re doing a startup, you meaningfully increase your shot at success if you live/move there… For now. But it seems like there is something special happening in the NYC area. And London(?). Coincidentally, both financial centers that might have seen a rash of disillusioned geeks moving away from the world of finance, perhaps?

Anyhow, here’s a breakdown of the various locations of startup jobs as of 9:40am or so. I know it’s not REMOTELY scientific– it just stuck out to me.

Note: if you’re hiring, you should add to the thread.

But even if you are a founder, don’t do it for the money. Do it because you love small teams. Do it because you love your product. Do it because you love playing the startup game (even if you don’t win it). But for the love of God, don’t do it because you think you’ll get rich and retire on a beach somewhere when you’re 30. Because, as crazy as it sounds, when you sell your first company it almost certainly isn’t going to happen.

Let’s run through a common exit scenario. You and 2 co-founders spin up a company (say you’re creating one of Mike Arrington’s “Dipshit Companies that wants to sell to Google for $20m“). You take a smallish seed round and a small-ish Series A round (yeah yeah, you can bootstrap– but the vast majority of 7 to 9-figure exits are funded companies). So after investors and options for employees, let’s say you each own 20% of your company (it can be a lot less or more, depending on what kind of leverage you have while fundraising, how big your options pool is, and how many of those options are exercised/accelerated upon exit). Now let’s say you exit for $20m 3 years into it. Congrats! Light up the cigars and start hunting for beach houses– you’ve now joined the new rich! Except you really haven’t. You see, you (like a lot of folks) aren’t really thinking what it means to retire at 30. You’re not alone. The fellas at AdGrok have the same mental math going on in their head in their “Fuck You, Money” post:

“Before anything else, let’s do the numbers: money market funds yield around 4%. That’s $400K interest on $10MM, which is certainly a living wage, leaving aside inflation. Of course, it doesn’t have to last forever: human life is sadly finite. Crunching more realistic numbers, ‘fuck-you money’ is about $4.2MM for a 30 year old guy who plans on dying at 70 and wants to make $200K/year. Well within the payout picture of a fortunate startup founder whose company is acquired.”

Of course, many of these numbers are strange. 4% for a money market? I’d love a link to that– the best I’ve been able to find is around 1.5% right now for a jumbo money market. Dying at 70? Chances are you’ll live to 90, at least. “Leaving aside inflation”? That’s disastrous (why would you leave aside a number that cuts your 4% by more than half?!). Let’s run through some REAL numbers, using my “Early Retirement Spreadsheet” (AKA “Fuck You Money Spreadsheet of DOOM” – feel free to save a copy and noodle with it).

In our above scenario, our happy founders are walking away with 20% of $20m, or $4m (might be a touch more due to unclaimed options, or a lot less if your investors are the double-dippin’). $4m– we could live on that forever, right? Let’s plug in some variables. 3% for average inflation (a touch higher than the average over the last decade to be conservative). Let’s assume you can get a 5% return (even though the last decade gave us -0.99% for the S&P and the outlook isn’t too rosy). And let’s assume you want to live in a major metro area in a nice house, a couple of kids in private school, and solid travel budget. You’re a millionaire, right? So let’s assume your annual family budget will be $200k. Upper middle class– certainly not in “butler country”, but real comfy, flying first class and living large. Here are our variables:

That’s not too crazy-conservative, is it? Heck, if you’re earning 5% on $4m, that’s $200k right there. No problem, right? You can coast forever with your fat nest egg largely untouched. You’re probably doing what I (and the AdGrok guys above) were doing: “Leaving aside inflation”. Let’s look at what you’ll have to spend to keep your $200k per year lifestyle with compounding annual inflation.

Wait a minute! I’m going to be spending nearly half a million dollars per year when I’m 60 to compensate for a 3% annual inflation? Don’t worry– you’ll be broke LONG before you 60th birthday. Let’s look at how your F@#$ You Money evolves over time with these variables.

You don’t even make it to 50. If you want to be optimistic about inflation and investment income (after all fees) and nudge them to 2.5% and 7% respectively, you don’t make it to 60.

There are a few morals to this story:

• make sure you freakin’ LOVE what you do. Love the game, love your product, love your co-workers, love your market.
• If you are going to be a mercenary, make sure to optimize not just for “f@#$ you money” but “f@#$ you influence”– make sure that as you sell your $20m company that you are well positioned to build another company, have a fat executive job, some great advisory roles, paid speaking engagements, and the like. Because you’re still going to want income.
• DON’T love the idea of living rich AND being retired. You can live rich on $5m OR you can retire early with $5m– but you sure as hell aren’t going to do both… for long.

Note: If you’d like to see the spreadsheet, it’s here. You can make a copy of it if you’d like to noodle with the variable to find your personal “never have to work again” number.

On a recent trip to Alaska, my ideas around “F@#$ You Money” changed pretty radically because of two conversations (which I’ll relate below). First, let’s start with a definition:

F@#$ You Money: any amount of money allowing infinite perpetuation of wealth necessary to maintain a desired lifestyle without needing employment or assistance from anyone. (via Urban Dictionary)

Retirement Plans

The first conversation I had on my Alaskan trip was with an older retired couple who was traveling around Alaska. We’d had a few drinks at a local bar and got to talking about retirement, risk-taking, and (eventually) f@#$ you money. He started talking to me about his finances and told me that he was really anxious about money despite having a “couple million bucks”. “It used to be absolutely true when people said ‘money makes more money’,” he told me. “Be relatively sharp about flipping real estate, have a solid and diverse stock portfolio, and you’re making 6-10% per year or more.” 8% of $2 million is 160,000. Add some Social Security money to that and the fact that older couples generally have a paid off house or a cheap mortgage, and that feels pretty close to permanent retirement. If you want to live more lavishly, you can chip away at the principal.

But this couple was shaken by the new reality. What, exactly, are they supposed to invest their money in that throws off 6-10%? Real estate in major metro areas are looking at a 5-20% drop in the next two years. The stock market is volatile but stagnant (more on that in a minute). Money markets are throwing off less than the rate of inflation. Top all that off with the potential that inflation accelerates, turning their couple of million bucks into dramatically less… Which means that even if they leave it in cash, there is a lot of downside risk.

The formula for a 2 million dollar retirement changes from:

$2,000,000 * 8% = $160k/yr + Social Security

to

$2,000,000 / # of years you expect to live after retirement (say 30) = $66k/yr + Social Security

If that all works out, you die nearly penniless on your 30th year.

The idea of a millionaire couple (surely the top 5% of retirees?) living on a combined wage that is dramatically less that what they were likely earning before they retired was pretty damn shocking to me.

The second conversation that I had on my Alaska trip was with a money manager at the Seattle airport. He was one of the top wealth managers at one of the big Wall Street firms. His belief was that it was likelier to get worse before it got better and that it could be 10 years or more before the economy bounced back. “I think we’ll see Dow 4,000 before we see Dow 12,000,” he told me. With the ratio of workers to retirees changing for the worse and with birth rates flattening, he wasn’t sure how much it COULD bounce back. Obviously, his opinion isn’t shared by everyone. But there’s a chance he’s right. Given that, where exactly do you put your f@#$ you money? A balanced portfolio isn’t enough protection against that kind of drop.

(Want to worry some more? Consider how much you have to save to retire if your savings don’t throw off interest.)

Want to be Mercenary? Time to give up on F@#$ You Money and Focus on Other “F@#$ You” Things

Pretend that you sold a startup tomorrow and walked away with a cool $5,000,000 at the age of 30 (well, $4m after taxes). Assuming you live 50 years, that gives you $80k/yr (non-inflation-adjusted dollars). Perfectly comfortable, but certainly not the image of wealth that a $5,000,000 windfall historically brought to mind. So if you’re young and angling for greatness, I think you’re better off aiming for “f@#$ you influence and credibility” (which has as much to do with your personal brand as it does your financial success). THAT is the investment that keeps giving. It allows you to charge $30k+ for a 1 hour speaking engagement. It gets you a feeding frenzy of investors when you start making noises about your next startups (reducing your financial risk to near-zero). It gets you fat advising gigs (where you trade advice and influence for ~1% of startups), seats on boards of directors (which can be compensated for in various ways). It gets you access to the best angel investment opportunities. Hell, it could allow you to raise a $30,000,000 seed fund (rock on, Dave!).

Better yet, in the mercenary vs. missionary debate, don’t think like a mercenary at all. Focus on creating value, being passionate about what you’re building every day and let the windfall (if it happens) be a happy surprise.

Since I’ve announced that I’m moving on in the coming weeks/months, I’ve been bombarded with cool offers at existing startups, larger companies, and, of course, I’ve been pondering some of my own startup ideas. So his question which I didn’t really consider very carefully at the time is now one that I’m thinking a LOT about.

So without further ado, here is my “checklist for good startup ideas”. No startup will do great on every aspect of the checklist, but this allows me to put startups/products to a sniff test that I think is pretty darn useful. Note, this list is in rough order of importance.

1. How deeply do you think the startup will effect people’s lives? Can you imagine them using it every day? Can you imagine them being royally pissed if they couldn’t use it? This can range from utility (gmail) to emotion (twitter), but if a product isn’t in the “I’d rather chew off my own arm than lose it” category for a meaningful percentage of it’s users, it should be a non-starter.
2. Are the hypotheses that form the basis of the startup tractable? In other words, can test the idea(s) in a short period of time? I’ve talked about the importance of tractability before (hat tip, Ev Williams). Bottom line is that most initial hypotheses are wrong to varying degrees. Twitter was very tractable. Tesla is not. I’ll re-use the money quote from Fred Wilson: “…Of the 26 companies that I consider realized or effectively realized in my personal track record, 17 of them made complete transformations or partial transformations of their businesses between the time we invested and the time we sold. That means there a 2/3 chance you’ll have to significantly reinvent your business between the time you take a venture capital investment and when you exit your business.”
3. How does the cost-of-acquisition, cost-of-goods-sold (COGS) and revenue-per-customer stack up? Most software startup have a pretty low COGS, so this question generally comes down to, “How much does it cost to buy a customer and how much revenue does that customer represent over their life?” This obviously requires a lot of guesswork early on, but experience is a helluva teacher here. If you haven’t been on the wrong side of this ratio a few times, find a mentor who has. Any way you slice it, you need to fine a “scalable, cost-effective way to get your customer’s attention”. I can’t count the number of startups that aimed squarely at small businesses or “prosumers” with sub-$100 price point and have no idea on how they’re going to buy a customer (other than word of mouth, SEM/SEO, and PR).
   
   I love extremes here. Zynga, Twitter, and Facebook has nailed one extreme– their cost of acquisition is free and nearly infinitely scalable. If you can build a service that grows virally (free and growing customer acquisition), you can focus most of your attention on value creation and revenue-per-user. With a little success there and a little time to let the virus spread, and you can almost not help but succeed. I think it’s hard to overestimate the power of free marketing/customer acquisition.

   There are certainly extremes on the other side. What do you think Oracle’s revenue per customer is? How much can they afford to “buy” a customer for? What about Groupon?

   Pro Tip: If you’re raising angel or Series-A money and you say you’ll be using the proceeds for things like magazine ads and wrappers on busses, you’ve probably already lost.

4. How MANY lives could you imagine touching in 5 years? This is different than asking about total addressable market (TAM). Craigslist started as a classified ads mailing list for San Francisco. Amazon started selling books. Have some imagination and consider what your company could morph into. Is it interesting enough to justify the opportunity cost and the fact that you’re looking at a drastically reduced salary for 2-5 years?
5. Is it an invention or re-invention? Hats off to you inventors out there, but I strongly prefer an existing market to creating one from scratch. The companies whose equity I covet didn’t build anything NEW, they just built something BETTER (Google, Facebook, Apple, Amazon, Craigslist, eBay, Zynga etc). In short, the first mover advantage is a crock of shit (most of the time).
6. Is it worth talking about? Can you tell a story about the product that would make a blogger say, “Holy crap– I could write a story around that that would get tons of links, tweets, and comments?” One of my favorite products is Visual Website Optimizer (it’s a brilliant A/B testing tool). The founder (a great product designer who I’ve had a few conversations with) sent out a barrage of emails to major tech bloggers and heard nothing but crickets (he appealed to Hacker News readers for advice– I think the discussion is interesting). His fundamental problem is that he doesn’t have a story that will drive links/tweets/comments/pageviews– all of the metrics that pro-bloggers care about. Oftentimes, clever PR people can create a story out of something that has nothing to do with the product (see: 37Signals & Zappos), but it certainly helps a lot if your product is funny, controversial, unusually useful, or inherently exhibitionist.
7. Are you passionate about the end-game? This one is hard to rank. All of the points above assume you are a “mercenary” founder (maximizing for opportunity) rather than a “missionary” founder (passionate about a vision that keeps you awake at night). Great video on that point here. Regardless of whether your end game is a vision realized or a big pile of cash (or some combination thereof), you need to be passionate about it… You need to have something that powers you through the bumps in the road where a rational person would cut and run. Both motivations are dangerous, by the way. If you’re motivated by cash, you might have a hard time sticking through tough times when you realize what you’ve built might only be a single or a double. If you’re motivated by vision, you might not like the pivots your startup needs to take to survive/succeed.
8. Is the market moving in the right direction? Can you imagine there being a LOT of growth and consolidation in the next 5-10 years? I just saw my first RedBox the other day (it’s a cool box outside of supermarkets that allow you to rent DVDs). They are currently on the wrong side of a market shift away from physical media– can you imagine people renting DVDs in 10 years? I think this one is particularly hard to get right (which is why it’s low on the list).

That’s my list. Am I missing something that’s on yours?