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4/19/2012 @ 11:12PM |890 views

3 Features Of Great Startups: How To Make A VC Go All In

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Guest post written by Hadley Harris

Hadley Harris is chief business development officer at Thumb and general partner at ENIAC Ventures, where he invested in Thumb.

Hadley Harris

It’s not everyday that a venture capitalist makes the leap from being an investor to a full-time position at one of the startups in their portfolio. Diving head-first into running marketing and business development at a startup is a drastic change from the high-level involvement of an investor.

Yet I’ve traded in the comfort and safety of being a VC for the sweat and peril of working for a startup. So there has to be a good reason, right?

As a founding partner of ENIAC Ventures, an independent seed stage fund with a focus on mobile software and services, I have looked at over 600 startups in just two years – and out of that vast pool of companies I have only invested in 25.

After spending extensive time with startups, I suddenly found myself driven to become more involved with one of them. I wanted to trade in the VC life for the chance to help build a company, but first, I had to ask myself, “Is developing this company worth all the blood, sweat and tears required?”

After spending three-and-half years building Vlingo, while simultaneously co-founding ENIAC, I was well aware of the effort required.

After making the transition myself, I’ve identified three core traits of a successful startup – the features that caused me to throw myself back into the trenches.

• Insane User Engagement

The strongest factor in determining whether a company has staying power is user engagement. A successful startup needs to be able to take a simple idea and craft a product that intrinsically resonates with users. Facebook has shown us that engagement – even more than monetization – is paramount for social platforms. Capitalizing on an idea that seems obvious in hindsight, Facebook set the user-engagement bar high for competing social utilities: its users currently spend an average of 6 to 7 hours on the site each month. The majority of Facebook’s value comes from its engaged user base, not its revenues.

The current state of Google’s fledgling social platform, Google+, paints a clear picture of why user engagement carries so much weight for a startup. Google+ may have an impressive user base of 170 million, but this says nothing for the platform when coupled with its engagement rates, which are lagging behind competitors at a meager three minutes per user per month in January. On the other side of the coin is Pinterest, drawing tons of attention from the tech community. The virtual pin board may have relatively few users compared to Google+, at about 12 million, but its average engagement rate of 98 minutes per month position it as the riper fruit.

With so many companies in the social space competing for a slice of people’s time, user engagement is one of the most vital factors driving success, and it was the biggest one for me.

• Monetization Potential

As a VC you learn to take a long-term view of a startup’s revenue potential. Monetizing too early can be disastrous, and I firmly believe that startups need to focus on building products that attract and engage users first, rather than impose a revenue model that can stunt its growth and turn off early users. This strategy of building a user base before monetization is traditionally thought of as a West Coast mentality, but it has recently become the norm on both coasts, as evidenced by NYC-based startups like Tumblr and Foursquare.

This doesn’t mean startups should have an unlimited runway; they need to have a clear strategy for driving revenue when the right time comes. Dropbox’s freemium model, Zynga’s virtual goods and Twitter’s advertising-based revenue model exemplify the wide variety of successful business models in existence today.

Even within broader models, different products are able to achieve different levels of success. Like Twitter, both Google and Facebook are primarily advertising driven; however Google’s search engine has a far higher value per user, about six times higher than Facebook, in fact. The difference in the two advertising models is simple. Facebook’s users are targeted with ads while they are casually checking out what their friends are up to. Google, on the other hand, is able to advertise to users who are searching for something – reaching consumers at a pivotal point in their decision-making process. Google users have a much higher level of intent to spend money then those on Facebook. Because of this, Google is able to charge advertisers a lot more.

Most leaders in the social space have already fallen into set revenue models, but the beauty of a startup is it doesn’t need any revenue to have billion-dollar valuation (as Instagram recently showed). Right now VCs are tripping over each other to invest in Pinterest, or kicking themselves for passing on previous rounds – as I once did. Pinterest may not be generating revenue, but the potential is clearly there. Users are expressing product-related sentiment across a vast expanse of topics, so it is easy to see how this can translate into revenue because of the intent its users are expressing, in much the same way as with Google.

While it is best for emerging startups to focus on internal growth before expanding their efforts towards monetization, having a product that has a clear potential for revenue generation is a major factor in a successful startup. And seeing that potential in a startup is a key reason why I felt comfortable making the leap.

• Killer Team

Any VC will vouch for the fact that the team is a very important factor in evaluating a startup’s investment potential. The significance of the team multiplies when considering actually joining a startup. In addition to the most commonly evaluated traits of intelligence and vision, a team must have courage, humility and tenacity to prosper.

It is essential that any team driving a startup have the guts to take the necessary risks involved with creating a truly disruptive product. Plenty of startups build viable businesses by playing it safe, but to go big the whole team must possess the confidence in the product and the personal audacity to welcome risks and go all in on their vision.

Without humility, a company represses its own fruition. A great idea cannot evolve if the team behind it is not receptive to internal and external input. Sometimes companies can become too immersed in an idea to see how it appears to the outside world. A team that’s humble enough to listen to their community of users, as well as their critics, will be on the fast track to owning their market because they’ve incorporated a broad set of insights into their product formula.

Once a team has demonstrated courage and humility, it takes tenacity to ultimately trump the competition. Startups don’t operate in a nine-to-five work environment, and the entire team has to be willing to put in their all. The team behind a startup must take an aggressive approach. Pundits often point to strategic decisions as drivers for startup success or failure, but the truth is that sheer work ethic is probably the more common determinant.

Exposure to hundreds of mobile startups as an investor helped me develop my vision of the qualities necessary for a company to succeed in a highly competitive market. A company with crazy user engagement, clear revenue avenues and an amazing team has tremendous potential for growth were the primary factors when I made my decision to rejoin the startup scene. The feeling of accomplishment you get from investing in successful startups is incredible, but pales in comparison to the gratification and excitement that comes with having a direct hand in building a company.

(http://www.forbes.com/sites/ericsavitz/2012/04/19/3-features-of-great-startups-how-to-make-a-vc-go-all-in/)