You’ve been served.

How do you do it as quickly as possible?

1. Complete all business diligence before you sign a term sheet.
2. Set a firm closing date for your lawyers and justify it with something like, “I’m leaving the country on that date.”
3. Have a strong BATNA that keeps the other side moving quickly.

Listen to our podcast below for the details.

Audio: How to close a term sheet quickly (mp3)

Transcript

Nivi: I was talking to a couple of entrepreneurs today about how to expedite the closing process. Closing is when you go from a signed term sheet to money in the bank.

You are taking the signed term sheet, which is really just a letter of intent; it is for the most part non-binding, except for some confidentiality and no shop clauses, and turning it into a set of closing documents and money in the bank.

Closing can take anywhere from one week, to four weeks, to six weeks, depending on the complexity of the closing. There are some things that you just can’t speed up. There may be legal diligence that needs to be done that just can’t be expedited. It takes time to get it done.

Other than those issues that you can’t really speed up any faster than they are going, it is really up to the entrepreneur to set the timetable for closing. You can set things up so it gets done in a week and you can set things so it gets done in four weeks.

My preference is to get it done quickly for a few reasons. One: It just reduces the risk of not closing. Two: The faster you get it done the quicker you can get back to building your business. Three: It is just good experience and practice to move things forward during negotiations with your lawyers, with the other side’s lawyers, and with the other side.

There are three parts to closing quickly. One: What you do before you sign the term sheet. Two: After you sign a term sheet, what you do on your end to make sure things are moving quickly. Three: After you sign a term sheet what you do to make sure the other side is moving quickly. Lets cover each of those parts.

Before you sign the term sheet

First lets talk about what you do before you sign a term sheet. Number one, most term sheets have a clause or term in there that indicates what the expected closing date is so your lawyers, the other side’s lawyers, and the other side can all work together towards that date.

My next suggestion is to conduct all your business diligence before you sign the term sheet so there is no business diligence left to do once you have signed the term sheet, during the closing process.

A lot of startups, I think, make the mistake of signing a term sheet too quickly before the investors have made the decision to really invest in the company. And they are just locking the company up with the term sheet, taking the company off the market so they can do their real diligence.

I would prefer to get all the business diligence done before I sign the term sheet. And we have a blog post on this, look it up. It is called, Complete business diligence before you sign a term sheet. We have also got another blog post called, Discuss your plans before signing a term sheet.

You also want to complete as much legal diligence as makes sense and is possible before you sign a term sheet as well. Why leave some legal risks? Why take yourself off the market and expose yourself to the risks that there is some legal issue that is going to trip up the financing. You want to get as much of that done before you sign the term sheet as well. You can find more info on that in the blog post. For most seed stage investment there is not a lot of complexity in your legal documents, whether it is IP or existing contracts, or what have you.

And top tier investors aren’t going to try to push business diligence to after a signed term sheet, in general. And if they do they are pretty up front about it and there is usually a good reason why. If you are working with a good firm you will get the business diligence done before you sign a term sheet anyway. And if you are a seed stage startup without a lot of complexity the legal work is pretty turnkey, which means that you can get it done quickly. And it is really up to you to determine how long it is going to take. These financing closings take as long as you let them take.

How do you expedite the closing process? There are two parts to this. The first part is making sure your lawyers move quickly. The second part is making sure the other side moves quickly. The other side consists of the fund and their lawyers.

Moving quickly on your end

First lets talk about making sure your side moves quickly. You should understand that you are in a very high leverage position with respect to your lawyers. Your lawyers have taken the risk of working with you while you were an unfunded, seed state startup with a lot of risk that you would go out of business.

They perhaps deferred fees, or gave you reduced rates. And they took on the risks of working with you with the hopes that you would be come a venture backed startup and grow on to great success and do a lot of business with them. Which is exactly what is starting to happen to you at this point in time, you are getting venture backed. You have a signed term sheet.

Your lawyers are in a pretty precarious position. They have taken a lot of risks and that risk is starting to bear fruit. But they are in a position where they are not locked-in in any way. You are not locked-in with them so you can terminate them at any point in time still. If you terminate them they have taken a bunch of risks, worked for reduced rates, deferred fees, and they weren’t interested in working with you while you were a seed stage company. They just did that to build the relationship so that you could work with them when you were a venture back startup spending lots of money on legal fees. If you terminate them, they won’t be able to reap what they sowed. So they’re in a precarious position. You have a lot of leverage over them.

The first thing to do to expedite the closing process is talk to my lawyers and tell them — if you haven’t already, which hopefully you’ve done — is tell them you’re going to measure them in four ways. High quality advice, one. Two, the speed at which they get things done for you. Three, the number of errors in the work product. Four, cost.

Next, you tell your lawyers that you want to have an extremely firm date for the closing process. You can take the Steve Blank approach there, if you like, and tell them that prior to that date, if they need help you are available to help them out, but when that date comes you don’t want any excuses. Right? If they come at you with excuses by that date, it’s really a fireable offense.

The best way to justify an extremely firm date is with a justification. People like to have reasons for why you want them to do things. So come up with a reason why the closing needs to happen by such and such date. For example, “I’m going on vacation on that date, I’m having a baby, I’m leaving to go to a business meeting in a foreign country, we need the money to make a payment, we need the money to hire somebody.” Just get with your team, brainstorm a solid reason why it absolutely has to be closed by that date.

That’s the end of the story of making your side move quickly. Ultimately, it’s really in the interests of your lawyers to actually get it done quickly. We’ve seen too many law firms get fired after a closing because the closing wasn’t done quickly enough, there were too many errors and the entrepreneurs were not happy with it. I think it’s important and good for the law firm for you to communicate what your metrics for success are. Finally, your lawyers are not computers, right? They’re humans. So don’t take the tone of the discussion here too literally. You want to treat them with grace and humility and make them excited to work with you.

Making the other side move quickly

The other piece of the puzzle is getting the other side to move quickly on the closing and getting the other side’s lawyers to move quickly on the closing. In general, if you’re closing with a good firm, a good fund, they also want to close quickly. They don’t have any interest in a slow closing process. It’s just a question of getting their lawyer’s bandwidth.

The best advice I have to get the venture fund, or investors and their lawyers to move quickly, is to have a great BATNA. That’s really the only advice I have for you there. Preferably you’re in a situation where your BATNA has said something like, “If the other side blinks during the closing process, call me.” You want to have a BATNA that’s still chomping at the bit to invest in your company.

I’m not suggesting that you break any no shop clauses or anything like that, or confidentiality agreements that you have in your term sheet. What I am suggesting is prior to signing a term sheet, you want to have a BATNA that is chomping at the bit and will be interested in investing in your company even if the term sheet blows up after it’s signed. They’re chomping at the bit, like I said, they’ve said something like, “If the other side blinks during closing, call me.”

If they haven’t said something like that, you can say something like that. When you call the investors that you’re not going to take money from and tell them that you’re going to sign a term sheet with someone else, you can tell them, “If there’s any problem during the closing process you are going to be my first call. I’m not expecting any problems during the closing process, but in the odd case that there is a problem during closing and we decide to pull the plug, you are going to be my first call.”

So you’re setting things up to have a great alternative if things blow up during closing, and you’re providing yourself with an excuse. You’re saying, if things do blow up it’s not going to be them pulling the plug, it’s going to be me pulling the plug.

Take it away Kazumi.

This is wonderful material for entrepreneurs. I’ve already taken the class and I still subscribe to the Venture Hacks podcast and listen to the classes on my iPhone.

Administrivia: The sound quality of the lecture improves dramatically after the first few minutes. New students can catch up on Class 1, Class 2, and Classes 3 and 4. The readings for each class are listed in the syllabus. The main text for the class is Steve’s must-read book, Four Steps to the Epiphany.

Audio: Customer Development 5: IMVU (mp3)

You can find the second half of this class in How IMVU learned its way to $10M a year.

There are no slides for this class.

I recorded the talk with my iPhone and sync’ed it with the slides below. I think the talk came out well — let me know what you think. I discuss a lot of the material from our book, Pitching Hacks.

Thanks to Stanford’s BASES for putting on the event!

Slides: Pitching Hacks at Stanford (pdf)

Audio: Pitching Hacks at Stanford (mp3)

– Peter Drucker

Steve Blank recently asked me to prepare a list of startup blogs for his customer development class. Here you go Steve.

I read all of these blogs. They all have incredibly useful archives. And they’re all written by people who teach and practice, so the advice is practical.

Must read

Eric Ries – Startup Lessons Learned
Fred Wilson – A VC
Marc Andreessen – pmarca
Paul Graham
37signals – Signal vs. Noise

More to read

Brad Feld and Jason Mendelson – Ask the VC
David Hornik – VentureBlog
Dharmesh Shah – On startups
Josh Kopelman – Redeye VC

Should be posting more often

Bill Burnham – Burnham’s Beat
David Cowan – Who Has Time For This?
Naval Ravikant – StartupBoy
Steve Barsh – Barsh Bits

Lawyers

Yoichiro “Yokum” Taku – Startup Company Lawyer

Up-and-comers

Mike Speiser – Laserlike
Steve Blank

On the town

Andrew Chen – Futuristic Play
Dave McClure – Master of 500 Hats

Comedy

Venture Capital Wear

Listen to this excerpt from the second class of Steve’s customer development course for the rest of this wonderful lesson.

Audio: Vertical markets (mp3)

Slides: Vertical markets (pdf)

Here’s a transcript of the lesson.

We teach entrepreneurship like every vertical market has the same set of rules

Steve Blank: How many are in Web 2.0? Like the social something web. How many are in enterprise software? Anybody in semiconductors? EDA? OK. Is there a biotech guy still here? Oh!

One of the interesting things about when I put up the fact that there are different industries or markets, everybody goes, “Well, yeah. Of course.” I’m going to tell you a very funny story.

When I started teaching in the engineering school of the school not-to-be-named down south, but it starts with an “S,” I formed teams just like you guys are going to do for projects. And I’d always say, “Listen, anybody can start a company. All you need is a half a million bucks.” OK, yes, sir, a half a million bucks. Write that down.

Next week there’s always a group that looks like these three people, that says, “Startup, half a million dollars.” It’s a divide by zero problems here, because in our business they’d come back and say, “Hey, Professor Blank, in our business the common wisdom is $100 million.”

And then I’d go, “Oh, well, yes of course, you’re in the life sciences, that’s completely different.” The next week I’d say, “Except for these guys who need $100 million, you ought to get out and start selling your product on day one, because you don’t need to worry about any IP at all. Web 2.0. Just go out and get out there.”

The next week someone raises their hand and says, “Professor Blank, in our industry there’s a ton of patents and stuff and people tell us we shouldn’t be out there unless we start patent protecting all our stuff.”

And I went, “Oh, oh, oh, you’re in a different vertical market. In that vertical market you’re absolutely right. But OK, let’s keep going on with the class. The rest of you guys can keep going out because you don’t need to worry about anything, about government regulation or anything. It’s a startup. Just go out there. There’s no regulation to worry about.”

The next week it’s a group that comes up and says, “Professor Blank, we’re doing a medical device and there’s something called the 510K, and that’s a two-year process.” And I go, “Oh, oh, for those of you in medical devices…”

And what I began to realize is that we teach entrepreneurship like every vertical market and industry has the same set of rules. So the first heuristic I want to offer is that even in this class, there really is no common “these rules work” for all vertical markets and industries.

And the first heuristic I want you to think about is, when you hear common advice from friends or other people who’ve done startups, always ask what industry were they in, and was that particular advice relevant for me or not.

So for example, here’s a checklist of — I just randomly picked these. Web 2.0, enterprise software, enterprise software, communications software, communications software, consumer electronics, games software, semiconductors, EDA, clean tech, medical devices, life sciences, and personalized medicine.

I think, I’ve probably screwed up a startup in almost every one of these. That was a joke.

Did I miss anybody’s vertical market? Anybody here who I didn’t kind of get? All right. So this is not meant as a comprehensive list, but usually it takes about 95% of those students in the room.

Technical risk vs. market risk

Steve Blank: Now what’s interesting is if I ask you, Eric, in your biotech startup, what’s your greatest risk? What is it?

Eric: Our team is working on an asthma inhaler.

Steve: Right. So what’s the biggest risk?

Eric: The efficacy.

Steve: Right. The efficacy of what?

Eric: The efficacy of the drug and its impacts. That’s a big risk.

Steve: So whether the product, as envisioned, works at all.

Eric: Right. And even if it works, are the adverse effects….

Steve: Does it kill you?

Eric: Yeah. Not to put too fine a point on it.

Steve: It’s a very nice clinician’s way of saying did it kill him or did he grow a third arm. How about you guys, do you have a particular drug or product in mind?

Student: The technology similar to some medical devices, the bio-monitoring… interactions.

Steve: So whether biomarkers are predicted, for a predictor from an assay you’re thinking about making.

Student: Yes.

Steve: So it’s a technical risk, right?

Student: Yes.

Steve: How many of you are thinking about a Web 2.0 startup? Great. What’s the risk, Josh? What’s the product?

Josh: It’s a digital media company.

Steve: Perfect. What’s the technical risk?

Josh: Finding the engineers.

Steve: Right. Is that a risk in Silicon Valley?

Josh: There’s not a lot of risk.

Steve: What’s the risk?

Josh: Getting people to use it.

Steve: Interesting. If our drug works for asthma, or your friends drug, does he have a customer problem?

Josh: No.

Steve: Why?

Josh: Because there are a lot of people that need….

Steve: If you’re running out of air, you’re going to probably want your drug, right? But you have a different problem. You could almost say, unless we really are stupid, we’re not going to screw up the technology. Wouldn’t you love it, if you were these guys, to be able to say that?

Josh: Yeah.

Steve: Big idea here. It’s a big idea, one that I’ve never heard articulated before at all with startups, yet world-class VCs know this on day one. There are some industries where the risk is purely customer in market.

And by purely I just mean, in Silicon Valley we take for granted digital media and web, with all due respect, for the hard work your software engineers are going to do getting it up, it’s not invention.

It’s, gee, did, they do it efficiently or did the Oracle salesman convince them to buy half a million bucks of software they didn’t need. But it’s not invention.

There’s a whole other set of industries where it truly is invention. Where it truly is, we should be so lucky to get this product working. Because if we get an asthma drug or an oncology for cancer curing drug, our only problem is how big is the licensing deal going to be? And not whether customers are going to want this.

Is this distinction clear? When you start a company, question one to self. Memo to self. Am I in a market risk company? Or am I in an invention risk company?

Hybrid risks

Steve Blank: And by the way, I said this in the first class, I’ll remind you again, though. I’m happy to have every one of you in the class, but if you are in an invention risk company, now I’ll talk about hybrid companies in a second. Invention risk company, this class can offer you nothing.

To the extent that, what customer development is about, is how to dramatically reduce market risk. It is not how to reduce invention risk. So if I lose three of you next week. But you’re more than welcome, I just want to understand…

Student: I’m a hybrid.

Steve: I’m sorry?

Student: I’m a hybrid.

Steve: You’re a hybrid. And I’ll talk about hybrids in a second. Is that clear so far? Memo to self, duh! Can we assume the technology works and our problem is whether the product and market fit is correct? Or is in fact, the product itself the risk factor. But I have something says both.

Give me an example of a vertical market or an industry that has both risks.

Student: Semiconductor?

Steve: Perfect. Why?

Student: Because the technology is fairly advanced. There’s a lot of new insight there. But then the customers are very finicky, maybe, in the type of devices…

Steve: Let’s get specific. What kind of semiconductors do you have in mind? That has technology risk.

Student: Say, consumer electronics or…

Steve: Give me more specific than that. Anyone else in the semiconductor business? You raised your hands in the beginning, now you’re hiding. Yes?

Student: Yes, the industry I work in, we target what the customers want.

Steve: Right, so give me a specific case of technology risk in semiconductors.

Student: Like a high speed serial interface.

Steve: Perfect. OK. Or better, a new graphics architecture, or a new CPU architecture, or you’re making a new IBM cell architecture. Yeah, that’s on the bleeding edge. We don’t even know if the architecture is going to work. Right? I just want to be clear.

Semiconductors, if you’re just making a faster version of some one else’s chip, you’re not taking too much technical risk, are you? I mean, whether you can push it faster.

But typically in semiconductors, if you’re taking architectural risk, if you really have some insight you believe, or communications hardware.

Pushing the envelope is usually about how deep you can go into packet inspection, to how fast and et cetera. Those are some pretty serious trade-offs. You don’t know if this stuff works until you get first use out of the way. Is that fair?

Student: Yep.

Steve: That’s the technical risk. What’s the market risk in that kind of semiconductor business? What’s the customer risk there? Anybody? You don’t even have to be in the semiconductor business. Yes.

Student: For example, they could really mean technology. They could build a chip.

Steve: Yes.

Student: But for some reason, in benchmarking for the system provider assistance is another. Another vendor. Or even more, the old standard just doesn’t pick up.

Steve: Right. So you could have a neat, new architecture, but your competitor could kick your butt. By convincing all the platform people who have to design your product in, “Oh, listen. That’s so incompatible. It uses 62 Hz, rather than 60 Hz of electricity. You’ll never be able to use it.” By the way, I once convinced an entire industry of that, but that’s another story.

So you could win on technical risk, and lose in market risk in hybrid technology. Give me another example. I picked Semiconductors. What’s another one?

Student: I used to do R&D groups with Blu-ray.

Steve: Perfect, talk to me.

Student: I don’t know much about it, but basically from a technical stand point, it seems like you’re pretty similar technology. But it obviously, Sony and company convinced the company prior to movie studios that they’re better off just shipping their content with Blu-ray rather than the DVD medium.

Steve: So this was the next standard for DVD’s. Right? For the last three or four years. Huge battles over who would be the supplier. Lots of chess games, lots of technical risk.

Because even at the end, they were still playing games with the spec and adding more security layer and what ever. At the end of the day, Blu-ray won. Didn’t win on technology, it won because they finally got a critical mass of people to design in the product.

Now the irony is, who do you think might actually, ultimately win? Who may undercut?

Student: Streaming Hi-Def?

Steve: Streaming Hi-Def. Right? It might be that the current DVD standard might have been the last one that sold upon these that it is. Most people, certainly my kids, don’t go out and ever buy DVD’s.

They download stuff to their iPods or Macs or some thing else, or to streaming video. Oops. They’re all an investment. You might have just built the product that no one else wants.

So I just want to point out that when you look at a startup, ask those fundamental questions on day one. What problem do we think we have besides who are we, what business are we in, and what ever. It’s like, are we going to be risking trying to understand our customers and we ought to try to focus on that.

Or is the focus truly inside the building. Because Steve, it doesn’t matter what customers think unless we really nail this technology. None of this matters.

Encouraging word-of-mouth

We give everyone who buys the book a $5 discount code to encourage them to tell their friends about Pitching Hacks. It works: you can see people sharing the discount code on Google and Twitter.  We were trying to figure out how to make the book viral and, technically, this doesn’t make the book viral — but it does encourage word of mouth.

More excerpts

Wilson Sonsini kindly published our chapter on Introductions in their Entrepreneur’s Report for Winter 2008 (pdf).

And I put together this two-slide summary of the entire book for Steve Blank’s customer development class.

Slides: Pitching Hacks (pdf)

Why aren’t you buying site licenses?

A single copy of Pitching Hacks is $19 and a five-copy site license is $29. We have literally sold two site licenses — and one of them was to my dad!

When 37signals published Getting Real, 10% of their buyers bought site licenses. Pitching Hacks is only clocking 1%. Please let us know why you aren’t buying site licenses — I’m interested!

Read more free samples from Pitching Hacks and buy it here.

Listen to this wonderful story to learn how Steve uses these two prices to create a bounding box around the highest price customers will pay for a product. And see why he thinks “It’s very easy to underprice your product… particularly if you’re an engineer.”

Audio: It’s very easy to underprice your product (mp3)

Steve’s story is about enterprise software, but you can apply these same techniques and thoughtful approach to almost any market — including the consumer Internet.

This is an excerpt from the fourth class of Steve’s customer development course. I’ve already taken the class, but I still subscribe to the Venture Hacks podcast and listen to it on my iPhone while I’m walking home from the gym.

Here’s a transcript of the story.

“And she realized… she left money on the table.”

Steve Blank: Can I tell you a pricing story? When we starting Epiphany, I had no idea how to price enterprise software. There was one small problem, I had started an enterprise software company and never been in the business.

But, I had heard, and it actually was true, there was a woman named Sandy Kurtzig, who had started ASK Softwark. She was one of the first woman entrepreneurs, woman CEOs of a large corporation. And they were making software for IBM mainframes that was manufacturing software. Something called Manman, which I used in the late ’70s, early ’80s.

Since it was the first non-IBM enterprise software on IBM mainframes, [when] she got her first potential order, she didn’t know how to price it. It must have been back in the mid-’70s. She’s [with] this buyer, has a P.O. on his desk, negotiating pricing with Sandy.

The way she tells the story is, she didn’t know what to ask for it. But, the head of manufacturing told the buyer to go buy this damn thing. [He] didn’t care, [if] it was the world’s best piece of software. So, Sandy said she goes into the buyer who says, “How much is it?”

And Sandy gulped and picked the biggest number she thought anybody would ever rationally pay. And said, “$75,000″. And she said all the buyer did was write down $75,000.

And she realized, shit, she left money on the table. Sandy Kurtzig was awesome. And she said, “Per year.”

And the buyer wrote down, “Per year.”

And she went, oh, crap what else? She said, “There’s maintenance.”

He said, “How much?”

“25 percent per year.”

And he said, “That’s too much.”

She said, “15 percent.”

And he said, “OK.”

[Ed: This is called "flinch pricing."]

So, enterprise software got priced at $75,000 per year, per module. Now, I have to tell you when I started at Epiphany I heard this story and someone said, “Steve, how much is your software?”

I said, “$75,000 per year, per module.”

Now, fast forward to about four years later. I’m leaving Epiphany, we’re about to go public like the next week. I did not want to be a Section 16B officer. I happened to be walking by a conference room. It must have been conference room 702B then. I think we had 800 people.

I happened to be hearing a pricing discussion. So, I kind of stand outside. And they are arguing about the pricing I had just made up as an entrepreneur, because I heard this war story. And somebody was screaming, “You can’t change the pricing. It was calculated by…”

“I was about to let it go for $75,000… By the time we walked out, we got an enterprise software order for about $1.2 million.”

Steve Blank: But the best Epiphany story, which I actually learned from a world class saleswoman named Gina Rulon-Miller. Her brother Todd was the first sales person at Netscape.

We went into Triple A, CSAA in San Francisco. It was going to be our first multi-million dollar customer. I went in with Gina. They loved our stuff, it really was going to do them a world of good. They said, how much is it?

And I was about to go, “$75,000…” And Gina goes, “Shut up I’m the salesperson.” She said, “A million dollars.”

And I went “…” Gina’s going, “Shut up. I’m the salesperson.”

And the guy looks at Gina and said, “Gina you’re out of your mind. We don’t pay more than $675,000.”

And Gina said, “All right. We’ll let you have it for $675,000.”

So, here was this software. I was about to let it go for $75,000, my first professional software salesperson had just gotten $675,000 and she did the same thing. And she said, instead of per year, she said, “But that’s for the base module. What other ones would you like?”

By the time we walked out, we got an enterprise software order for about $1.2 million. The point about pricing is, particularly if you are an engineer, it’s very easy to under price your product. Because you tend to value it on cost or need or competitive or whatever.

Bounding box pricing

Steve Blank: I, finally, in an almost every business I now work up what I call “bounding box” estimate, which is:

“How much is your product?”

“It’s free.”

“Steve, you can’t mean it. This is our fourth meeting. You know I’m serious.”

“No, no, no. It’s free. Assume it was free, how many would you use?”

“No, Steve. How much?”

“No, assume it’s free. How many would you use?”

Now, for enterprise software does anybody know how you make money in enterprise software?

Yeah. Turns out for enterprise software it’s the number of seats you actually got deployed on. Yeah, you made money on maintenance later, whatever. But, if you just got deployed on ten seats in one department, it’s not really enterprise is it?

It’s like closet software, which I used to get stuck into. You actually want to come out of the closet and be deployed broadly, as broadly as you can. And the test was if it didn’t cost anything, what would it take to deploy it?

When I used to do that they said, “Well I didn’t really tell you, but the IT guy really needs to approve this through the…”

“Well, why didn’t you tell me that before?”

“Well, the product wasn’t free before. I thought we were just going to put it on ten seats.”

My point is going to zero flushes out a whole set of issues. Other times, I’ll go say to that same question, “How much is the product?”

“It’s a million dollars.”

“Steve, we’ve been talking for three months now. You know I don’t have a budget for a million bucks.”

And you get an answer sometimes like Gina did. “The most we pay for this type of software is $500,000.” Seriously. In a startup, you will find out by asking these questions continually, what the bounding box of your potential revenue is.

Do not be bound by what other people are charging. Anybody know where that science experiment that is being run today on a much lower price? Anybody know?

Anybody have the device in their pocket? iPhone. What’s the price of an iPhone app? Anybody know?

I don’t know. There are a bunch of sites out there with some iPhone revenue charts. It’s interesting. Go take a look at what the right pricing for iPhone apps are. My observation is people are running bounding box experiments real time. Real time.

Are they free and they drive other upgrades later or they charge you $9.99 and get real value now?

Fliggo Pro is a minimum viable product in action. MVPs reduce time to market. It’s a good sign when people sign up to be notified. And if nobody signs up, you build the next iteration and see if that’s the minimum viable product.

How would you modify this MVP to collect credit card numbers? Could you promise to not charge customers until Fliggo Pro is delivered? Could you give customers a discount for buying early? What do you think?

Add links to your favorite minimum viable products in the comments.

At IMVU, Eric and the management opened up board meetings to the entire company. Why?

1. To give people the information they need to do their jobs.
2. To teach everyone in the company to think like the CEO.
3. To prevent employees from gossiping about board meetings.

And more!

I’ve synchronized the audio with some simple slides below. That’s my favorite way to consume the audio. You can also find a transcript and stand-alone audio below. Please let me know if you find the transcript useful.

Read on to learn what kind of employee Eric used to “show the door” at IMVU…

Slides: Opening up board meetings (pdf)

Audio: Opening up board meetings (mp3)

How do people find out about our product if we haven’t launched?

Nivi: And this gets to a second topic, which is you guys weren’t doing any of this really in public, because you had not launched a product, right?

Eric: Amen.

Nivi: Nobody knew who you were, but people were, at the same time, were using the product, so how did you do that?

Eric: I got a question today which was something like, “I’d love to follow your advice about not having a public launch, but we need to get early beta users for our product launch. How can we do that if we are not willing to talk to bloggers? Nobody really knows who we are.”

I think a lot of people have that attitude, that without PR, you just can’t get any early customers. Again, we have got to start with, “What is the goal of early customers? Why do you want them?”

If you are charging from day one, one of the reasons you want them is you actually want to make money. You want to show that your business is viable. But even if you are not charging money, you have a need to find out whether your business is viable, whether you have that minimum viable product, whether the business model, at the end of the day, is going to work.

For that, you do need customers, and you do need to be putting customers through a product experience that will give you that information. But you don’t need a lot of customers. I think that is where people get confused.

For a big fancy launch you can get hundreds of thousands of customers to show up for one day. But for metrics analysis, generally a cohort of 100 people or 1,000 people are plenty to learn from.

If you change your goal from, “How do we get the maximum number of customers,” to, “How do we get the minimally sufficient number of customers to learn what we need to learn,” new possibilities get opened up to you.

Acquiring customers on $5 a day

Eric: For example, at IMVU, we practice the $5 a day AdWords campaign. I was the VP of marketing in those days. If I actually knew anything about marketing, I would have known not to try this. By traditional marketing standards it is considered crazy to spend only $5 a day, but we had a pretty low budget and we really were pretty frugal.

I discovered that in those days you could buy clicks for five cents a click. But to me, $5 a day meant every single day 100 human beings are coming to try my product.

If you think about that from a beta testing point of view, especially if you look back at the old days of software shipped by CD, getting 100 people to try your product is actually a lot and you can learn a lot from that. And at 100 people a day, you are in good shape, just at that tiny, tiny level.

The risks of doing that are really quite low. I think a lot of engineers have this idea that once you put your product out there in public, the investigative journalists are going to find out about it and write about it and we are going to lose control of the story. Let me tell you. You should be so lucky.

IMVU was a top 1,000 website in the whole world before it got any press whatsoever. We were making millions of dollars a year. The press was writing about newly funded, venture backed competitors that had no traction whatsoever; because those were the guys sending them press releases.

It was frustrating, and psychologically you want to have that cover story on WIRED that you can send home to mom, but you know what? We did not start this company to have good vanity covers printed about you in the press. We were there to serve customers and serve them well.

Running experiments under a different brand name

Nivi: How do I run experiments, if I already accidentally got that TechCrunch article and I…?

Eric: Yeah, I am sorry. You are not doomed, but you are going to have to go waste energy later cleaning up the positioning that you put in that article, which is undoubtedly wrong.

Nivi: Right. There is that aspect of it, but do you think you should, just basically pretend that article never existed, or do you run tests under a different brand name?

Eric: That is not a bad idea. Especially on the iPhone, I see this because of Apple’s stringent release process where there is this huge delay before you can actually bring things to market.

And also because people want to get into the top 25. That is where all the action is in the Apps store. There is a lot of competition to make sure that on the day you launch your app you get all the right coverage lined up and all the stuff happening.

People feel like they don’t want to do a bad launch under their real brand name, because that will harm their ability to do the proper launch later and get to the top 25.

But there is no law that says you can only bring out products under one brand name. I strongly, recommend that to people if you are very concerned about your precious brand. I think most startups are way too concerned about the power of their brand. They should be so lucky to get some kind of brand going.

Even still, bring it out under a terrible name. I specifically recommend people bringing products out under brand names that they hate so that they won’t ever be tempted to make that into their real official brand name and then become afraid to experiment with it.

You have got to be bringing products out under a brand that you feel comfortable experimenting in. Then once you find the right formula, there are two possibilities.

Either you will be able to port that product over to your new brand name and it will be great, or the product concept you brought up under that bad brand name will be so powerful, you just can’t get people away from it.

It is too sticky and you are stuck with it. But congratulations! You are successful! Is it really so bad that you personally don’t like the brand if customers do like it? I think it is not so bad.

Running pricing experiments in public

Nivi: A friend of ours has a popular subscription based product that they don’t charge for and now they want to start charging for parts of it for the premium model, and they want to find the optimal pricing strategy. How can they run those experiments in public and in secret? What would you suggest to them?

Eric: I would actually not be afraid to run them in public. It is hard for people who are afraid of what the worst possible thing that could happen is, to do this. But I think it is good to just try it and get over it.

What happens is, it is true that customers don’t generally like the idea that one customer got charged one price for something that somebody else got charged a different price for the same item. So there is some risk when you do different pricing offers in a split test.

But in my experience, there are two mitigating factors that make it not so bad. The first is it is actually incredibly difficult for most customers to figure out that is happening, especially if you only do it in a limited time window.

For example, I am going to tell you a story that may not seem related, but bear with me. When we were at there.com, the virtual world company, we would do a lot of QA. That was a heavy QA company.

For hours every day we had QA testers sitting in a lab together running the virtual world software and testing to make sure that it worked. I remember one day getting called in to see about…

There was one tester. They were around a physical corner from each other. So you couldn’t see each other, but they were not more than 20 feet away. They were both engaged in this activity.

The guy called me down and he said, “I am in this dune buggy riding around with somebody in the virtual world and we are seeing this glitch. We are not seeing the same thing. Something is not right.” They were calling back and forth, trying to pin down what it was.

I remember sitting there really confused about what the problem was, because it looked like the two of them were sitting there in the dune buggy and everything was fine.

I walk around the corner to the other guy. I talk to him about what the problem is. I look at his screen. On his screen, he and the other guy are engaged in a paintball match. They are not in a dune buggy at all.

He was almost a mile physically distant in the virtual world from where the other guy was, yet their conversation was perfectly consistent to them and it never occurred to anybody to ask, “Wait. What planet are you on in this time that we are comparing notes?”

They had no clue that this was happening. I think, we totally tend to underestimate just how powerful the pull of what you see is to most people. They basically can’t imagine the world, any other way than the way that it is.

Entrepreneurs don’t have that problem, so a lot of times they don’t grasp what is true for customers. It is actually very unusual for the customers to go onto a forum and post, “Here are all the offers that I am being offered and exactly what I see. Does anybody else see the same thing?” Our natural assumption is that everybody else sees the same thing.

So you are not totally likely to get caught. That is a mitigating factor. It is actually not as bad as you think when you do get caught, because don’t forget; you have the power of the apology, especially as a startup.

If you screw up… You are going to screw up all the time. If you are a customer of a startup, your general experience is, “These guys are constantly screwing up.” What customers care more about than whether you screw up or not, is how you treat them when you do screw up.

They care that you listen to them and take them seriously more than if you always get it right. If they want to work with a company that always gets it right, they will go work with some premium giant company that really has a very carefully constructed customer experience.

If you get caught doing this thing, you can always say, “We are so sorry. We were experimenting with this pricing. We didn’t mean for this to treat anyone unfairly. And if anyone was treated unfairly, we have gone back in the records and we are going to give them all double the money back for the thing that happened,” or whatever you have to do to make it right.

That is OK! It is really not that bad. What happens then is people say, “Wow. These guys are serious about making sure that we get treated fairly.” Meanwhile, you get to keep experimenting.

Opening board meetings to the entire company

Nivi: Yeah. You have talked a couple times on your blog about how you opened the board meetings up to the entire company and the positive benefits of that, and people’s perceptions of negative benefits.

Eric: Yeah. Well this is not something that a lot of companies adopt. This is considered pretty crazy.

I don’t know if it’s that most people are actually afraid of giving the whole company information they need to do their job, because it might lead them to judge the top management harshly, but people judge you harshly whether you give them the information or not, from my point of view.

Just give them the information! Your pathetic attempts to hide what’s happening don’t fool anybody.

Having been on both sides of that divide, I can tell you I never felt like I was being successfully fooled. And if you do manage to fool me for a limited time, I’m awfully pissed. My point of view is: you want people to have the maximum information possible.

You need to do it in a trust-building way. You’ve got to make sure the people you’re giving it to understand what they can and can’t do with that information, and they understand that they need to keep company secrets confidential.

If you don’t trust your employees to keep company secrets confidential, you’ve got bigger problems and you should go address those problems first.

There is some board business that has to be done in secret for legal reasons, so it’s not true that absolutely every meeting that any time ever happened at the board level is open to the public.

Employees have critical things to say in board meetings

Eric: But the interesting part about board meetings is the strategy conversation where you present progress, show data, and you make discussions about what should happen next. And that’s the part of the meeting I strongly recommend people open up to their employees.

What we did is we actually had a board of advisors and then a board of directors that was a subset of those advisors. We would convene the full set, advisors and board, at nine o’clock in the morning and we would have a maybe two-hour strategy conversation followed by maybe a half-hour or one-hour private board meeting.

For the strategy conversation the rule was: every employee can attend. We did this up until we were a 50- or 60-person company. We actually, physically crammed everybody into one room, and we had the employees sit around in as much seating as we could fit and the board members would sit at the big table.

It wasn’t a free-for-all, most of the employees were encouraged to listen, not to speak. But every once in a while the rule was that if someone had something they really needed to say, they could be recognized by the CEO and say their piece.

It was amazing. We would, occasionally have a board meeting where we would have a moment, where there would be data we were presenting to the board, and it would indicate that on a certain day, a certain metric went up and that was due to us launching that feature that day, or whatever our interpretation of what that data meant.

And not an insignificant number of times we would have an employee raise their hand and say, “Excuse me, but do you also realize that something else happened on that day?” Yada, yada, yada.

And occasionally, I’d be the one presenting! On the one hand, I’m really embarrassed. So I’m like, “No, I didn’t realize that.” This is a critical thing about running my own business I didn’t know.

But once I got over my personal embarrassment, what you would find is the board loved it! They’re like, “Thank God that guy was sitting in the room and could enlighten us about that. That changes our interpretation of what this means.”

And quite a few times I think we saved ourselves months of work by coming to a realization of something way earlier than we would have, because the right guy happened to be sitting in the room.

And yeah, occasionally you had an employee who’d make an off-color comment or say something that really shouldn’t have been said in front of the board, but people learn from those experiences. Most of the time most people had really substantive conversations.

Nivi: Did you ever get in a situation where some of the employees were like, “I don’t even care about these board meetings. I don’t even want to go?”

Eric: Yes, yes! We eventually had people who on occasion would beg me not to have to go to the meeting. And we eventually made them voluntary. For a while I was really rigorous, I said, “No, everyone has to be there. If I have to be at the meeting, you have to be at the meeting. Why do you think I’m any more privileged or unprivileged than you?”

Yeah, because board meetings are actually pretty boring. But when people are outside the room looking in — and you know most conference rooms have some form of glass — people can see what’s going on. They’ll come up with an excuse to walk by, kind of peek in. They will make up whatever crazy conspiracy theories are consistent with the data if they’re not there.

An, in my point of view, that’s such a source of waste: people gossip and there’s rumors and people don’t know. Let them be in the room, let them see how boring and mundane most board meetings are. So that for the occasional one where something actually interesting gets decided, let them be there to hear it themselves.

Everybody in the company has the ability to understand what everybody else in the company has to understand

Eric: There are some costs, definitely some down sides to doing it. One which took us by surprise was that, people can occasionally get confused about who’s in charge, we did occasionally have people — some board member would say, “You guys should really build feature X.”

Board members occasionally would just spout off about what’s randomly on their mind, and occasionally you’d have an employee get confused that that means the company is now going to go do feature X because board member so-and-so said so.

And that was actually good practice for us, to be a constant reminder that no matter who you are, no matter what it says on your business card, nobody gets to decide randomly that the company’s going to do feature X. Right? I don’t care if you’re the CEO or the lowliest person, we’re going to have a reasoned and considered process for deciding what to do.

Nivi: And it’s a learning opportunity.

Eric: It’s always a learning opportunity. The other thing that was hard for me personally was it’s hard to have your people who work for you see you be criticized in public. That was not fun.

Nivi: Hard for whom?

Eric: Well, it’s hard for me. My emotional reaction was like, “Wait a minute! I’m doing the best I can and now you’ve got to watch me get smacked around because I screwed something up.” But once I got over my personal emotional response to it, it was wonderful.

Because it humanized me to the people who worked for me — they got to see, “Oh, I see the pressure that he’s under” — but more importantly, when I needed something from somebody for the purposes of presenting to the board I could go to them and say, “Do you remember what happened the last time I didn’t have the right answers to these questions or I had shoddy this? You’re really going to send me in there with this? Come on, you’ve got to help me out!”

So it made us collaborators in creating solutions for the board rather than I’m constantly asking them for stuff and they don’t know why.

And I think, get over your own infallibility. We all make mistakes and it’s better for people to see what the real stuff is.

Nivi: I think you wrote about this on your site, basically the assumption is that everybody in the company has the ability to understand what everybody else in the company has to understand.

Eric: That’s right.

Nivi: The assumption is I have the ability to understand what the CEO has to understand.

Eric: That’s right. And that makes people uncomfortable, because sometimes we would say, “You have the obligation to understand what the CEO’s going through right now, because it’s going to impact the way you do your job.”

Some people would say, “I just want to sit in my narrow corner, do my little thing, and I don’t want to worry about what the company strategy is.” And we would show those people the door. We were really serious about that.

You really needed to have people who were… they didn’t have to be good at it! We weren’t asking them to be good at the CEO’s job, but we are asking them to understand why is the CEO making the decisions that he’s making. Because they’re going to have to make CEO-level decisions sometimes.

Sometimes the actions that have the biggest impact on the company’s performance are taken by people at the line employee level. They may not realize it’s going to have that big impact, but they are going to make those decisions. By the time the CEO finds out about it, sometimes it’s way too late to do anything about it.

We sure hope that the guy at the line level understands what the company strategy is and how his decisions impact, at least the best that he can.

Nivi: Yeah, I think maybe their decisions impact the company more than the CEO in the sense that if the CEO doesn’t come in to work, who cares? The company proceeds, but if the team doesn’t come in to work nothing happens.

Eric: OK, let me tell you: when the community manager takes a day off, you can have serious, serious meltdowns in the community if it happens to be the wrong day. That can have major impacts on the company.

Should we share bad news with employees?

Eric: I’ll say one more thing because this is a real effect that people are afraid of, which is that if you give people information about how a company’s doing, it can impact morale negatively. Sometime the company’s not doing well.

It makes some people have this idea that part of your job as a manager is to shield people from bad news or shield them from chaos. Because it’s not fair to them to have them have to do their job and also be confused about how the company’s doing. I just think that’s a really paternalistic attitude that we just need to let go as an industry.

If you want people to believe you when you tell them the good news, you have to sometimes tell them bad news. Otherwise, you have no credibility. And when there’s bad news to be shared, yes, it negatively impacts morale. But for a good reason, because things aren’t going well and we now need to rally the company around the fact that we need to change what we’re doing.

And there’s nothing like actually seeing the board say, “You guys have a major crisis on your hands that you have not yet understood,” to get everyone in the company saying, “We’re alarmed. We need to do something about it.”

That can cause some chaos, and that can be disruptive, but if you build trust and rapport with your employees then what you could do is you can sit everybody down for an analysis meeting after the board, which we would always do, and say, “OK, let’s talk about what we heard and what does it mean for the company,” and let people share their perspectives.

Let people say stuff like, “This says to me we need to cancel all our projects and completely retool.”

You need to get that idea out in the open because when somebody thinks that, you don’t want them to just unilaterally go execute on that plan! You want the opportunity to tell them and everybody else who didn’t have the courage to say the same thing: “No, we’re not retooling, but we are going to make some adjustments and here’s how we think about it, here’s what we’re going to do about it and here’s what’s going to happen.” That was pretty powerful.

Nivi: Thank you!

Eric: You’re welcome.

Nivi: I think that was great.