Justin Mares

“Thanks for visiting mom and dad!”

My parents had traveled all the way from Philadelphia to visit me in San Francisco. I was excited. They don’t travel often, so this was my chance to show them how cool the city was.

They’re also pretty conservative, so my role for the weekend would be part tour guide and part Fox News. I’d have to turn the San Francisco experience into a conservative one they wouldn’t hate.

On the first day of their trip we went to grab subs from Deli Board, one of my favorite spots in the city. This place is my kryptonite: if I ever for some reason lose all ambition and drive in my life, at least I can be somewhat happy getting fat and slamming Deli Board on the daily.

Deli Board’s only blemish is that it’s on 6th and Folsom. If you know San Francisco, you know that’s the one area in Soma where the Tenderloin broke through Market Street’s defensive line and is doing a crazy dance in the endzone. It was a risk taking my parents there, but one I was willing to chance to get to my urban lunch mecca.

**

For the most part, I love living in San Francisco. There are loads of smart people, lots of cool happenings in tech, and the weather is awesome. Seriously, those that complain should try living somewhere where you see the sun once a month during winter. Or a place where getting caught in a rainstorm means you actually get wet, not just a light film of mist on your shirt.

I’ve also gotten really lucky with my living situation and have managed to make friends quickly. All in all, I’m enjoying my time here. There are tons of cool street fairs, free concerts, and even a summer Chipotle festival. That sealed the deal for me.

Like any city, there are downsides. It’s expensive, and is the only place in the country where rent prices are partially determined by Facebook’s stock price: I actually met someone who’s rent went up several hundred dollars within weeks of Facebook’s IPO.

Plus, it has “character.” Lots of it. As my parents were about to find out.

**

Being a beautiful San Francisco day, I decided it’d be nice if we enjoyed our Deli Board outside in the park by the sub shop. First mistake.

We sit down to partake in the sub-of-the-gods. After I was halfway through, some homeless men sat down on a bench near us. My parents looked disturbed.

“Yeah, San Francisco has a bit of a homeless problem. It’s a problem in that the city basically turned out their mental institutions in the 80s and there are some drug addicts out here. It can be depressing.”

Then they started smoking crack.

For a second, I hoped this was a generational thing. My parents wouldn’t know what “crack” was, or what it looked like. It could be a health substance they were ingesting.

Nope.

They knew. They’re not idiots, just really uncomfortable watching drug addiction and homelessness hold hands on a park bench. There are few things that are more of a departure from normal suburban life than sitting next to two homeless men as they take turns roasting a crack rock.

Fine. Weird, but they can handle themselves. We’ll just finish our Deli Board and I’ll take them to Twin Peaks like we planned.

Ignoring the crackheads, we continued to eat lunch. In my peripherals I spotted another man approaching us – a man I could only hope was going to let us eat in peace. When I turned to look at him, my hopes were crushed. There’s no way my parents are coming back once they realize he’s walking right towards us. Not because he was dirty, or smelly, or smoking crack.

They weren’t coming back because he was holding a sword.

This was a new one, even for me. Apparently, Man With A Sword had gotten his bike stolen in the park just seconds before walking over, sword brandished, and asking if we’d seen anyone riding a white bike. Or the police.

“NoIhaventsorrybuddy” I spit at the person who’d just beheaded the last chance that my parents would ever visit me again. “We’ve been sitting here for 15 minutes and haven’t seen anything.”

He walked off. I quickly requested a cab and took them to Twin Peaks. $30 and one beautiful view later, I was in the clear.

They haven’t visited since.

There’s a war of opinions going on in the B2B software world, and one side is winning. The war is over one fundamental question – how should I price my product or service?

No doubt, pricing is an incredibly nuanced and complex topic. I wrote a rather simplistic piece as a thought experiment, and had redditors suggest I should go back to school and understand price elasticity. Thanks, guys.

I’ve read a lot about SaaS pricing, including some very convincing arguments against Freemium. They basically boil down to these points:

1. Free-to-paid upgrade rates are incredibly low (true)
2. Free customers are often your worst customers (also, often true)
3. Free customers suck up support and engineering time while giving nothing back (true)
4. You lose out on users that would have paid you but opted for the free plan instead (true, though hard to quantify)
5. They cost you money if they come through any paid marketing channels (ads, affiliate, etc.)

The prevailing thinking among software startups (led by people like Jason Cohen and Patrick McKenzie) is that extended free trials, or software trials with money-back guarantees are the best way to convert prospects to real, paying customers. For the most part, I agree.

However, I think there are also benefits to the Freemium model that don’t get talked about besides the fact that you’ll likely have a higher visitor -> signup conversion rate. Some other ways Freemium is useful:

Allows for risk-free testing of product features. At any sort of scale, an effective Freemium program means you have hundreds or thousands of free users. This gives you a lot of flexibility in terms of features you can test with your audience. You can build a very basic version of a new feature and see if your free users like it – all without worrying about whether or not they’ll cancel if it doesn’t work exactly as expected. You can also run cheap tests where you message or email your free users, pitch a feature and see what excites them. What features do they use and what don’t they?

Test referral programs. Having a large group of free users can be beneficial in terms of testing referral programs and getting new users. For one, an effective referral program takes a while to get right. If you’re constantly running tests to get your paying users to share your product, there’s a risk that they’ll get angry and cancel their service. Small risk, but still something people worry about.

On the other hand, having free users gives you the opportunity to test many different variations of a referral program – both because you can run more tests and because there are (presumably) more free users than paid. All else being equal, if you have an effective referral program, and 5x as many free users as paid, referrals could be an effective marketing channel that comes at the marginal cost of supporting free users. For any company with a product that requires group communication or social interaction, a referral program that utilizes a large cohort of free users can be very effective.

Test upgrade levers. Having free users also gives you the opportunity to test what makes them want to upgrade. Does a certain feature drive lots of upgrades? How about hitting a certain number of users? Or a storage limit?

Whatever it is, you can measure the main reason why most of your free users upgrade to paid. Once you have that information, you can then design your product’s onboarding process to move them in a direction where they get to a “quick win” moment sooner. For example, if most customers upgrade after hitting a certain user limit, you could design your onboarding process and create triggers that cause them to invite more users as they naturally engage more with your application.

As a side note, Freemium can also be valuable if you have a whole suite of products you can cross-sell or upsell into your audience. In this case, Freemium becomes a cheap marketing channel that comes at the cost of supporting your free users.

Have a larger audience. Assuming that having a free product tier means you’ll have more signups, adding a free product tier means that you will have a larger audience than if you went paid-only. Having access to this larger audience – and an easy way to reach them – makes other marketing activities easier. Things like partnerships, co-marketing, joint webinars and referral programs are all easier to land if you can tell a prospective partner you have several thousand customers, rather than several hundred who are paying.

This makes sense. Partnerships and other co-marketing activities take a long time and are tough to get right. What makes them attractive is access to a large pool of potential new customers. The smaller this pool, the harder it is to get interest.

A more attractive acquisition target. Earlier I mentioned that a cohort of free users can be great if you have a suite of products to upsell into a captive customer base that isn’t paying you yet. Developing a suite of products (not to mention supporting, improving and marketing them) is really hard and takes time. But guess who does it well?

Big companies.

Big companies have tons of products they’re just itching to sell into new markets. When a large company looks at your company as a potential acquirer, you can bet they’re going to price the number of users into the acquisition. They’d much rather acquire a company doing $X per year with 5000 free users than one just doing $X per year – it gives them new segments to sell into and can be a competitive advantage.

I’d love to hear your feedback in the comments. Or, sign up to get irregular emails about marketing, SaaS and startups.

For 3 years I’ve been trying to learn programming. And every year, I’ve deepened my understanding of how the web works.

Learning the basics of software development and how the web works at a high level hasn’t been easy. The best learning experience has been to dive in. I’ve learned so much in the past year working for Airbrake (a developer tools company now a part of Rackspace), talking to customers, and becoming a part of the developer tools space.

Throughout my research, I never came across a single post that’d give a non-technical person a broad base of knowledge they could then use to specialize. I’m hoping for many other non-technical people, this is that post.

How the Web Works

At a high level, the components of the web look like this:

Ok. If I had seen this 2 years ago, I wouldn’t know where to start. Let’s roll through some definitions here.

The App Layer

For complex websites the app layer encompasses your actual application: a web app, mobile app or basic WordPress blog. A website’s application is what you think probably of as the actual site. It is everything you click, see and interact with.

Let’s take Facebook. Their application includes the interface where you can see friend’s photos, upload pictures, post stuff, like other things, comment, add friends… you get the picture. The application is everything you interact with.

A website is like an iceberg. You know how 80% of an iceberg’s mass is below the water? A website (or application) is similar – most of the action occurs under the surface. How you interact with an application is determined by…

The Stack

As a tech company, your stack refers to the list of tools, languages, frameworks and databases you use to build your application. These languages can generally be separated into two buckets: front-end and back-end languages. These buckets interact to provide the overall experience of using an application.

The front-end  determines how your application looks when pulling it up via a web browser like Chrome or Firefox. A web browser does one thing: it reads and displays the front-end languages that a page is made of.

Front-end languages include HTML, which makes up the text on a page, CSS to style that text and other page elements, and JavaScript to make things on a page interactive. For example, if you hit the “Follow @jwmares” link on the upper right of this page – which you  should – clicking that link runs a JavaScript command that fetches your Twitter information from cookies in your browser and sends a command to Twitter that says “add @jwmares to the list of people I follow.”

Cool, huh?

If this still isn’t making sense it might help to get an idea of what a web browser actually does. If you’re curious what a website looks like to your browser, right-click and hit “view page source” on this (or any) webpage. You’ll see what your web browser sees – HTML tags with their layout defined by CSS stylesheets and their interactions defined by JavaScript scripts.

The back-end includes everything that happens before stuff hits your browser. It might be simple (like a program that displays the date and time) or something more complex (like Facebook, Twitter, eBay or hundreds of other applications).

Let’s take eBay for example. Everything you do (product searches, rankings, price checks and payment) all happens on the back-end.  Typical back-end components include a program (written in a back-end programming language like Python, Java, Ruby or PHP) that determines what an application can do, and a database that stores any relevant data.

In the case of eBay, you have specific programs that determine how to display products – how to rank them for specific searches, how to display the prices, how to update given people bidding on different products, and thousands of other use cases. These programs fetch necessary information from a database that stores everything a website needs to hold.

In a lot of ways, this is analogous to Excel. Think of Excel as a massive database, holding every bit of information you need regarding your product. Actually, when you’re writing functions in Excel (things like “add this column, subtract this value from this value), you’re writing programs! Web programs do the same thing – return and manipulate information that’s stored in a database – just on a much larger, more complex level.

Some common languages often used for the back-end include:

• Ruby
• Python
• PHP
• Java (which, confusingly, is totally different than JavaScript)
• Perl
• ASP.NET
• C
• C++
• Go
• Erlang
• Javascript (Node.js)

Each of these languages can accomplish roughly the same thing, though there are tradeoffs in terms of hiring, speed, performance, etc. that I won’t get into.

Common types of databases (also called data stores) are:

• PostgreSQL
• MySQL
• MongoDB
• CouchDB
• Redis
• Riak
• NoSQL
• Oracle
• Microsoft Access

Phew. That’s a big (and confusing) list. As someone trying to familiarize yourself with tech, you don’t need to understand exactly what each of these programming languages or databases do. Instead, you should be able to understand the context in which someone has expertise. For example, if Redis or MongoDB comes up, you should understand that each is a tool used to store data.

Programming frameworks are the last thing I  want to touch on. Programming frameworks are tools that make it easier to build something quickly. Think of your typical web application. Most contain common elements: an account creation process, shopping cart, etc. Frameworks help abstract away many of the more repetitive components that need to be built for a website by giving developers pre-built “gems” (or libraries) with functionality already included. For example, if you want to build a shopping cart, Spree provides a framework that makes it easy to build one.

As an analogy, think of building a house. The frame of every house is similar – wooden boards nailed together to form a basic structure. All the customization that makes a house unique goes on top of this frame – the finish in the kitchen, the layout, paint on the walls, etc. What’s remarkably consistent across houses is the frame. If you wanted to build a stable house fast, it’d save you time to use a prebuilt framework.

That’s exactly what using a web framework does. It allows you to build faster by taking advantage of prebuilt units of code. Rather than rewriting a shopping cart, you can use code from other developers who’ve built shopping carts in the past.

A complete list of frameworks for each programming language can be found here, but many of the popular ones you’ll hear about are below:

• Python – Django, Pyramid
• Ruby – Ruby on Rails, Sinatra
• PHP – CakePHP, Zend, Laravel, CodeIgnighter
• Java – Grails, Play!
• Javascript – jQuery, Backbone.js, Ember.js,

Each of these frameworks come with different software packages, known as libraries, plugins or gems (in the Rails community), that help developers accomplish specific things. For example, here’s a list of Python libraries and the different reasons developers may want to use them.

Together, these languages, databases and frameworks make up a product’s tech stack. Take a look at Instagram’s tech stack to get a general sense of how a tech stack looks to other engineers.

That was a lot to take in. The last two parts are somewhat simpler, and contain a LOT less jargon.

Platform

The platform an application runs on refers to any software platform they may be using to build their app. As you’ll see in the server section, buying or renting server hardware, managing those servers, provisioning them and scaling them can be a major time-suck. Many companies choose to instead focus on building their application, and build on top of a platform-as-a-service (also known as PaaS) like Heroku or OpenShift. Imagine if you were trying to work in Excel and had to download, install and set up a new version of Excel every time a worksheet filled up. That would take time and not help your efforts to build an amazing Excel model.

Basically, building on top of a platform like Heroku means you don’t have to worry as much about buying servers and scaling them. Instead, you can just push code to Heroku and let them deal with the inevitable provisioning, setup and scaling issues.

Not much else to say here, just that going this route is a lot easier than managing this yourself. However, it is more expensive so it may not make sense at a certain scale.

Server

Beneath the entire virtual world that is the internet lies something many don’t like to talk about. That something is actual hardware.

That’s right. Everything you see, do and interact with on the internet is a program running on top of a physical box. A server. That sits in a cooled room on a rack somewhere:

You don’t need to know a ton about servers to be honest, only that they have their own operating systems (usually Linux), and make up what people refer to as “the cloud”. If you’re using a cloud hosting provider like Rackspace, you’re paying them to manage your servers for you.

Cloud hosting is one of the major reasons it’s easier to start a web company now than it was 10 years ago. Rather than buying and setting up dozens or hundreds of your own servers, you can pay Rackspace to manage hundreds, even thousands of them for you.

How Software Actually Gets Built

First, there are different stages (known as environments) in which software gets built. There’s the dev environment where software engineers work on building new features. These are things that are being worked on but aren’t ready to go live just yet.

Developers will use tools like GitHub to manage and share versions of their code (and push code live); an IDE or text editor to write code, and a staging server to host the code they write. For managing and spinning up servers, they’ll use tools like Puppet or Chef to ensure servers are set up in a consistent way.

Once features are ready to go live, they get pushed (or deployed) to what’s known as a production environment. At this point, the code has likely run through a series of automated tests to make sure it won’t break anything once it’s live. There’s a whole subset of software development – DevOps – responsible for deploying code into a production environment, and making sure that the deploy process goes smoothly and is consistent. To get a better understanding of this process, check out an interview I did with a lead engineer at Stripe and another with Digg’s former lead architect, Joe Stump.

Why Is All This Important?

Understanding how the web works from a technical perspective – even at a high level – has been extremely valuable for me.

I’ve made bad hires because I didn’t understand the skill-sets of people I was interviewing. I’ve lost $14k (as a college student no less) because I didn’t grasp what I was hiring developers to build, or comprehend what goes into building an application. I was completely blind.

Especially if you want to start a company, learning how technology actually works is imperative. As this article mentions, non-technical founders create successful startups by having these 4 traits:

1. Technically literate
2. Product oriented
3. Have cash
4. Are well-connected

As software seeps into every sector of the economy, it’s even more important for employees of all kinds to understand tech at a basic level. Your sales, support, marketing and community hires will all be better off if they have a basic understanding of how the web works, and how their software product fits into that landscape.

Early on at Airbrake, I had to turn a non-technical account management team into one that could talk and sell to developers. This process made me realize how few people understand how software is actually built, and how hard it was to explain. Hopefully, this post provides a jumping-off point for the many of you that want to improve their technical literacy.

What parts of this do you still have questions about? What have you struggled with in the past? Leave a comment below, and I’ll respond to every one.

I’m tweaking this older post as part of Startup Edition, a community I recently joined. This week’s edition asks “how do you turn your idea into a company?”

After reading this fantastic post I started thinking about how startup will jump into an idea they’re excited about. The problem is, many of them make the leap without doing the necessary research.

I’ve seen quite a few people start a company thinking of the riches that will soon be theirs, only to realize that their idea isn’t going to work. I almost had the same thing happen, but instead went through a serious process of idea research, which I cover below. Instead 0f spending 3-4 years of my life working on something with a high likelihood of failure, I’ve been able to do some other cool stuff.

The basic idea was this. College tuition is ridiculously expensive, and different people receive different value from their educations: a computer science student from Harvard has vastly different earning/job prospects than an English major from the same school. However, these two students pay the same tuition and borrow money at the same rates, which are based on family income. In financial terms, a student with an engineering major from a top 50 university is a low risk for default, but priced as if they defaulted at the same rate as English or other majors. Thus, the idea was to give lower-interest student loans to engineering students – they’d receive a cheaper education, you’d receive a solid return from a low-risk asset.

Strong idea (I think), but I wanted to make sure that it was something that could work. I did all of this research to answer 3 simple questions:

1. Could I create something more valuable than what currently exists?

2. If yes, could I reach people to make them aware of my superior product/service?

3. Assuming things go well, could I make enough money to run an interesting business?

To answer whether or not your idea is better than the competition, you need to do some competitive research. Since most people start a company based on an idea (and not the size of the potential market), that’s where we’ll start.

Competitors

Your idea should have competition in some way, shape or form. Mine certainly did. If there’s no competition, it might be a sign that there’s no market for what you’re doing. In this step, you want to answer question 1: Can I create something more valuable than what currently exists?

The fastest way to find your competitors is to do a Google search for a relevant market keyword. For me, it was “private student loans”. Take a look at the Google AdWords that appear with your results. Any company with an ad budget (and thus an ad) means they’re likely a serious player – they have money to afford a marketing budget, and probably some idea of what it costs to buy a customer.

By clicking through each of your competitor’s Google ads, you can also see how they position themselves on their landing pages. What benefits are they selling? Are any of them claiming the same benefits you’d be bringing to the market?

This is a good sanity check – if some of these competitors do the same thing you’re planning to do, it doesn’t mean you have a bad idea. You could still out-execute, get better distribution or have a better product. After looking for competitors, I found that SoFi and Upstart were doing somewhat related things, in addition to the banks that do private student lending.

Once you know your competitors, it’s important to then get a feel for their company strategy. The way I usually do this is by looking at their jobs page. Depending on what positions they’re hiring for, you can figure out the direction they are heading over the next few months. For example, based on the campus ambassador job at SoFi, it looks like a key part of their growth plan is to have campus reps get fellow students to use SoFi. You can then think through the likelihood of that working as a channel, and if you’d be able to copy it if it worked.

I also checked out the Crunchbase for both companies, and saw that SoFi raised $77 million to roll out their lending program to other MBA programs. Based on this (and a careful reading of their company website), I figured that they are planning on giving out loans themselves, instead of just connecting alumni and students. This is a big deal, because it means that they were likely struggling to get alumni to fund students OR they realized that being a market intermediary wasn’t a profitable spot to be in. As you’ll see later, this was red flag #1 with the idea.

Although my idea wasn’t really web-driven, when doing competitive research on other web-based companies here are a few other things I look at:

• Compete to see their traffic data, and which way it’s trending
• Quantcast to get a rough feel for the demographics of their average customer
• AppData (if they have a Facebook or mobile app) to see how engaged their users are

At the end of this stage, you should know three things: who your biggest competitors are, the basics of their company strategy, and how you are (or will be) different from what they’re doing. If you think your approach has more value, time to dive a bit deeper.

Distribution

Once you’re confident in your product compared to competitors, it’s time to research how you’ll reach your potential customers. Understanding how you will acquire customers (and how your competitors do) is rarely done. This is unfortunate, because it may just be the most valuable part of your research. Having a rough idea of how much it will cost you to acquire a user informs just about every major decision you’ll make - what you’ll charge, how much you need to raise, how much of your marketing spend should be on advertising, and what marketing channels you should test.

Luckily, with all the free tools available you can get a really good idea of how your major competitors are driving customers. First, you can use Google Trends to look at the popularity of your competitors in the space. Who has been mentioned more often over the last months? What blogs/media outlets have covered them?

Doing this will give you a good idea of the blogs or media outlets that would be receptive to running a story about what you’re doing. This type of information is really important. Early on, while you’re still figuring out what you’re doing, copying competitor’s distribution channels is a good way of getting some early traction.

Next, you want to look at your competitor’s (likely) two largest sources of traffic – paid advertising and organic search. One of my favorite tools is SEMrush, which you can use to get an estimate of your competitor’s search engine traffic, organic keywords that are working for them, and where their traffic is coming from. In the case of SoFi, I was able to see that they did no advertising, and most of their search traffic came from people specifically searching for “SoFi” or related terms.

This can be really helpful in web-based businesses. For example, take a look at the SEMrush data for Dropbox:

From this, you can see that they have made SEO a focus of their strategy, and are working on expanding to other countries through paid search and organic SEO. That’s a good thing to know when figuring out how to attack the market. It means that you’ll have to do a really good job executing on SEO if you wanted to start a competitor, or choose a different vertical.

That most of Dropbox’s traffic is organic is further borne out by taking a look at Alexa‘s clickstream data. Here’s what that looks like:

This information tells you that Dropbox is doing a good job of driving traffic via Facebook, that Youtube accounts for a surprisingly large percentage of their visitors, and that they have many people searching for them in Europe. Overall, if I was looking at starting a file-sharing competitor, I would write off SEO as a channel through which I could beat Dropbox. They’ve done a great job, and it’d be extremely difficult (and take a long time) to achieve the types of rankings and traffic they have through SEO.

If I thought I could potentially do well with SEO, I’d use the following tools to dig deeper into this channel:

• Open Site Explorer to see where they get their links from.
• Sign up for a free trial of SEOmoz to see where the competitors rank for different terms, and determine how hard it would be to rank for certain keywords.
• Take the free trial of HitTail to see if there were potential opportunities to rank for certain longer-tail SEO keywords.

Lastly, I’d use the Google Keyword tool to figure out how much it’d cost me to buy search advertising, and see how much my competitors are paying for certain search terms. If it’s a lot, I now know that advertising may be a difficult way to acquire customers, and start looking at other channels.

At the end of this process, you should know a few things: how much traffic your major competitors are getting, where that traffic is generally coming from, what sites have linked to them, and an idea of whether or not SEO and PPC could work for you as acquisition channels. If not, start thinking about others - viral, partnerships, PR, etc. Starting a company with some idea of how you’ll attract customers vastly increases your chances for success.

Market

Lastly, you want to know how large your potential market is. This involves a lot of googling to answer the following questions:

Who are the major players in the space, and what is their total revenue? What is their market cap (if public)?

• Here, use the 10k’s of publicly traded companies to research total revenue, profits, expenses, and profitability history. Pay special attention to net income and expenses – where are they spending the most money? Are their profits growing or shrinking? Why?

What are people saying about the industry? What are some recent blog posts or press covering the market or its major players?

• Use Google’s search tools to see most recent blog posts or press mentions over the last month. How often is the market covered? Who covers it, and what are they saying about the market and the companies in it?

Is it a growing market? What gaps exist that I can leverage, and how entrenched are the players in the market?

• Here, look for industry reports and revenues of companies in the space. Also use Crunchbase to see if other companies raised money at increasing valuations in the past 6 months. That’s a strong indication that they’re seeing some kind of growth.

What do my potential customers care about?

• Use Delicious to see what popular articles people have tagged as memorable. What do they care enough about to save? For example, if you are thinking of doing a web analytics startup, take a look at some of Kissmetric’s most popular posts to see what people are interested in and found valuable.

At this point, I also set up Google Alerts for certain key terms in a market. For example, with our hypothetical fire-sharing competitor, I’d create alerts for the top 3 competitors and a few key terms (e.g. “file sharing” + funding) I wanted to monitor.

I’d also subscribe to a few relevant blogs that covered the space, and follow relevant players (and reporters who cover them) on Twitter. In the case of a file-sharing company, I’d follow Aaron Levie, the CEO of Box, Dropbox’s CEO Drew Houston, and a few TechCrunch reporters that you can see often cover Dropbox and the file-sharing space - Josh Constine, Sarah Perez, and Ingrid Lunden.

You can also do some basic market sizing by using Facebook ads to determine how many people are in your potential market. Noah Kagan talks about that in a great post here.

Lastly, get out of the building and talk to people. Having conversations with industry experts will expose you to problems and ideas that you can’t find on your own. Often, these people will be happy to talk to you – in my case, I even had one guy who wanted to invest after I did some of my research.

Why I Didn’t Do It

In the end, I passed on the idea for a few reasons. The largest one was the numbers didn’t make sense: starting a company that connects alumni or other institutions to engineers who need student loans is a great idea if you collect the 1-2% spread between private loans and what you could offer. If I had $50m+ I’d do this in a heartbeat. Otherwise, as a middleman, you’re only getting a small piece of the 1-2% differential between the loans you’d facilitate and the rates students could get elsewhere. You have to have a LOT of volume to make this a worthwhile business – even if you facilitated $500m in loans (about 16% of the total market), you’d still only make $5-10m annually.

So, the math didn’t make sense unless you were the one actually giving out the loans (the strategy SoFi seems to be taking). I thought about it, and given my status as a 23 year old recent grad, I didn’t want the potential success of the company hinging on whether or not I could raise $50m+ in capital to lend out to engineering students. When you account for regulatory and legal compliance issues that come with being a lender, and the idea just didn’t make sense for me to pursue at the time.

The last piece of this was a few conversations I had with people in the space. A few people I spoke with saw the opportunity, but didn’t think it could be a major business given the economics of the market. Additionally, SoFi has a mature and well-connected team of executives that I wouldn’t want to compete against in a market that will be rapidly changing over the next 5 years. If the price of college collapses, and the education bubble pops, SoFi is in a tough spot where they have to process more and more loans to reach the same volumes. Even if the cost of college drops 10%, that 10% has a big impact on the loan volume they can process.

In the end, it’s an idea I could have raised money for. I had a few people who said they were willing to invest, and a marketing plan that I’m confident would have worked. However, thanks to intensive market research lasting 2 months, I think I saved myself years working on an idea that likely wouldn’t have paid off.

I’d love your thoughts on this post. What ideas are you looking at? What concerns do you have before jumping in to start something?

Paul Graham’s latest essay is one of his best. Several of his recent essays have focused on traction (growth, scale), which leads me to believe it’s something at the top of his mind.

My guess is, the largest issue facing most YC companies is a lack of traction. Thus, PG writes about distribution, thinking through and trying to help future founders looking for their distribution “secret.” In his latest essay, he talks about doing things that don’t scale – personally recruiting users, taking manual photographs of AirBnB host’s apartments, etc.

This is one of the biggest problems with startup marketing advice today. It’s all tactical. There’s little strategy: few thoughts of “how does this apply to my situation?” PG’s advice makes a ton of sense to a newly-formed company, as he points out. For a company trying to prove traction in order to raise a Series A, such advice is less clear – will recruiting users manually really make a difference as you try to acquire your next 1000-10k users? In such cases, investing in more scalable traction channels makes more sense.

Without a framework to think about traction, the tactics you’ll hear about daily – cheap ways to drive clicks via StumbleUpon, how to lower the CPC on your Facebook ads, or hacks to get more followers on Twitter – will overwhelm you. This is why we introduce the Bullseye Framework - a systematic way of thinking through the many customer acquisition channels that a startup could use.

It’s hard predicting what traction channels will work for a given startup. What helps is thinking through channels that could work for you given your company stage. By thinking through the universe of marketing tactics and narrowing them down to what’s likely to work, you can have an educated and well thought-out approach to getting traction: real customers and real growth.

This framework allows you to read through (excellent) articles like these and apply relevant tactics to your startup. There’s some awesome stuff in there, but to any company with real revenue or growth, things like commenting on blogs probably doesn’t make sense. It isn’t a core action that will lead to growth.

Paul Graham is absolutely right. Founders make their companies succeed by pushing through the early phases and doing things that don’t scale. Often, by narrowing their focus to just a few traction channels that make sense given their stage. Then, by later focusing on more scalable channels (in AirBnB’s case, referral loops, Craigslist distribution hacks, word of mouth, paid advertisements and Facebook integrations), they build them into billion-dollar companies.

I recently found out that an executive at a major big data corporation reads my blog. He emailed me to comment on something he learned from one of my posts. #humblebrag.

It’s crazy to think about: if I sat down and had lunch with this person, I’d feel every bit his junior. There are 1000 things I could learn from him, and maybe 20-30 he could learn from me. Instead, online, my thoughts are the ones he’s paying attention to, simply by virtue of hitting “publish”.

Another funny thing came from this article. Here’s the money quote:

It’s generally accepted that you can’t grow a software business charging only $5 per month, so the chief argument in favour of the bottom tier is always that “these guys will move up through the plans”.

The whole article is well worth reading, but I found it hilarious that something I wrote in my boxers at 1am became “generally accepted” pricing wisdom. You’re welcome, world.

Writing has a weird way of attributing that influence to you, even if not necessarily deserved. Countless times I’ve read blog posts and articles in the past that have shaped my thinking, but can’t actually remember who wrote it. In cases like these, the author has hidden influence, where they shape the way individuals think about things but don’t necessarily receive credit. More than any other medium right now, publishing online can give you this influence.

It’s also easier and faster to get than before thanks to the proliferation of social channels. In fact, one of the valuable things about following thought leaders, investors and entrepreneurs on Twitter is because you can see what they read. Who’s thinking influences them, and how does it fit into their worldview? For example, I know of 4-5 VCs that read Ribbonfarm on a regular basis. Even though Venkat (the guy behind it) is a blogger and a consultant, his thinking and writing still influence the investment theories that control hundreds of millions of investment dollars. That’s hidden influence, whether Venkat realizes it or not.

What’s valuable is turning this influence into real productivity outside of your writing. Venkat could probably raise a small fund (or an associate position) by leveraging his audience and readership. Charlie Hoehn could get basically any job he wants, and I have lots of plans for things to do post Traction Book (email me if you’re curious).

This applies to companies as well. If you’re trying to grow your business, shaping the way people think is more valuable than gold. It’s the driving force behind multi-billion dollar advertising industry. Savvy companies like Unbounce and Hubspot understand that creating educational content that shapes their customer’s thinking is valuable. In fact, it’s the main driver behind each company’s respective business.

For instance, Unbounce’s series of case studies, how-tos and posts about how to improve your online marketing all seed the idea that your marketing strategy should include a healthy dose of custom landing pages. They then show you how to rock awesome landing pages to get more customers. And, once you believe that customizable landing pages are a core part of your traction strategy, Unbounce is the first company you’ll buy from.

Right now, this influence is best achieved through writing. I’d consider myself somewhere between readable and average as a writer, but even I’ve reaped the benefits of having some amount of hidden influence. As attention becomes more and more scarce online, framing the way people think about things becomes more valuable than simply getting them to view your content (though both are valuable). This is something I’m trying to think about in both my career and my writing.

Over Memorial Day weekend I crossed off a bucket list item and spent an hour in a sensory deprivation tank. Minus the saltwater (still) stuck in my ears, it was a really cool experience.

Way nicer version of the isolation tank I used

It’s a weird experience, and definitely different than anything I’ve ever done. You’re weightless (or as near to it as I’ve ever felt) and can’t see or hear anything.

The first 10 minutes were tough to get used to. My mind was racing, still caught up in the email/friends/work loop that it too often cycles through. Once I settled in, it was an amazing experience – peaceful, meditative, and just a good chance to chill out and think. Afterwards, I felt more relaxed than I have in months, like the post-shower calm you feel after an intense workout.

It was also a little depressing watching my thoughts during this process. I try to stay grounded and think about impact (as opposed to money), but find it challenging. Regardless of intent, too many of my thoughts revolved around money or success in some way.

My buddy Scott wrote a great post about money last week that I’d encourage you to read. Along with my co-author’s post about money (and how his perception of it changed after becoming a multi-millionaire at 26), I’ve realized the problem with my thinking is that I haven’t defined how I measure success. And with no personal definition of success, our culture kindly defines it for me as money, power, fame.

This is really easy to fall into, and is only really fought against by choosing different scales by which to measure yourself. The stoics suggest always choosing internal rather than external goals. Instead of  ”I will make a million dollars by age 30″, they’d choose a goal you can measure internally. Something like “I will start 2 businesses and spend 40 hours/month on each of them by age 30.” This is measurable, and most importantly allows you to feel accomplished because you put in the effort. It’s a process you have complete control over, and will get you closer to that external  goal. Taking the time to reflect on my principles and how I’m applying them was really helpful in this case.

The rest of my experience in the isolation tank was really cool: deep calm punctuated with small hallucinations. It’s an experience I’d definitely recommend again to anyone, especially if you’re feeling stressed or like you want some time to reflect.

Taking meetings with smart people is extremely valuable. There’s no faster way (that I’ve found) to learn and build a relationship.

This comes with a catch. Busy people are, well, busy. Meetings with the busiest of people tend to last 10-30 minutes – this doesn’t give you a lot of time to ask about whatever it is you want to know.

While at lunch with the awesome Scott Britton, I talked through the basic question framework I use when meeting a busy person. I like to learn as much as I can in a short period of time, then spend the rest of a meeting building a relationship. In general, I’ve found the less you talk about business and the more you talk about stuff you both care about (women, careers, ideas, interests, whatever), the better relationship you have.

Let’s see this in action. If I wanted to learn about running a sales team, here’s what I’d ask:

1. What’s the 80/20 I should know about sales? What if you had to boil it down to 2-3 things?

2. What do you wish you knew when you started running a sales team? Why those things specifically?

3. If you were in my position now, what would you focus on for the first week? First month? First 6 month?

4. At what point would you re-evaluate how things are working? What metrics would you look for in doing such an evaluation?

Asking these few questions will take you right to the heart of whatever you want to know, and have the added benefit of nearly always sounding intelligent. If you can follow these basic questions with more specific ones based on their answers, boom. You’re suddenly impressive!

In my earlier blog post on pricing, I talked about how there are two ways to increase profits as a B2B company: increase LTV (which I covered) or decrease CAC (cost of acquiring a customer). Let’s take a look at increasing profits by decreasing your CAC.

Your access to (and the efficiency of) distribution channels has a larger impact on your CAC than just about anything else. The more it costs you to acquire a customer, and the longer it takes to receive a return on that CAC investment, the slower your company will grow if you’re plowing profits back into growth. CAC relative to LTV is the single most important determinant of a successful company in a B2B setting, as it directly determines how fast you can grow. (Note: this is why in competitive, new markets like payments, a well-funded startup has a large advantage. PayPal raised nearly $200m, and paid a $10 referral for every new user. If they had to wait a year to make a profit from that new customer, there’s no way they would have grown as rapidly. To companies like that, CAC is almost irrelevant).

This is a hard lesson I learned with the first iteration of Roommatefit. When I started the company, the idea was to sell a personality-based matching solution to colleges and universities. After looking at the data behind roommate conflicts and student retention (basically, if you have a crappy roommate you’re far more likely to drop out or transfer), I thought there was enough of an opportunity to create matching software and sell it to colleges and universities. I went through the customer development process, got some great feedback, built a product, sold it to a few early customers and raised a small round of funding.

Only one problem – I was totally ignorant of my CAC.

The biggest problem was that there was no way to reach these university decision-makers at a scale that worked. Really, my potential customer base was about 3000 people. This group is extremely small, highly targeted, and not very active online: all of which made it near impossible to reach a sizable portion of them via Adwords, SEO or other traditional online ads. After unsuccessfully testing partnerships, trade shows, email marketing, content, and magazine advertising strategies, the last viable marketing channel was field sales.

Field sales didn’t make sense either… which I figured out after a year doing them. Given the university market’s incredibly long sales cycles, our mid-four-figure pricing, and the cost of making a sale (multiple phone calls, emails, whitepapers and demos), the cost of our time was thousands more than what we’d bring in for every marginal sale. And, as much as I tried, I couldn’t see that changing in the future.

People much smarter than me – people like David Sacks – get this concept. In fact, one of the main reasons David started Yammer was because of the distribution opportunity he saw in applying viral marketing to an enterprise channel. He realized that no other companies (at the time) were applying viral mechanics – which have a near-zero CAC – to reach enterprise adoption at scale. Successfully executing on this distribution channel allowed them to get acquired within 4 years for $1.2 billion dollars. All because Yammer was able to acquire customers basically for free.

The two major ways B2B businesses are drastically decreasing their CAC are through content and email marketing. This growing popularity is largely due to the rising cost of other channels. Now that other platforms are mature, it’s much harder to buy a customer via Adwords or Facebook ads at very low cost. The channels are just too crowded and competitive.

This is why it’s important to test other traction channels: if you start using one early enough, before it inevitably becomes crowded, you can benefit from a low CAC and little competition.

After reading this fantastic post last week, I started thinking about how startup founders will sometimes jump into an idea they’re excited about. The problem is, many of them have no idea how to research it properly.

I’ve seen quite a few people start a company thinking of the riches that will soon be theirs, only to realize that their idea isn’t going to work. I almost had the same thing happen, but instead went through a serious process of idea research, which I cover below. Instead 0f spending 3-4 years of my life working on something with a high likelihood of failure, I’ve been able to do some other cool stuff.

The basic idea was this. College tuition is ridiculously expensive, and different people receive different value from their educations: a computer science student from Harvard has vastly different earning/job prospects than an English major from the same school. However, these two students pay the same tuition and borrow money at the same rates, which are based on family income. In financial terms, a student with an engineering major from a top 50 university is a low risk for default, but priced as if they defaulted at the same rate as English or other majors. Thus, the idea was to give lower-interest student loans to engineering students – they’d receive a cheaper education, you’d receive a solid return from a low-risk asset.

Strong idea (I think), but I wanted to make sure that it was something that could work. I did all of this research to answer 3 simple questions:

1. Could I create something more valuable than what currently exists?

2. If yes, could I reach people to make them aware of my superior product/service?

3. Assuming things go well, could I make enough money to run an interesting business?

To answer whether or not your idea is better than the competition, you need to do some competitive research. Since most people start a company based on an idea (and not the size of the potential market), that’s where we’ll start.

Competitors

Your idea should have competition in some way, shape or form. Mine certainly did. If there’s no competition, it might be a sign that there’s no market for what you’re doing. In this step, you want to answer question 1: Can I create something more valuable than what currently exists?

The fastest way to find your competitors is to do a Google search for a relevant market keyword. For me, it was “private student loans”. Take a look at the Google AdWords that appear with your results. Any company with an ad budget (and thus an ad) means they’re likely a serious player – they have money to afford a marketing budget, and probably some idea of what it costs to buy a customer.

By clicking through each of your competitor’s Google ads, you can also see how they position themselves on their landing pages. What benefits are they selling? Are any of them claiming the same benefits you’d be bringing to the market?

This is a good sanity check – if some of these competitors do the same thing you’re planning to do, it doesn’t mean you have a bad idea. You could still out-execute them on distribution, or have a better product. After looking for competitors, I found that SoFi and Upstart were doing somewhat related things, on top of the many banks that do private student lending.

Once you know your competitors, it’s important to then get a feel for their company strategy. The way I usually do this is by looking at their jobs page. Depending on what positions they’re hiring for, you can figure out the direction they are heading over the next few months. For example, based on the campus ambassador job at SoFi, it looks like a key part of their growth plan is to have campus reps get fellow students to use SoFi.

I also checked out the Crunchbase for both companies, and saw that SoFi raised $77 million to roll out their lending program to other MBA programs. Based on this (and a careful reading of their company website), I figured that they are planning on giving out loans themselves, instead of just connecting alumni and students. This is a big deal, because it means that they were likely struggling to get alumni to fund students OR they realized that being a market intermediary wasn’t a good spot to be in. As you’ll see later, this was red flag #1 with the idea.

Although my idea wasn’t really web-driven, when doing competitive research on other web-based companies here are a few other things I look at:

• Compete to see their traffic data, and which way it’s trending
• Quantcast to get a rough feel for the demographics of their average customer
• AppData (if they have a Facebook or mobile app) to see how engaged their users are

At the end of this stage, you should know three things: who your biggest competitors are, the basics of their company strategy, and how you are (or will be) different from what they’re doing. If you think your approach has more value, time to dive a bit deeper.

Distribution

Now that you know you’ll bring more value to the market than the competition, it’s time to figure out if you can reach your potential customers. Researching how you will acquire customers (and how your competitors do) is rarely done. This is unfortunate, because it may be the most valuable part of your research. Having a rough idea of how much it will cost you to acquire a user informs just about every major decision you’ll make – what you’ll charge, how much you need to raise, how much of your marketing spend should be on advertising, and what marketing channels you should test.

Luckily, with all the free tools available you can get a really good idea of how your major competitors are driving customers. First, you can use Google Trends to look at the popularity of your competitors in the space. Who has been mentioned more often over the last months? What blogs/media outlets have covered them?

Doing this will give you a good idea of the blogs or media outlets that would be receptive to running a story about what you’re doing. This type of information is really important. Early on, while you’re still figuring out what you’re doing, copying competitor’s distribution channels is a good way of getting some early traction.

Next, you want to look at your competitor’s (likely) two largest sources of traffic – paid advertising and organic search. One of my favorite tools is SEMrush, which you can use to get an estimate of your competitor’s search engine traffic, organic keywords that are working for them, and where their traffic is coming from. In the case of SoFi, I was able to see that they did no advertising, and most of their search traffic came from people specifically searching for “SoFi” or related terms.

This can be really helpful in web-based businesses. For example, take a look at the SEMrush data for Dropbox:

From this, you can see that they have made SEO a focus of their strategy, and are working on expanding to other countries through paid search and organic SEO. That’s a good thing to know when figuring out how to attack the market. It means that you’ll have to do a really good job executing on SEO, or choose a different vertical.

That most of Dropbox’s traffic is organic is further borne out by taking a look at Alexa‘s clickstream data. Here’s what that looks like:

This information tells you that Dropbox is doing a good job of driving traffic via Facebook, that Youtube accounts for a surprisingly large percentage of their visitors, and that they have many people searching for them in Europe. Overall, if I was looking at starting a file-sharing competitor, I would write off SEO as a channel through which I could beat Dropbox. They’ve done a great job, and it’d be extremely difficult (and take a long time) to achieve the types of rankings and traffic they have through SEO.

If I thought I could potentially do well with SEO, I’d use the following tools to dig deeper into this channel:

• Open Site Explorer to see where they get their links from.
• Sign up for a free trial of SEOmoz to see where the competitors rank for different terms, and determine how hard it would be to rank for certain keywords.
• Take the free trial of HitTail to see if there were potential opportunities to rank for certain longer-tail SEO keywords.

Lastly, I’d use the Google Keyword tool to figure out how much it’d cost me to buy search advertising, and see how much my competitors are paying for certain search terms. If it’s a lot, I now know that advertising may be a difficult way to acquire customers, and start looking at other channels.

At the end of this process, you should know a few things: how much traffic your major competitors are getting, where that traffic is generally coming from, what sites have linked to them, and an idea of whether or not SEO and PPC could work for you as acquisition channels. If not, start thinking about others - viral, partnerships, PR, etc. Starting a company with some idea of how you’ll attract customers vastly increases your chances for success.

Market

Lastly, you want to know how large your potential market is. This involves a lot of googling to answer the following questions:

Who are the major players in the space, and what is their total revenue? What is their market cap (if public)?

• Here, use the 10k’s of publicly traded companies to research total revenue, profits, expenses, and profitability history. Pay special attention to net income and expenses – where are they spending the most money? Are their profits growing or shrinking? Why?

What are people saying about the industry? What are some recent blog posts or press covering the market or its major players?

• Use Google’s search tools to see most recent blog posts or press mentions over the last month. How often is the market covered? Who covers it, and what are they saying about the market and the companies in it?

Is it a growing market? What gaps exist that I can leverage, and how entrenched are the players in the market?

• Here, look for industry reports and revenues of companies in the space. Also use Crunchbase to see if other companies raised money at increasing valuations in the past 6 months. That’s a strong indication that they’re seeing some kind of growth.

What do my potential customers care about?

• Use Delicious to see what popular articles people have tagged as memorable. What do they care enough about to save? For example, if you are thinking of doing a web analytics startup, take a look at some of Kissmetric’s most popular posts to see what people are interested in and found valuable.

At this point, I also set up Google Alerts for certain key terms in a market. For example, with our hypothetical fire-sharing competitor, I’d create alerts for the top 3 competitors and a few key terms (e.g. “file sharing” + funding) I wanted to monitor.

I’d also subscribe to a few relevant blogs that covered the space, and follow relevant players (and reporters who cover them) on Twitter. In the case of a file-sharing company, I’d follow Aaron Levie, the CEO of Box, Dropbox’s CEO Drew Houston, and a few TechCrunch reporters that you can see often cover Dropbox and the file-sharing space - Josh Constine, Sarah Perez, and Ingrid Lunden.

You can also do some basic market sizing by using Facebook ads to determine how many people are in your potential market. Noah Kagan talks about that in a great post here.

Lastly, get out of the building and talk to people. Having conversations with industry experts will expose you to problems and ideas that you can’t find on your own. Often, these people will be happy to talk to you – in my case, I even had one guy who wanted to invest after I did some of my research.

Why I Didn’t Do It

In the end, I passed on the idea for a few reasons. The largest one was the numbers didn’t make sense: starting a company that connects alumni or other institutions to engineers who need student loans is a great idea if you collect the 1-2% spread between private loans and what you could offer. If I had $50m+ I’d do this in a heartbeat. Otherwise, as a middleman, you’re only getting a small piece of the 1-2% differential between the loans you’d facilitate and the rates students could get elsewhere. You have to have a LOT of volume to make this a worthwhile business – even if you facilitated $500m in loans (about 16% of the total market), you’d still only make $5-10m annually.

So, the math didn’t make sense unless you were the one actually giving out the loans (the strategy SoFi seems to be taking). I thought about it, and given my status as a 23 year old recent grad, I didn’t want the potential success of the company hinging on whether or not I could raise $50m+ in capital to lend out to engineering students. When you account for regulatory and legal compliance issues that come with being a lender, and the idea just didn’t make sense for me to pursue at the time.

The last piece of this was a few conversations I had with people in the space. A few people I spoke with saw the opportunity, but didn’t think it could be a major business given the economics of the market. Additionally, SoFi has a mature and well-connected team of executives that I wouldn’t want to compete against in a market that will be rapidly changing over the next 5 years. If the price of college collapses, and the education bubble pops, SoFi is in a tough spot where they have to process more and more loans to reach the same volumes. Even if the cost of college drops 10%, that 10% has a big impact on the loan volume they can process.

In the end, it’s an idea I could have raised money for. I had a few people who said they were willing to invest, and a marketing plan that I’m confident would have worked. However, thanks to intensive market research lasting 2 months, I think I saved myself years working on an idea that likely wouldn’t have paid off.

Want access to the competitive research spreadsheet I use to evaluate a startup opportunity? Sign up for my (very) infrequent email list.