TANSTAAFL

At some point the internet tricked us into thinking we could get something for nothing.

More than any other company, Google is responsible for fooling us. It was the first free and legal service to gain ubiquity.[1] Google told us that we didn't have to pay anything for amazing services. It seemed to good to be true. It was and is, in fact, too good to be true.

What Google doesn't come out and say is that you're paying, a lot, just not with cash. Your data is valuable. Apparently, it's more valuable than charging you for services because you cannot choose to pay for personal Google services and avoid the sale of your data.

This means data, at least what we contribute when properly sifted, aggregated, and analyzed, is more valuable than the cash we'd be willing to pay for access to the same services. When the world is based on networks, as ours increasingly is, then the greatest network is the most valuable asset there is. By making network access look free, Google managed to capture a huge user base. Once it had the network, it started to charge. It cleverly adapted an existing model - advertising - but did it by selling data + access, rather than just access (which is the best radio and tv and newspaper essentially could really do).

If that's true, we need to ask if we're getting a fair deal. But most of us won't ask that question[2], and if we do, we have no alternatives of the same quality. The deal also keeps getting re-traded, without our truly informed consent.[3] Every time Google offers a new service, it collects more data about it's users. That data is valuable on it's own, and makes existing data more profitable. Users could get some sense of the data collected and how it will be used by scrutinizing ever longer legal documents - but that's hugely unlikely. And, again, even if users did just that and found the trade wanting, there's not much recourse.

And if we did want to pay? Mary Meeker's 2014 Internet Trends Report tells us how much our favorite services should cost. Google revenues wouldn't change if we each paid $45 for all of our free services.[4] To grow revenue, Google would have to release new services and charge for them.

That probably sounds crazy, but it isn't - it's roughly how Apple works.[5]

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[1] Napster is another important player in this story. It largely convinced a huge portion of internet users that piracy was ok because it was so easy.

[2] There are a lot of causes: laziness, ignorance, fear of complexity or awareness.

[3] Clicking "yes" on new terms and conditions hardly seems to suffice.

[4] This number is broadly indicative though likely skewed by the differences in data value between spenders with different geographies, socio-economic brackets, and histories.

[5] I've been thinking a lot about the way these two businesses work at the opposite ends of this spectrum. It's a fascinating dichotomy.

Pet Theories

All investors have pet theories. They may call these theories "theses" or "themes," but they boil down to the same thing - closely grouped sets of ideas which the investors want to be true. Investors will usually fund companies that seem to stand a chance of making these ideas real. At YC, we have quite a lot of pet theories, which end up getting expressed through our RFS.

Knowing the pet theories of the investors with whom you're talking is helpful. They may be more likely to fund startups that fit into pet theories and are likely to know a lot more about those theories than they do about other fields. That's great if you know what you're doing, but dangerous if you're half-assedly working on something. Let's assume you're in the first camp, because the second group shouldn't be talking to investors anyway.

You can learn a lot about the pet theories of investors by reading what they've written or spoken about in the past. Some investors - Fred Wilson, Andy Weissman, Chris Dixon - make this easy by writing blog posts that frequently reference what they think about and why they make the investments that they do. Other investors work at firms dedicated exclusively to particular pet theories. You can learn still more looking at an investor's career and past investments.[1] These are all pieces of information that can teach you about how an investor thinks, which will allow you to prepare better for actually meeting them.

Knowing an investors' pet theories can also help you get a meeting. An email directly referencing something near and dear to an investor's heart will get a response much more easily than something generic.[2] At the same time, the hurdle for getting a meeting on a pet theory is going to be high because the investor has likely seen many teams and ideas in the space.[3]

The really cool thing about meeting with someone who has a pet theory about what you're working on is that you won't really pitch them, you'll have a real conversation focused on the heart of what you're doing. These investors will be unlikely to ask simple, surface level questions. You'll be engaged and thinking the whole time, which should lead to better answers, and the best demonstration of how good you are.

Things will start to get really interesting when you begin to challenge the preconceived notions that an investor has as a result of how much he's thought about a given problem. Chances are that if you're doing something new, this is going to happen. It's where you'll be able to evaluate the quality of the investor. The best of them are flexible. They'll adapt their frameworks in response to new information and knowledge. The worst will be dismissive of ideas they hadn't considered before.[4]

There are also plenty of situations in which someone hasn't thought that deeply about a theory they discuss at length. Maybe they want to sound smart or look cool. Regardless, you should be able to figure that out pretty quickly and move on.

You should learn about an investor's pet theories when deciding if you should talk to them, and when preparing to actually meet. In the end, this is just one of the pieces of information you should have. It isn't as important as building a great business, but understanding the picture will help you pitch better, so spend some time on it.

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[1] Keep in mind, though, that investors generally don't only invest in their pet theories.

[2] This seems so basic, yet I get enough generic emails that I'm convinced it has yet to sink in.

[3] As always, warm intros are an even better bet.

[4] True in all situations, not just those related to pet theories.

Taking advice

I ask for a lot of advice. Maybe too much. Sometimes the advice is great, sometimes it ends up seeming worthless and wrong. Invariably, I attributed the outcome of following advice to the giver - following advice from good people led to good outcomes, and vice versa. In the last few years, I've found myself giving a lot of advice and have realized how wrong I was in attributing cause and effect.

There are two axes that determine the goodness of advice. The first is the obvious one: the quality of the person giving advice. This it the part which most often get discussed. We're told to seek out high quality mentors and advisors. These should be people who think clearly, have experience, have the time to think through problems and help.

While these things might be hard to find in a single person, they're not typically that hard to evaluate. What's much harder, and probably more important, is the other axis: how good you are at describing reality to someone with much less context than you have. It turns out, this is really hard to do for a number of reasons.

  1. Honesty is difficult, especially about issues we're facing. When you ask for advice, you are implicitly saying you don't know how to do something. That's hard, but seems to be accepted. What's much tougher is making sure you know the reasons you're having the issues you're having. Often, figuring this out is the point of advice (even if you started asking for something much more surface level).
  2. Context is hard because it is vast. Think about how much you know about your company. Think about how little anyone else knows, no matter how involved they've been. At best, they see a series of snapshots and can construct a reasonable amount of context themselves. This is nowhere near what you have rattling around in your head. Being able to rapidly construct necessary context is important for an advisor, but they rely on you to give them relevant details.

If you can't pull off these two inputs when asking for advice, you'll get bad advice no matter how good the person on the side is.[1]

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[1] Yes, this does constitute advice, but I'm pretty sure this is of the type that's good in all situations.

The importance of honoring pro-rata agreements

I've recently heard about a number of fundraises in which the company raising has refused to honor pro-rata agreements with early, small investors.[1] The most frequent reason seems to be that newer, larger investors demand a certain percentage in a funding round, and tell founders that it can either come from the founder stake, or by locking out earlier investors. Sometimes they just say "lock out the early investors."

This is bad behavior on a number of levels.

It's bad for the founders to do this because they're violating an existing legal agreement. As a founder, your word is your bond, and going back on a deal is a great way to destroy trust. Unfortunately, there's rarely an immediate/obvious impact because the small investors are unlikely to sue or cause a big stink. They don't want to piss off the big investors or get a reputation for being "troublesome," so they're stuck.

For the early investors, this is really bad. When an early investor negotiates for pro-rata, the money they invest buys equity now, and the opportunity to maintain that equity later. This is critical for early stage investors, especially those investing out of a fund. The cumulative impact of dilution is material and their models and expectations are built with that in mind. Investors would not/should not make certain deals if they knew they were going to get screwed out of their rights. Take a look at this model for a sense of just how important pro-rata rights are to early stage investors.

For the later investors, the behavior is actually pretty smart on several levels. By getting the stake they want from early investors and not the founders they can insure that the founders retain skin in the game (or are given opportunities to sell secondary). They can also weaken the ability of early investors to have a say in the company's future by reducing their combined voting power. Finally, this type of behavior may hasten the end of "super-angel" funds by handicapping their returns. Less competition is a good thing for those left standing.

Given how much competition there is around fundraising at the moment, it's unlikely that this behavior will stop any time soon. At the end of the day, the founders have to make the decision. If you find yourself in this situation, stand up for the agreements you made. If you'd like to discuss how, please reach out.

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[1] Dave McClure recently tweeted that he's seeing the same.

Advice on pitching

We're currently getting ready for demo day at YC, which means quite a lot of pitch practice. Here are the main points of feedback we tend to give to teams. This advice works for almost any kind of presentation you might give.

Speaking

  • Speak slowly and enunciate
  • Be excited. Your pitch should not sound memorized. Intonation, cadence, and projecting help a lot
  • Be specific and concise
  • Look at the audience. You don't have to make eye contact with individuals, just with areas of the crowd. People in those areas will think you've made eye contact with them
  • Don't use generic phrases as transitions ("so...")
  • Actually explain what you do, and do it quickly
  • If you make a large transition, be very clear about it and explain why
  • Don't be "cute" with your points, be declarative
  • If you make a joke, telegraph it. If you're not sure the joke will land, cut it
  • Don't hide the big good things because you are modest, highlight them specifically early on
  • Use natural language and simple sentences, i.e. no sentences with three verbs
  • Don't use words you wouldn't use in normal conversation
  • If an example is a real person, make it clear that you're talking about a real person, not a user model
Charts/metrics
  • Charts should be easy to understand - make one point with any graphic or chart. Don't make people read charts - they'll stop listening to you.
  • If you put up a graph that confuses people, they will feel stupid and stop listening
  • Line graphs are better than bar graphs when showing growth
  • Label your axes and use real numbers - even if they are small. The shape of the graph matters, not the absolute numbers
  • Explain anomalies
  • If you should be generating revenue and then show a different metric, investors will be suspicious
  • TAM should be bottom up, not top down
Slides
  • Titles should describe the slide
  • Slides should be reentrant - each should make sense and make your case individually
  • Remember that minds wander, and people check phones. When they look up, they should immediately be able to pick up the thread
  • Don't use pretty, but thin, fonts. This isn't a time for subtlety, make sure your slides are legible from far away
  • Coolness and legibility are not orthogonal, they're diametrically opposed[1]
  • Screenshot slides are typically bad

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[1] This feels like something PG might have said directly, but I can't honestly remember.

Investor Updates

At YC, we get lots of updates from our alums. There seems to be a correlation between quality and frequency of updates and the goodness of the company and founders. I strongly doubt there's a causal relationship, but I do think it makes sense that the best founders would write good and frequent updates because it reflects their own processes and attention to metrics and consistent growth.

While the act of sending updates is itself valuable, the quality of the update is critical. Writing a good update forces a founder to focus on the right things and keeps your investors engaged and helping.[1] A bad update can reflect the fact that a founder is thinking about the wrong things. When an update is just poorly executed, it doesn't get read, which removes a lot of the value, i.e., getting your investors engaged and staying at the top of their minds when relevant opportunities arise..

Here are some of the most common pieces of advice I give when I see updates that could be improved:

  • Figure out what you're going to report each month - this should probably be your growth (in revenue or users)[2], your cash/burn, what you need from investors and a qualitative measure of how things are going. As your business matures, these metrics may grow and shift, but stay consistent.[3]
  • Send updates monthly. It's a hell of a forcing function, a bit like writing  your growth on the whiteboard every month for everyone to see.
  • Lead with the key metrics and growth rates you defined.
  • Make requests of your investors after you report your key metrics. You could just as easily lead with this.[4]
  • Put the asks higher up so that the investors defintely see them. Key metrics and asks should be front and center to improve your hit rate.
  • Make it shorter. You want your investors to read the whole update and remember what they can do to help, and why they should do it.[5]
  • Charts are nice. They're hugely effective at showing progress in a way words can't.
  • When you finish an update, go back and read it. Does it have relevant data? Does it have your asks? Is it short? If not, rewrite it.

If you hit those points, you're probably all set.It doesn't matter if the update is in a fancy newsletter template or in a plain text email. The act of thinking about it and sending it is what is important, so just get in the habit.

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[1] If your investors think about you positively and frequently, they'll not only help you with specific requests but point serendipitous opportunities your way. That's one way you can "manufacture" luck.

[2] Avoid using "proxy metrics" without the necessary context. For instance, if you report GMV as your core metric, you should report your rake and action revenues. Otherwise, your investors are going to immediately wonder what's going on.

[3] Adding new things because they're important is good. Removing things because you can't hit your milestones is bad.

[4] Pretty sure this is how Chris Dixon advised me to write them.

[5] This can get hard when you have lots of good things to say. If you must include them, put it in an appendix or save it for quarterly or semi-annual updates.

How to create good outcomes when negotiating

When I watch my nieces and nephew negotiating with my siblings, I'm consistently amazed at how good they are. They have an innate grasp of leverage, relevant terms, and they know what they want. That, or they're completely unreasonable and illogical, which frequently amounts to the same thing - they win more frequently than they lose. Near as I can tell this is true of all children.

Founders don't have the same luxury as kids. The stakes are usually higher, the terms are less familiar, and the other party less willing to forgive tantrums. Based on what I've seen, a lot of founders (especially first time founders) don't really know how to negotiate. There's a whole section of the library devoted to negotiating tactics. From what I've seen, the problems founders run into are a lot more basic.

Some advice to avoid the mistakes I've seen:

  1. Know what you want - It's shocking how frequently parties enter into negotiations without a clear understanding of what they each want. If you don't know what you want, it's impossible to know what you can give up and what you need to hold onto.
  2. Understand the terms - This is basic, but generally ignored. If you're signing a document, you need to read it and understand it. If you're going to use terms in negotiations, make sure you know how to use them. This applies to financing terms ("pre", "pro-rata", "control"), employment terms ("vesting", "cliff", "at will"), and essentially anything else you say to the other party.[1]
  3. Do not leave anything to ambiguity - Turns out this is one of the hardest things to do, especially in "friendly" negotiations with investors you know or friends you might be hiring. Don't assume that something you think is implied is agreed upon. Every point that you negotiate should be made explicitly. Which leads to...
  4. Document everything - If you agree to something, confirm it in writing. This can be as simple as an email saying "Thanks for meeting Aaron. As agreed, we're excited to have you investing 100k in our round at $5mm valuation." If the other side confirms, great. Do this immediately because if there's disagreement on what was actually agreed in person, this is how you'll find out. Importantly, silence doesn't count as consent.
  5. Just because the other party is your friend... - Doesn't mean they're going to give you everything you want, or that you should give them everything they want. This is where mixing business and friendship get tricky, so keep in mind that deals are about business. Negotiating with friends is also where ambiguity is most likely to arise, so be extra cautious.
  6. You don't get points for being a jackass - There's a popular misconception that mean people are better negotiators. That's not true. People who are formidable are good negotiators. They're tenacious about the important points, and gracious about the things that don't matter. The key here is to remember that a negotiation tends to be the start of a relationship. You don't want to start that relationship on a bad foot.[2] In most cases, you're also operating in a surprisingly small world. You're going to see the same people again and again, so being on good terms with them is going to be productive.[3]
  7. Your word is your bond - Probably the most important rule there is. If you agree to something, don't break that agreement. Don't even let yourself fall into a place where you might break an agreement. If you agreed to something, whether with a handshake or in writing, the negotiating on that point is done. Reneging is the fastest way to destroy your reputation and any trust that you've built up. If you find yourself unclear if you agreed to something, refer to point 3. This is not the place to get cute or try to re-interpret after the fact. You can be forgiven being confused (up to a point) but not for breaking an agreement you knowingly made.

If you find yourself raising money from an experienced VC or negotiating a contract with an experienced business development lead, keep in mind that they negotiate for a living and are probably better at it than you. They know how to push your buttons to get what they want. This isn't malicious (usually), but it is effective. These are good times to ask a more experienced advisor for advice. Ultimately, you'll have to run the negotiation yourself, but it doesn't hurt to get an outside opinion. If you stick with these guidelines, you'll do alright.

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[1] Maybe it's because I'm married to a lawyer, but I'm continually shocked at how many people sign legal documents without understanding what those documents actually mean. This is how people end up with unexpected board observers, losing voting control, or taking unexpected dilution.

[2] This isn't exactly true when it comes to corporate raiders...

[3] Despite the best intentions, negotiations can get incredibly heated and parties will sometimes feel wronged. That's unavoidable, but it can be mitigated.

Uber's Economics vs. Its Users

It's rare that I find a service or tool that changes the way I go about my day to day life. It's much more common to find something that seems really interesting/cool, have it go into regular rotation, and then see it drop. In order for something to stay in frequent rotation, it has to fit into one of several categories:

  1. It has entertainment value beyond pure novelty. Instagram seems to have cleared that hurdle.
  2. It allows me to do something hugely useful that I'd not been able to do before. Cellphones certainly did that.
  3. It materially reduces the friction of doing something I already do/want to do. Dropbox does that.

At the same time, something that meets one of these hurdles can still fail because the cost of using it is too high. For me, that cost has always broken down simply to one of two factors:

  1. The dollar cost.
  2. The cost in time/frustration due to poor user experience.

If either of those cross a hard to define threshold, I'll give up. That line is hard to predict, because there's rarely a clear equivalency in the units by which I measure the value and the cost. Still, I know it when I see it.[1]

Recently, though, I've been thinking about a different dynamic, one that describes my relationship with Uber. Given the frequency with which I use Uber, I should love it. The design is great, and it really does make ordering a car easy in most circumstances. However, I hate using Uber. In fact, I only use it because it is currently the best option for me to get to and from the airport.[2]

I only realized recently how deeply I dislike using Uber. A few weeks ago, I pulled out my phone to call an Uber to my apartment in NYC. As I did so, I realized I had tensed up - stressed about what I was about to discover. Would the fare be normal? 1.5x? 3x? If surge pricing was in effect, I knew that I'd have to start calculating trip costs in my head to compare the different options, which surge at different rates. Then I started considering what the surge curve would look like throughout the approximately 30 minute window I give myself to leave. Would it rise throughout and sharply fall? Would it stay flat? When, exactly, would my optimal time to call a car? The service basically has me thinking incredibly hard to figure out whether or not I want to use it.[3]

What Uber has done is forced me to trade inconvenience and transparency for convenience and a total lack of transparency plus a huge amount of uncertainty. I can't recall another time I've been forced into such a stark and extreme choice in order to use an application that trumpets its own usability so heavily.

The source of my frustration lies with Uber's embrace of a clinical application of supply/demand methodology. On the surface, I actually agree with their argument that more demand should yield higher prices.[4] However, the more I think about their logic, the less it makes sense. Uber prides themselves on their control of the data of trips. They claim that that data feeds complex algorithms that spit out the surge pricing levels. However, if their data is so incredible, they should be significantly better at predicting surges before they happen, thereby mitigating the overall level of surges and the rapidity with which they appear and dissipate. Maybe they even are doing this on some level, but if they are, it certainly isn't apparent to users.[5]

It strikes me that Uber is playing a very dangerous game. Travis and his team have proven themselves to be incredibly good at execution. I worry, though, that their focus on that execution and their near religious belief in the power of economics will lead them to continue doing things that make users very angry. Uber has been successful because they made something people wanted, and made that thing accessible. They're currently skirting the edge of making that thing people want very distasteful to use.  At this stage, I would drop Uber in a heartbeat if another service offered similar access with increased transparency, even at a higher price point.[6] Anecdotally, I don't appear to be the only person that feels that way.

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[1] I'll never forget my 12th grade AP History teacher, Mrs. Broder, teaching us about Potter Stewart's use of that phrase in reference to obscenity.

[2] This is a really big factor in their favor, but it also feels incredibly temporal.

[3] This might be one of the biggest violations of Steve Krug's "Don't make me think" mantra I've yet encountered with a consumer application.

[4] Which mitigates my frustration only very slightly.

[5] For instance, they know I typically take a car on Monday mornings, and could easily text me a warning that, if I was planning a trip the next day, I should be aware that a surge is likely. Alternatively, they could make pricing out the different options transparent and simple to find.

[6] And there many trying: Instantcab (now Summon), Lyft, Hailo, Sidecar, etc.

Making Mistakes

At 10 years old, I lost a trillion dollar bet to my older brother. I bet him it was Wednesday. It was actually Thursday. I was very sure of myself (for reasons I can't recall), and saw a good opportunity to shave off some of the debt I owed him. Luckily, he has yet to call the debt. At the time, all I felt was keen embarrassment at my stupidity. As time went on It became clear I had learned a valuable lesson about taking deals that seem too good to be true.

Though mistakes that I make can be painful in the near term (and sometimes in the long term), I've found that they're a critical part of how I learn. I'm fairly certain that the mistakes I made which led to the end of Tutorspree taught me far more about how startups work than immediate success would have.

Success feels good

Success is usually idiosyncratic. Strategies that lead to success are self-validating. We build narratives around the cause and effect of success based on incomplete information and our own biases [1]. This makes it very easy to falsely attribute success to the factors that are easily seen without doing the work necessary to properly understand what happened. This tendency gets even stronger when we're looking at our own successes. At that point, ego starts to discount things like luck, which are frequently a huge part of success. Because success makes us feel good, it lulls our faculties for critical thinking, which almost by definition means it is harder to learn deep lessons [2].

Making mistakes doesn't give us the same kind of happy feelings that success does. Because the mistakes hurt, we investigate them more closely. Because we're thinking critically and comparing causal chains leading up to and flowing from mistakes, we're more likely to consider complexity and examine why things really happened as they did. That doesn't necessarily mean that each time I make a mistake I learn a critically important lesson about myself, but by thinking hard enough, I generally do learn something useful [3].

Mistakes vs. Failure

Near as I can tell, I'm not alone in believing that mistakes are a valuable tool for learning. In fact, in Silicon Valley, there's a tendency to talk about failure as a point of pride. But there's a disconnect between how we talk about Failure (intentional big "F") and how we talk about mistakes. While the internet is littered with post-mortems on failed companies, it's rare to find founders or investors who will freely admit to being wrong about a public comment or investment [4].

That doesn't make sense given what we know about mistakes. It does, however, start to make more sense with the addition of two other factors. The first is the increasing permanence and public nature of all media. It's relatively easy for me to admit mistakes to small and trusted groups because I don't fear malicious repercussions.[5] As that circle expands, the difficulty of admitting the mistake increases because I don't trust the intentions or actions of everyone in it. In the competition between wanting to learn by admitting mistakes and wanting to not be perceived as stupid or attacked for the same, not looking stupid wins.

This directly informs the second factor: increasing obsession with "personal brand." Personal brand isn't a new concept, but it has become increasingly important to more people because of the pressure to constantly tell the story of your life in public through social media. That publicity + the expanded circle again leads back to wanting to present a perfect image. Through that lens, each instant broadcast that is inconsistent with that narrative and "off-brand" appears to be a public failure in front of an untrusted circle. Not only do we look stupid for making a mistake; the mistake jeopardizes the narrative we've built about ourselves. [6]

Even if "building a brand" isn't something we consciously think about, knowing how public everything is makes being honest about mistakes hard. So how do we get as comfortable looking at recent mistakes as we are looking at the ones in the distant past? We probably can't - there's too much baggage. But I think there are ways to start moving in the right direction. Recognizing the cycle that makes it hard to admit mistakes is a good start. Developing a close friend, set of friends, or mentor, with whom you can speak honestly is another step. Most importantly, I think we probably need to take it easy and remember that no mistake, public or private, is likely to be the defining moment of our lives [7].  At the same time, cutting some slack for others who make mistakes will likely do a lot to ease the culture of recrimination/fear that has built up around making mistakes.[8] Really, we just need to be decent and thoughtful. Hard, but important.

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[1] Fitting facts into a story is a common trap that seems to go the base of how our brains are built.

[2] If you happen to be watching the success of someone you dislike, the reverse might be true. Your critical thinking faculties might be working just fine, though your conclusions and avenues of investigation might get clouded by envy or jealousy.

[3] That might be "be careful when stopping with your new clipless pedals." Maybe small, but better to learn the lesson than assume it was easy.

[4] Interestingly, you'll see more evidence of VCs admitting to investments they missed than investments they should not have made. See Bessemer's Anti-Portfolio

[5] That certainly wasn't always easy. I've had to work on being able to admit my mistakes. The benefits I've reaped by doing so have made it easier and easier.

[6] Truth is, I haven't prioritized my personal brand that much. I firmly believe that trying to build a brand is the best way to get the reputation of just being a scenester. I think I should be judged on the things I actually do with and for the people around me. That, however, is a completely different topic.

[7] With the possible exception of Bill Buckner in and around Boston.

[8] That may mean you lose the chance to show Twitter how clever and snarky you can be. That's a good trade in the long run.

When SEO Fails: Single Channel Dependency and the End of Tutorspree

Although we achieved a lot with Tutorspree, we failed to create a scalable business. I've been working through why. In doing so, I’m trying to avoid the sort of hugely broad pronouncements I often see creep into post mortems that I’ve read: “don’t hire people!”; “hire people faster!”; “focus on marketing at all costs”; “ignore marketing, focus on product” etc.

I’ve focused here on the strategic causes of our failure. While I learned a huge amount about operations, managing, and team building; mistakes made in those areas were not the ultimate cause of failure just as the many things we got right within the company did not ultimately lead to success. I also recognize that this doesn’t cover every detail, even on the strategy side.

SEO: Too good to be true

Tutorspree didn’t scale because we were single channel dependent and that channel shifted on us radically and suddenly. SEO was baked into our model from the start, and it became increasingly important to the business as we grew and evolved. In our early days, and during Y Combinator, we didn’t have money to spend on acquisition. SEO was free so we focused on it and got good at it.

That worked brilliantly for us. We acquired users for practically nothing by using the content and site structure generated as a byproduct of our tutor acquisition. However, that success was also a trap. It convinced us that there had to be another channel that would perform for us at the level of SEO.

In our first year, that conviction drove our experiments with a series of other channels: PPC, partnerships, deals, guerilla type tactics, targeted mailings, craigslist posting tools, etc. Each experiment produced results inferior to those from SEO. The acquisition costs through those channels were significantly higher than what was allowable based on our revenue per customers. We also found that potential customers coming through PPC were converted at a lower rate than those originating through SEO. Even as we sharpened our targeting, experimented with messaging, and sought advice and consulting from more experienced parties, we found that paid channels just weren’t good enough to merit real focus.

That dynamic put us in a strange position. On the one hand we had a channel bringing in profitable customers. On the other hand, we did not have the budget within our model and product to push hard enough on other channels.

The AirBnb Head Fake

At the end of our first year, the divergence between our success with SEO and our failure with other channels dovetailed with a whole set of lessons we drew from analyzing user behavior on Tutorspree. We realized that there were fundamental problems with the product of Tutorspree which both prevented us from converting visitors to customers at optimal rates and from having enough capital to spend on acquiring more visitors/potential customers.

We had modeled ourselves on AirBnB, believing we were a clear parallel of their model for the tutoring market. What we were seeing in terms of user behavior, however, was fundamentally different. Parents simply didn’t trust profiles and a messaging system enough to transact at the rate we needed. Our dropoff was too high, and the number of lessons being completed was too low. We realized that we were wrong in how we thought about the entire market, and radically altered our model to suit in March of 2012. Looking back, it is also apparent that we were able to ignore our error for as long as we did precisely because SEO worked as well as it did. The dynamics of our marketing provided air cover for any other issues we had.

We called the new model Agency as we pulled in aspects of a traditional agency’s hands on approach and combined it with our matching system and our customer acquisition channel – SEO. Within a month of the change, we doubled revenue. Six months after the shift, our revenue had increased another 3x and we’d increased margins from 15% to 40%. The new model gave us our first profitable month, and put us within striking distance of consistent profitability. It looked like we had cracked the product problem. Our conversion rates were way up and per user revenue was climbing rapidly. Those factors gave us the budget we needed to more productively experiment with other channels.

Virtually all of our customers came from SEO.

New and Better Model; Same Old Channel

By December of 2012, we had virtually infinite runway and were at the edge of profitability. We still wanted to swing for the fences, and, given the radically shifted economics presented by our new model, we made the decision to retest all the marketing channels we had tried with our initial model and then some. We knew that only having a single scaling channel – SEO – would not let us become huge, so we began pushing for another scalable channel.

Given the strength of where we were and the challenges we saw, we raised another round with the explicit purpose of finding the right marketing channels. While we considered raising an A, we played conservatively, deciding that we wanted to find the repeatable channels, then raise an A to push them hard rather than raise too much money too early.

We finished that fundraise in January, began a much needed redesign of the site to fit with our significantly more high touch model, hired a full time growth lead and began to push rapidly into content marketing, partnerships. Then, in March of 2013, Google cut the ground out from under us and reduced our traffic by 80% overnight. Though we could not be 100% certain, the timing strongly indicated that we had been caught in the latest Panda algorithm update.

With our SEO gone, we took a hard look at our other channels. While content may have played out in the long run, and in fact showed signs of the beginning of a true audience, the runway it needed was far too long without the cushion provided by SEO. PPC - mainly through Adwords (though also through FB) – was moving in the direction of being ROI positive, but the primary issue turned out to be one of volume rather than cost. Because of our desire to focus heavily on the markets in which we had the highest tutor density (and therefore the greatest chance of filling requests), we had to carefully target our ads in terms of geography and subject. Given that dynamic, we simply couldn’t find a way to generate enough leads, no matter the price. In the end, that calculus applied to nearly every paid channel we could identify.

Common Thread

Our reliance on SEO influenced nearly every decision we made with Tutorspree. At the beginning, it influenced our decisions to allow tutors to sign up anywhere, for almost any subject. On the one hand, that brought in leads we could never have specifically targeted. On the other hand, it spread our resources out across too many verticals/locations. That problem was compounded by our move into Agency. While we were converting at a higher rate and price than ever, we were also forced to spend too much time and money on completely unlikely leads. When you build your brand on incredible service, it becomes very hard to simply ignore people.

When our SEO collapsed, we routed virtually all of our technical resources to fixing it. In that effort, we had significant amounts of success. We regained most of the traffic that we lost with the algorithm switch in June. We regained a significant portion of our rankings. However, the traffic that we were getting at that point was not as high quality as that which we had been getting beforehand.[1]

Because of how successful SEO was, it was the lens through which we viewed all other marketing efforts, and masked the issues we were having in other channels along with important realities of how the tutoring market differed from how we wanted to make it work. We were, in effect, blinded by our own success in organic search. Even though we saw the blindness, we couldn’t work around it.

Lessons Learned

Tutorspree taught me a lot of lessons. I learned about product, users, customers, hiring, fundraising, managing, and firing. I made some bad hires because of my own blind spots and desire to believe in how people operate. There were periods of time where I avoided conflicts within our team too much – decisions that were always the wrong ones for the business and that I regretted later. Those mistakes were not ultimately what caused our failure.

Nor is the largest lesson for me that SEO shouldn’t be part of a startup’s marketing kit. It should be there, but it has to be just one of many tools. SEO cannot be the only channel a company has, nor can any other single channel serve that purpose. There is a chance that a single channel can grow a company very quickly to a very large size, but the risks involved in that single channel are large and grow in tandem with the company.[2] 

That’s especially true when the channel is owned by a specific, profit seeking, entity. Almost inevitably, that company will move to compete with you or make what you are doing significantly more expensive, something Yelp gets at well in their 10K risks section: “We rely on traffic to our website from search engines like Google, Bing and Yahoo!, some of which offer products and services that compete directly with our solutions. If our website fails to rank prominently in unpaid search results, traffic to our website could decline and our business would be adversely affected.”

For me, this is a lesson about concentration risk and control. In this case, it played out on the surface in our only truly successful marketing channel. That success wound its way through everything we did, pulling all that we did onto a single pillar that we could not control.

By necessity we had to concentrate risk on certain decisions (something likely true of most small startups). I did not have the time or resources to do everything I wanted or needed to do. I never will. But I need to be cognizant of the ways in which that concentration is influencing everything I do. I need to make sure that it doesn’t dig me into holes I can’t work out of on my own.

Ultimately, this post mortem is about the single largest cause I can identify of why we failed to scale Tutorspree. In examining our SEO dependence, I was surprised at how deeply it influenced so many different pieces of the company and aspects of our strategy. It powered a huge piece of our success, and ultimately triggered our failure. There’s a symmetry there that I can’t help but appreciate, even though I wish to hell it had been otherwise.

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[1] This is a whole other issue I explored in the Tutorspree blog at the time. It seems that Google is increasingly favoring itself in local transactional search.

[2] RapGenius recently ran into this issue, but were able to overcome their immediate problems through some impressively fast and thorough work.