Here are the slides from a talk I gave at a Carnegie Mellon Alumni event in the Bay Area today. #20tweets is tweet-sized advice for founders of tech startups. In the presentation I went into more detail and provided some rationale/anecdotes behind these tweets. For now, here are just the tweets:

Update as of 07/10/2010: The video recording of this event was done using a ceiling mounted camera; so the video quality is not great and the slides are not very visible, but you can still hear reasonably well. The talk was a two part talk. In the first part I talk about my experience as an entrepreneur — a journey spanning 6 years, 5 different companies, 4 M&A deals, 3 financing rounds, 2 licensing deals, and 1 serial entrepreneur. This part of the talk just used a map as a guide to keep people on track. So here is the unedited version of the video recording from this event — it is somewhat long, but hopefully at least some of you will find it enjoyable/useful.

A Tale of Two Startups and #20tweets from K9 Ventures on Vimeo.

I’m pleased to announce the formation of K9 Ventures, L.P. – a seed-stage fund.

K9 Ventures, L.P. is a $6.25M fund that is designed to do concept and seed-stage investments in technology companies. The fund will be deployed over a period of 3-4 years, with initial investment in the range of $100K – $250K, while reserving capital to participate in the follow-on round. K9 expects to be an active investor in portfolio companies and will typically make only 4-6 new investments per year.

The fund focuses on investing in companies that meet the following necessary but not sufficient criteria:

• Technical Founders: The founding team needs to be capable of building its own product and have the technical chops to make it happen.
• Technical Product: The product must have some technical depth. Either protectable IP or at least hard IP.
• Direct Revenue: The company must have a direct revenue model. No advertising, content or media businesses which may have a three-way business model, but rather companies which deliver direct value to paying customers.
• Capital Efficient: Companies that need a Seed round, probably a Series A, but potentially may not need a Series B or Series C. No retail, no cleantech, no biotech etc.
• Hyper Local: Entire team must be local to the San Francisco Bay Area. No distributed teams, and no outsourced product development.

The first closing for the fund was held in Q2 2009. K9 began investing in 2009 and is honored to have the following five companies in its portfolio:

• CrowdFlower (Seed and Series A)
• Twilio (Seed and Series A)
• DNAnexus (Series A)
• HighlightCam (Seed)
• “Project Oscar” (Concept/Seed)

K9 Ventures sits in between individual angels and institutional venture capital funds. The fund target was $6M and I’m pleased to meet (and slightly exceed) that target. You may call it a micro-cap VC fund or a super-angel fund. (Personally, I prefer just saying a seed stage fund, but as some folks have pointed out a super-angel sounds a lot better than a micro-VC! ) The objective is to provide entrepreneurs with a meaningful amount of capital and support to help the company build a sustainably profitable business.

I would like to take a moment to thank K9′s Limited Partners for their support of this first fund. Most of all I would like to thank the entrepreneurs who have allowed K9 to be part of their companies and their personal entrepreneurial journeys. In a lot of ways I see K9 as my next startup — except it’s a meta-level startup.

P.S.: The K9 Ventures website will be revamped to provide more details soon. In the interim, please follow @k9ventures and @manukumar for updates and direct any questions to manu@k9ventures.com.

On Saturday, October 24th, Stanford University hosted the Stanford Roundtable. The renowned interviewer Charlie Rose moderated a discussion titled: ‘The Road Back: From Economic Meltdown to Renewal’.  The archived webcast video is available on iTunes and on YouTube.

At one point in the discussion Charlie Rose asked about the education system. President Hennessey remarked that: “We depend at the graduate level on importing lots of graduate students because we don’t do enough out of our K-12 system. Because if it’s broken somewhere it’s broken deeply in science and math education.”

The following conversation is simply brilliant and is a showcase for how silly and frustrating the US immigration policy really is — even to those who have a direct audience with the President of the United States. Here are some of the best quotes from the video:

Eric Schmidt: “We don’t give them visa guys! This is a brilliant strategy; bring the smartest people in the world to Stanford, educate them and kick them out of the country. Brilliant strategy, great for America!”

Charlie Rose: “We should staple a greencard to a diploma”

Eric Schmidt: “Don’t you think a Stanford Graduate education is a reasonable condition for actually becoming a US Citizen?”

Eric Schmidt: “It is the stupidest policy in all of government; take the smartest people who are going to build companies and pay taxes and have them do it in another country.”

John Hennessey: “It makes no sense to take somebody who came here at two or three, with their parents, and say ‘you got a Harvard education, now go back to where you came from’”

The above quotes don’t really come through with their full intensity until you watch the video below. Watch from 0:24:41 till 0:27:45.

I have written before about my story as an immigrant founder. I am constantly meeting brilliant people who have come to the US for their education, studied here, and either have to return to their home country, or, are stuck working with their big-company employers simply because of their visa/immigration status. Perhaps the US should really consider taking the top 10% of all foreign students who earn their bachelors from a top 50 US school and give them greencard. Lets make that top 25% of all foreign students who earn a Master’s degree and 100% of all foreign students who earn a PhD. (I’ve tweeted this before, but Twitter search is so broken I can’t find my own tweet.)

Smart people come from all over the world. The US is lucky that they want to come here. It is foolish to not do everything to keep them here.

In the past few days there has been a lot of discussion on the topic of a Founders Visa. The credit for starting this fire goes to Paul Graham from Y Combinator, who wrote a great essay titled The Founders Visa in April 2009. Brad Feld (Brad is an advisor to K9) from the Foundry Group was instrumental in keeping the flame alive by posting about it on his blog (The Founders Visa Movement) in September. More recently, Eric Ries and Dave McClure added fuel to the fire (See Eric Ries’ blog post: Support the Startup Founders Visa with a tweet) and helped kick off a campaign on @2Gov. As an immigrant founder, this is a topic that I can relate to and care about. This was one of the biggest hurdles I had to overcome when I was starting up, and if I hadn’t been fortunate to find ways around it, my story would have been very different. I figured I would share some of the background of this story here, as it may help make a case for the Founders Visa movement.

I came to the United States in 1992 at the age of 17 (so there, now you know exactly how old I am!) to attend Carnegie Mellon University. My interaction with what was then called the Immigration and Naturalization Service started earlier that year to get an F-1 (Student) Visa for my undergraduate studies. Fortunately, my application for the F-1 visa was very smooth, and I was granted a 5-year visa to study at Carnegie Mellon. I completed my Bachelors in 3 years (another story for another time) and so was able to go directly into a professional Masters program (also at Carnegie Mellon) and complete a masters degree without having to apply for a new visa. During that time, I did one three month long internship — actually it was closer to 2 months, but it used up three months of my 12 month F-1 OPT window.

In December 1996, while I was still a student in the Master of Software Engineering program at Carnegie Mellon, I got bit hard by the entrepreneurial bug. I always knew that I would someday start my own company. It was only a question of when, where, and how. I decided that I was going to do it right then. The first step to figuring out whether this was even possible was to determine if I could start a company while I was on a student visa. After some research, including speaking with lawyers who were kind enough to answer my questions, the conclusion was that any person, whether a US citizen or not, whether in the US or not, can own assets in the US. What that meant was that I could start a company, own the company, but under the terms of the F-1 visa, I couldn’t work for the company (i.e. couldn’t draw a salary). The latter was fine by me since there was no money in the company for me to draw a salary any way. I formed SneakerLabs, Inc. in December 1996, while on a student visa.

I graduated from Carnegie Mellon in 1997 and decided to use my OPT to give the company a proper shot. I knew that in the worst case scenario, if things didn’t work out, I could always fall back to the traditional route of looking for a job. So this was a great time to take a chance on myself and see what I could do. The F-1 optional practical training (OPT) is one of the best things about the student visa program as it affords the flexibility to work for any company, provided it is in your field.

I was bootstrapping the company and started with $5,000 that I had saved up from a prior summer internship. I spent $2,500 on the first computer and let’s just say that there were lots of tomato sandwiches consumed for a while (I guess the tomato sandwiches were my healthier version of PG‘s Ramen noodles.) To bring in some money into the company, I started consulting through the company (to pay the company bills) and teaching at Carnegie Mellon as a lecturer (to keep the tomato sandwiches going!). At the same time, I was also working on the product. I hired my TA as my first employee and paid him $12.50 an hour to come to my apartment and hack code with me in my living room, which I converted into an office.

Towards the end of my OPT (mid 1998) is when the H1-B visa cap issue hit. The US issues 65,000 H1-B work visas every year. And it so happened that that year, all of the 65,000 visas had been issued and there would be no more visas available till October of that year. I was within weeks/months of being “out of status.” The options were to either go back home to New Delhi, India, or, risk getting myself into an immigration nightmare. Fortunately, I had advisors who helped me come up with creative solutions. They suggested I go back to being a student. I applied to a PhD program at Carnegie Mellon so that I could return to a F-1 (Student) visa while I was waiting for the next round of the H1-B visa quota. Fortunately, I was accepted into the program and that allowed me to legally stay in the United States. I took myself off the payroll of the company and went back to being a student.

When it came time to apply for an H1-B there was a genuine concern that my fledgling company may not be able to show that it had the financial resources to pay the prevailing wage for me. This meant that I had to either show enough revenue, or find investors who would be willing to put money into the company. There were a sum total of three or four “venture capital” funds in Pittsburgh at the time, and none of them had done much with this new fangled thing called the Internet. Besides I was a young, first-time entrepreneur at the age of 23. Raising money in Pittsburgh was not going to be easy.

In my attempt to build credibility and recruit people for my little company, I had started the Pittsburgh Java Users Group (the PittJUG today has close to 500 members!). By a stroke of luck, I met a visiting professor at one of the PittJUG meetings who offered to introduce me to his friends who were looking at investing in startups. I engaged in conversations with these angels investors and they provided a letter that I could use in support of my H1-B application. Some of you may have already caught on to this by now, but it is rather unusual for someone to start a company and then have an H1-B sponsored through that same company. My second employee signed the H1-B petition on behalf of the company so that I could be hired by my own company!

In the meanwhile, I had also been teaching more at Carnegie Mellon. The Director of my Masters program, the late Dr. James Tomayko, agreed to hire me on full-time at CMU and file for a second H1-B visa through Carnegie Mellon. This was great as it provided me with a backup option in case the petition through my own company was rejected.

In October 1998, I was excited beyond belief when I received an approval notice for an H1-B visa through my own company! I could now legally stay in the US and work for my own company. This also eliminated the big risk for my potential investors that I wouldn’t be able to stay in the country, and so I was able to close the financing round for the company in November 1998. I was elated to have overcome one of the biggest hurdles of my entrepreneurial career and ready to build my company.

In a startup cash is king. Under the terms of my H1-B visa, the company was required to pay me a prevailing wage of $60,000. However, I didn’t need that much to survive. I would much rather leave more money in the company and have a longer run way ahead of us. The workaround was that the company would pay me at the prevailing wage rate of $60,000 per annum, but then I would take a part of what I received in-hand, and loan it back to the company. The loan would be senior debt on the company’s books. If the company failed, I would lose it all. If it succeeded, I would get paid back. Fortunately, things worked out and the repayment of my loan to the company is what allowed me to buy my first new car.

I should emphasize that there were multiple points at which I came very close to having to leave the United States because of the visa issues. Though in the end it all worked out and the above story reads like it was all smooth, I can tell you that it wasn’t. I couldn’t go out and raise money for the company when I started because the risk of my having to leave the US hung over my head as the sword of damocles.

My journey with the INS by my side continued as my companies grew and became successful. Over the years, I held multiple H1-B visas (for SneakerLabs, Carnegie Mellon, Octane/E.piphany and iMeet). Every corporate transition we went through meant that I had to re-file for my visa under the new company.

After the success of SneakerLabs, I wanted to try and get legal permanent resident status, so that I could end the immigration hassles once and for all. My immigration attorney (Robert S. Whitehill, now a partner at Fox Rothschild) suggested that we shouldn’t use the typical path to a greencard under the EB-3 (Skilled worker/professional) category. The EB-3 greencard could take up to 5-6 years to be approved since it required labor certification. For anyone coming from India (like me) or China, this mean a protracted waiting period. Instead, we opted to go for the EB-1 (Alien of Extraordinary Ability) category. While it would take several months for me to assemble the dossier in support of an EB-1 application, there was no waiting period for EB-1s (no labor certification required) and it could be a faster path to getting a greencard. Bob’s advice was fortuitous since the EB-3 is also employer-sponsored and so if you change companies (which I of course did) the application would have to be refiled and would lose its position in the queue. The EB-1 on the other hand is self-sponsored and not tied to any company, which turned out to be the right choice for me.

I got my greencard approval in 2001, a few months after 9/11. By this point, I had already sold my first company and founded two additional companies. My first company employed about 20 US citizens (I was the only “alien”). My second company at its peak employed about 80 people — also almost all US citizens.

Technology leadership and innovation knows no bounds. There are smart people all over the world. What has worked for the United States for so long is that these people gravitate towards the United States. Some, like me, come to the United States for their higher education and advanced degrees. The definition of entrepreneurship is ‘insane perseverance in the face of complete resistance.’ Therefore, I fundamentally believe that true entrepreneurs will find a way regardless of how difficult or complex the system may be. I’ve used my own experience as a prototype to help the founders of two of my portfolio companies obtain their legal permanent resident status by going through the EB-1 (Alien of Extraordinary Ability) and EB-2 (National Interest) process respectively. However, in both cases, these founders had advanced degrees (PhDs) from Stanford, and were already amazingly accomplished in their field. Therefore, they could make the case for their legal permanent residency under these categories. That doesn’t however account for the thousands of other highly qualified individuals who would otherwise make for brilliant entrepreneurs.

I have chatted first hand with founders of companies that are from Singapore, Ireland, India and various other countries who have to contend with visa issues. These visa issues often become one of the significant hurdles to pursuing their entrepreneurial dreams here in the United States. I am now a bonafide citizen of the United States and as a US citizen, I feel strongly that the best thing the United States can do is to attract and retain the smartest people from all over the world. Having a Founders Visa would not only encourage the formation of new ventures that would create jobs and prosperity in the United States, but would be one more way for the US to attract and retain top talent from all over the world. PG, Brad and others have already addressed how the vetting and qualification process can work to ensure that the right people are allowed into the US. Modifying the criteria for the EB-5 visa category such that the investment dollars can come from US-based venture capital firms seems to be the most efficient way to make a Founders Visa happen.

I’d encourage you to participate in the Founders Visa Movement by voicing your opinion on your blog, in the comments below and most of all by sending a tweet for the cause at @2gov.

Update: There is now a new website for the Founders Visa at http://www.startupvisa.com — please visit and chime in. Also, I’d be happy to continue the discussion on twitter — I can be reached at @manukumar.

Update 09/27/2009: Slightly updated the post to explain why the choice of an EB-1 over and EB-2/EB-3 (protracted waiting period for labor certification since I am originally from India).

Update 03/12/2010: Vivek Wadhwa pointed out that the Startup Visa is something the Kauffman Foundation has been looking into for a while, possibly pre-dating PG’s blog post. Kudos to the Kauffman Foundation for doing so and kudos to PG for bringing it to the foreground with his blog post.

Yesterday, while attending TechCrunch50, I tweeted some tips for the companies presenting at the conference and those participating in the demo pit. By popular demand, I’m aggregating these tweets in a blog post:

Ever since I found the blog Startup Company Lawyer, I’ve had a high regard for its author, Yokum Taku, a partner at Wilson Sonsini Goodrich & Rosati. Yokum’s posts are always chock-full-of-good-information. His most recent post was on the topic of When do I need to incorporate a company?

I’ve spent some time thinking about this before, and, in fact, had a couple of tweets related to this as well:

Yokum already did an excellent job of laying down the legal considerations. As an extension to my tweets above, I wanted to expand upon some of the reasons behind these tweets. Here is the text of the comment I posted on Yokum’s blog in response to his post. I suggest you read his post first and then read my comment below:

Yokum, thanks for another great post! EAU (Excellent as Usual) as one of my favorite customers used to say!

You provided a great overview of the reasons to incorporate from a legal point of view, I wanted to chime in with some more subtle, but hopefully useful comments:

I maintain that the best time to incorporate is ‘yesterday’ — or as soon as you are 100% sure that you want to give this idea/company a real shot. To me incorporation is a ‘show of commitment’. It sets a date and time in stone for the inception of the company, and, it starts the clock running. This has several advantages:
1) If you are going to be bringing on co-founders or employees, the fact that the company has already been incorporated, and is official, can have an impact on how the equity split gets portioned out.
2) Incorporating starts the clock on the corporate history — which can often be useful when dealing with customers. For example, when asked, ‘How long have you been in business?’ you can confidently point to your date of incorporation as the ‘start of business.’
3) The same also applies when having valuation discussions with VCs. If the company hasn’t even been incorporated yet, then they are likely to try and push you more on valuation. I’m sure several folks will disagree with this, but I am confident this happens — even if it happens subconsciously.
4) Likewise, the date of incorporation often plays a role in what portion of the founders’ stock is already vested at the time of a venture financing.
5) Incorporating forces you to start maintaining the books (or so I hope!) and also forces you to learn all the administrative details it takes to run a company. While this isn’t something that directly adds value to the company, it is something that needs to be done. The sooner you learn this, the better it is. Doing this from the beginning and keeping things clean will be something you appreciate when you get into due diligence.

There are of course some disadvantages to incorporating as well:
1) Cost — even though most law firms will defer some of the legal costs involved, incorporating through a law firm is still an expensive process (deferring is not the same as not charging!)
2) Administrative overhead — once you incorporate, you are expected to comply with federal and state regulations. So you have to file taxes for the entity every year (Federal Taxes, DE Franchise Tax, California Tax ($800 minimum if I remember right)).

Tip: If you are thinking of incorporating and it’s close to November/December already — WAIT till January! That way you don’t have to file all this paperwork for just a month or two of existence! And you’ll have a full year ahead of you to find an accountant/tax person to help for tax time.

But all in all, I say, incorporate as soon as you are sure you want to give this a real shot. Stop hedging, and just do it!

It was 2:00 AM and I was still sitting in ‘The Cave’ — the name we affectionately gave to the cubicles in the bowels of Wean Hall  at Carnegie Mellon. It was called ‘The Cave’ because it’s all under ground, with no natural light portals whatsoever. The cave was kinda like Vegas — once you enter you lose track of time. Day or night it looked the same, and smelled the same (and not too pleasant at times!).

I was in the cave late that night because I was firefighting. A couple of weekends ago, on a whim to teach myself Java I had written up software for hosting chat rooms. The server was the decrepit little Pentium 200 sitting under my desk. The problem was that the server was crashing under the load of all the people using it. I could just go home and sleep, but the problem was that if the server crashed, I would end up with a ton of email the next day from the disgruntled users. In hindsight, I should have used Moore’s Law to solve the scalability issue. But I was a student and buying machines in 1996 was still expensive.

I was chatting with one of the frequent and loyal users of my site that night and explaining to him how I didn’t have enough resources to keep up with the growth of the service. Running thousands of concurrent users was pushing the limits of what the Java VM could handle on the P200. That’s when he suggested, maybe I should start a company — and start charging for the chat rooms. The bit flipped — I went from being a hacker, to being an entrepreneur.

There is nothing like your users telling you to charge for your service, because they want it and need it. At the time when I started my first company, I had one of the few Java-based chat solutions available, and was one of the first to offer what are now known as embed tags so that people could create their own rooms. SneakerChat, as I called it, had over 20,000 concurrent users with well over 50,000 registered users (registration was optional).

Starting my own company sounded cool. I knew it was something I wanted to do eventually anyway. It’s what I had always considered doing, right from the time that I was building and selling musical doorbells to my parents friends. (That’s a whole other story for another time). But, I knew nothing about starting a company and I knew even less about what it meant to start a company in the United States. I hadn’t grown up here, I was only here as a student and that too on a student visa. And I didn’t have any extra money I could use as capital to start a company with — but when did that ever stop anyone!

I decided I needed to learn about what it meant to start and run a company. Some of my classmates had taken a course on entrepreneurship at the business school across campus. I asked them which class it was and who the professor was. They recommended taking the class appropriately called ‘Entrepreneurship I’ taught by Professor John R. (‘Jack’) Thorne, who was the Director of the Donald H. Jones Center for Entrepreneurship at the business school. In the next couple of days, I walked over to the business school and into the Don Jones Entrepreneurship Center. Jack’s assistant (whose name eludes me right now, but I think it was Suzanne) was great at calming my nerves as I was probably visibly nervous when I walked into my first meeting with Jack.

I told Jack that I wanted to take his class on entrepreneurship. Jack suggested that I take a different class — Technology-based Entrepreneurship, which was offered the following semester. He explained to me that his class was only for students of the business school and on top of that, it was already over-subscribed with a long waiting list. I was somewhat disheartened, but didn’t know what else I could say or do. Though I was despondent, I decided to at least show up for the first lecture for Jack’s class to see what it was like. Later that week, I snuck into Jack’s class and found myself a corner I could stand in without being noticed much. I was at least 5-10 years younger than everyone else in the class, I wasn’t from the business school, and didn’t want to ruffle any feathers.

The first slide Jack put up that day was his definition of entrepreneurship: ‘Insane Perseverance in the Face of Complete Resistance.’ That was it! I was hooked. It took a couple of seconds for it to all come together, but then it just clicked. Jack had just given me the perfect way to get into his class. It was the first test on the way to becoming an entrepreneur. I decided right there, on the first slide of his first lecture, that the only way I could be successful as an entrepreneur was to first convince Jack Thorne that I should take his class!

I scheduled a followup meeting with Jack and in his office. I told Jack that he had already given me what I needed to take his class: Insane Perseverance. I told him that I was not going away. That I would keep showing up to his class and hiding in the back listening in. I wouldn’t ask any questions or say anything so as not to disrupt the class, but I was going to be there for every lecture, and the only way Jack could get rid of me would be to have me thrown out!

Needless to say, Jack relented and he welcomed me into his class. I got to take his class when several other people on the waiting list didn’t. I took every single class Jack Thorne taught at the business school. Entrepreneurship I. Entrepreneurship II. Entrepreneurship Project. Entrepreneurial Management. If it had the word entrepreneur in it, I was there. I wrote the business plan for my company as a class project for Jack’s class. I incorporated my first company, SneakerLabs, Inc., while I was still a student in Jack’s class. I was 20.

Jack Thorne

Jack Thorne passed away last year. He was one of my mentors, without whom, I would have never gotten one of the most important lessons of my entrepreneurial life — Insane Perseverance in the Face of Complete Resistance. Those words were at times the only things to fall back on when things got tough. And while there are lots of other experiences and stories that got me there, that first day in Jack Thorne’s class is the day I started my journey as an entrepreneur — one with Insane Perseverance.

Thanks to my wife and Ron Yeh (@ronyeh) for proofreading the above post.

Rajeev Motwani

I was in complete disbelief when I read the first tweet yesterday evening that Stanford Computer Science professor Rajeev Motwani had passed away. I was still incredulous and hoping that it was untrue until the sad news was verified in a email sent to the department. Even now as I write this with Rajeev’s picture on my screen, it’s still hard to believe.

In March of this year Rajeev agreed to be an advisor to K9 Ventures. I was very excited to have Rajeev on board as an advisor for K9 and as a personal mentor. His untimely passing is a shock that will reverberate through Stanford and the Valley.

My introduction to Rajeev began as a student in the PhD program at Stanford CS. Rajeev was the head of the PhD program when I joined, and he was the defacto advisor to all incoming students until they found their own advisor. He was responsible for making sure that every student find a new home within the department in a timely manner. I can still remember Rajeev’s advice to all the students — that your only job in the first quarter is to find an advisor. And to not worry about requirements like Comprehensive Exams and Qualifying Exams and focus on the research. His mandate to us was that a PhD should make an incremental contribution to human knowledge. That phrase stuck in the back of my head throughout my PhD work and proved to be a good filter to test potential thesis topics. 

Even Rajeev didn’t know that in my first few interactions with him, I felt quite intimidated. Intimidated because of the immense respect I had for his intellect, his ability and his judgment. Even though my research interest was in the field of Human Computer Interaction, since my advisor (Terry Winograd) was on sabbatical at Google for the first year that I was at Stanford, I was fortunate to interact with Rajeev a little while longer than I otherwise would have.

When I decided that I wanted to enter the field of Venture Capital, Rajeev was one of the first people I contacted. He was instrumental in opening several doors for me and made valuable introductions to other VCs and firms on Sand Hill Road — leading to several valued relationships. As just one datapoint, it was through Rajeev’s introduction that Refocus Imaging obtained its funding.

Rajeev truly was a pillar of Stanford Computer Science and of Silicon Valley. He touched and helped so many people — as students, advisees, entrepreneurs, colleagues and friends. He directly or indirectly contributed to the formation and the success of numerous startups (Google being the most notable, but there are many, many more). I am incredibly thankful to Rajeev for this advice, his mentorship, and the role that he played in guiding me in choosing my path not only as a student, but for life. 

I feel truly fortunate to have interacted with and learnt from Prof Motwani. At the same time, I am deeply saddened at his sudden and untimely passing. I sincerely wish Rajeev’s family all the best in this difficult time and beyond.

I’ll start by admitting up front that the purpose of this post is to hopefully incite a discussion, to start a fire, and to get you, and your startup to think really hard about what your business model should be. The title for this post ‘The Case Against FREE’ is a throwback to Chris Anderson‘s cover story in Wired Magazine titled Free: Why $0.00 Is the Future of Business, but, this post isn’t really intended to be a blow-by-blow rebuttal of Chris Anderson’s position. It just makes for a juicy title for me to express my opinion on startup business models (or often the lack thereof).

At the core of my argument is a short tweet that I’ve sent out at least twice on Twitter:

To elaborate: Too many startups feel like the right pricepoint for them to start out is “free.” What they fail to realize is that once you start offering a valuable service for free it is very difficult to later charge for that same service. And if that service happens to be the core value of what you have to offer, well, then you’ve just given it away. Yes, you can claim to use a “freemium” model in order to charge for added features or services over and above your core service, but, if you give away the most valuable part of your service, the uptake on the number of people who convert to the for-pay premium services is not going to be very high.

I’ve seen way too many companies fall into this trap. In a lot of instances, companies fell into this trap because of competition. And yes, competition is a good thing for consumers; it encourages companies to build better product, deliver better value and, in some cases, give away everything for “free.” That last part is the one that I’m going to take issue with. Competing on price isn’t always a good thing. If you want to compete, compete by innovating, compete by out-smarting, compete on quality, and on really solving the customer’s problem in a better way. If you compete by making the price of your most valuable offering zero, then all you have succeeded in doing is create a “divide by zero” problem for yourself, and, if you’re even a little bit of a geek you know that that’s a NaN.

Contrary to Chris Anderson’s view on Free, I strongly believe that the best revenue models are where money changes hands directly. You deliver real value to me, and I happily pay you some reasonable amount of $$s for that value. That has always been the fundamental basis for business and it will remain the fundamental basis for business for the foreseeable future. That core principal of where money changes hands for value delivered is an invariant that must exist in every real and sustainable business. Whether you do it by using a direct exchange or a three way exchange or any other way doesn’t matter much. If you’re not making money, then you’re not really building a sustainable business (no wonder so many startups are jokingly referred to as defacto “non-profits!”).

In my opinion, there are very few of the three way business models that work. Google is obviously one where it does work, and it works brilliantly. But not every startup is going to be able to pull that off, and especially not for every type of product offering. Advertising has always been a three party model and lots (okay, maybe “some” is a better word here) of companies make lots money using an advertising model (ala Google); but I am partial to a direct revenue model. That’s my opinion and I’m sticking to it.

Let me give an example: Plaxo. I often rail on Plaxo because I believe that they started out with a brilliant idea. Managing contacts is a huge problem and honestly no one has had a better shot of really solving that problem than Plaxo. They did a few things right: The ability for updates to be propagated across the network was great in concept. Having all my contacts backed up to the cloud, and be able to sync across multiple machines and devices was great. But, they also got a few things wrong: They were using email a little bit too liberally to where it created the perception of being a generator of spam. Most of all, the biggest mistake Plaxo made (in my opinion) was that they started to give away their core value for free. That core value that Plaxo delivered was backing up and synchronizing the data in Outlook. There were multiple occasions when Outlook crashed or the computer crashed and the only way to recover that valuable contact data was to resync with Plaxo, and boy am I thankful to them for that! But, they gave it away for free and then never really found a reasonable upsell to build a real business model for the company.

I won’t even start about what I call the “critical mass plays” — businesses that hope to monetize based on traffic and advertising. That model isn’t flawed, it’s just overly optimistic. Very few companies ever get to having enough critical mass to make it work.

The last thing you want to do is compete in a commodity market place. The mentality of ‘Free’ and the mentality of acquire users first, and figure out how to make money later (see the next post coming up soon for more on iterating the business model) is creating an environment that puts our companies in a commodity market. Are we really selling lean hogs or coffee? I thought we were in an industry where innovation matters. If innovation matters, then prove it by building a better product — one that your customers will be happy to pay you real $$s for.

We (me and presumably anyone who reads this post) are startup people. That’s what we do. Day in and day out. I think about startups every day, 7 days a week — even though I know I probably shouldn’t. The Valley is a fascinating place for startups. Honestly, you absolutely cannot find a better ecosystem than what exists here. I realized this only after being here and seeing what it is like everyday. I still kick myself for not moving here in 1996, when I started my first company. Don’t get me wrong, Pittsburgh, PA was very good to me and I love, respect and admire the people I met there. I wouldn’t have been able to make it without all the coaching and guidance I received along the way. But the Valley is still its own beast.

However, sometimes I feel that in all the hubub of startup life, we lose perspective of one thing: Starting up is hard. It is hard not because it is intellectually hard or that it takes a lot of work. And yes, it takes both of those. But is is especially hard because of the emotions that surround the process of starting up. Though I’ve known this for a while, it only surfaced in my mind when a young graduate student at Stanford posed the question to me more directly: “How did you deal with the emotions of doing a startup?” In particular his question was directed towards whether he should take the safe route and go get a job or whether he should take the entrepreneurial leap of faith. This made me think back to my experience of startup up 12-13 years ago and also reflect upon what I am doing today. The punchline first: Starting up is hard. And it doesn’t get a whole lot easier.

Starting a company is as much a personal decision as it is a professional one. Yes you need to be smart, yes you need to have an idea, but, yes you also need to think through all the emotions of venturing out on your own. For someone coming out of a good graduate program (like I was at Carnegie Mellon when I started and like the person who inspired this post is at Stanford) there is no dearth of job opportunities. Even in a market as bad as today’s, companies still salivate over students from top schools. So starting a venture right out of school comes with an opportunity cost. You can either take the safe route of going to work at a company where someone else is paying you and you do your job, and make big bucks right off the bat. By contrast, if you chose to start your own company, you have to figure most of it out on your own. You possibly will not get a paycheck for a long time and you will be stressed out of your mind with all the decisions you need to make but feel that you aren’t qualified to make. Things like choosing a law firm, finding an accountant, hiring people, finding an office, figuring out equity structures, raising money. And that’s just the list from the top of my head, there is a lot more than that too.

In this scenario, when you’re starting out right out of school, I say: “The greatest position of strength is when you have nothing to lose.” You’ve already been living on a meager stipend. You haven’t started earning the big bucks and your lifestyle has a low burn rate. That’s the best time to start a company, because you’re making a lateral move and not taking a step down as you would if you try to start a company after going to work somewhere else. And if things don’t work out, you know all you have to do is raise your hand and job offers will come. Your startup experience won’t be held against you, and you will still have your academic training to fall back on. That was part of my thinking when I started. I had all of $5,000 to my name when I started my first company. There wasn’t much to lose.

But, once you do decide to start a company, that’s when things get really tough — emotionally. In my analysis, most of the stress stems from the fact that starting up requires making lots of decisions. A decision to not take that cushy job. A decision to hire someone when you don’t know how you’re going to pay him/her yet. A decision to rent office space before you have the money for it. A decision to pick a law firm. A decision to pick your co-founders. A decision to pick your advisors. Decisions, decisions and more decisions. And this is something people can give you advice on, but ultimately it is your decision. And it’s hard because you second guess yourself. You don’t really know whether what you are doing is going to work. Sometimes you get this sick feeling in your stomach which makes you think “What am I really doing here?”

That emotional distress is only complicated more when someone close to you begins to question you. In a lot of cases it’s parents, but it could also be your spouse or your best friend. While they aren’t actively trying to make your life complicated, they inevitably do — because they have your best interest at heart. They’re also usually very risk averse. They may not even understand your vision and think that you’re just building castles in the air. That one question: “Do you really think this is a good idea?” Or “Don’t you think that <insert hot company name here> would be a nice place to work for a while before you go out on your own?” feels like a stake going through your being. If you’re lucky they will be behind you no matter what. It’s part of their job to question you. To make you think twice.

An entrepreneur’s life is full of stress. While I don’t have any scientific data to back this up, anecdotally, I have known several entrepreneurs who have all developed similar physiological manifestations of the stress they are under. The stress of starting up is one of the reasons why 2-founder teams have a higher likelihood of success than and single founder — because you get to load balance and spread the stress. When one person is down, the other person can pick up the slack. You boost each others confidence. Sometimes just knowing that someone else shares your vision is just the moral support you need in order to get going. I started my first company as a solo-founder and I can tell you from first hand experience, it is way harder than it would have been with a co-founder. But, finding a co-founder can be just as hard. As an entrepreneur, you make the best of what you have. You make lemonade.

K9 Ventures is my new startup. It’s a meta-level startup — a startup that helps to start other startups. And even today as I do what I consider is my 4th real entrepreneurial venture (there have been others along the way that I don’t count) I can feel the same stresses that I went through when starting my first company. You learn to recognize it, but you still have to deal with it. So the best advice I can offer to fellow entrepreneurs is to surround yourself with good advisors who have done it before (not consultants or VCs, but real entrepreneurs). People who have had a similar experience and can help to guide you through the process. They may not be able to get you to your destination — that’s something you have to do internally, in your own mind, but they can certainly point you in the right direction.

For all the glorification of the invincible, unshakeable entrepreneur just remember that when they started out, they went through all the same turmoil in their heads that you are going through. It’s part of the process. It is the essential part of the journey that makes real entrepreneurs empathize with others and willing to help. It is what ultimately makes you a better human being. The best entrepreneurs are humble, yet determined. Humble because they don’t know how they ever did it before and because if they had to do it again, it would still be hard. And they are determined because it does take insane perseverance in the face of complete resistance to do a startup.

Ultimately doing a startup is about passion and perseverance. It is an experience of a lifetime that cannot be replicated in any other setting. No educational program can even come close to what you learn in doing your own startup. And regardless of whether you succeed or you fail, no one can take that experience and that learning away from you. That is your true gift.

Yes, starting up is hard, but don’t let that stop you.