The success of any startup starts with building the right team and recruiting the right people; this means keeping an eye on innovations in the human resources space.  Human resources can be broken down into two main entities: talent acquisition and talent management.  This blog will highlight themes for acquiring new talent and a later post will touch base on managing that talent to stay on board.

1.     Tools that help evaluate skill set

No surprise, LinkedIn continues to be the dominant platform for recruiters and corporations to discover potential hires. Rather it be searching and viewing résume-like profiles, or finding articles and blogs posted by members that demonstrate their expertise, the hub has built a reputation among business professional as everyone knows to put their best foot forward on LinkedIn.

Allowing members to upload rich media files is another advantage that LinkedIn offers, but what really excites me are communities like Github and Codewars that serve a specific vertical and have the capability to challenge someone’s skill set.  Codewars allows coders to compete in mini challenges to build their reputation in the community. If I were in the market for a programmer, I would check out who’s winning the crowd here.

2.     Applicant tracking system

Companies these days are pushing hard for an integrated applicant tracking system.  However, LinkedIn has deliberately stayed away from this space, as it is incredibly complex to build a robust system and listing potential customizations for each employer could go on forever.  Even the best systems in the market like Taleo and Jobvite have complex interfaces that require training, common tasks that are not easy to execute, and creating a standard report still requires significant manual input and most of them are not compatible to mobile.  What the market needs is a product that follows the 80/20 rule that addresses the most important customization while having a very simple user experience.  For example, JobSync offers a simplified overlay for major ATS platforms that’s pretty nifty. If you can’t change the way it works, at least change the way it looks.

3.     Preemptive recruitment

What most of Karlin Venture’s portfolio companies do when they are looking to hire is to reach out to a couple of potential candidates within their LinkedIn network. In the future, I’d like to see alerts or suggestions that notify you beforehand if a potential candidate is interested in your company or is ready to make a career switch.  I think LinkedIn is making progress through the release of features for recruiters to figure out which LinkedIn users are following their company and allowing recruiters to send updates on their company (new job posting, product releases) to their followers to continue to engage potential candidates.  I’d like to see LinkedIn take a leap and provide engagement metrics to recruiters, such as the frequency with which certain followers check out the company’s profile or open rates with regards to alerts.  I am just waiting for someone to develop kickass (a higher level of) technology for ‘preemptive recruitment.’

Be on the look out for the blog on talent management that will emphasize the importance of retaining talent.  What if there is a ‘flight meter’ that warns companies when their most valuable employees are thinking of leaving?  Wouldn’t that be cool?!

Outsourcing overseas has been a growing trend for the fast-paced, emerging tech industry. Companies should consider overseas development teams to scale operations and reinforce product development, execution, and expansion. Hiring outside of the states can be beneficial in many ways, but there are several things to consider when setting up shop.

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You should start grounded

A company must first establish the mission, vision and culture before they make their first hire.  A common mistake for both partnerships and startup businesses is not having these standards mapped out, identifying the essence of the ora they are trying to create.  Hiring first will cause some hurdles and backpedaling to get everyone on board, which is way harder.

Founders can have slightly different opinions on where they want to take the company, but they need to strike a compromise and agreement and be consistent when communicating the mission, vision and culture on a company level.  A very common issue we run into is unparallel expectations among founders.  For example, if they want to sell the company, what they will sell the it for, or if they plan to IPO someday, etc. Founders really need to have an understanding on this right from the get-go as it creates a lot of dissonance when they receive an acquisition offer or even a funding offer for that matter.

You want to win the race, but need to focus on getting to the next ‘time extension’ point

I am a strong advocate of the 3 month, 1 year, 3 year strategic planning framework or variations of it and have seen that it is beneficial for startups to use this model.  However, for early-stage startups, we have garnered more success using a 3 month plan with short term milestones.

One key difference between an early-stage startup and a mature corporation is that an early-stage startup is unlikely to have established strong product-market fit and has a more fluid business plan.  With that in mind, more progressed companies need to be open to changing the 1 year and 3 year plan and revisit or revise strategies on a regular basis.  Taking the time to reevaluate the 1 year and 3 year plan is something that startups and their boards don’t do often enough.

I thought we had someone covering this job

A big part of strategic planning that startups often neglect is figuring out staffing needs based on the business plan in advance and being proactive with onboarding staff that is needed regularly.  Many startups rely on “just-in-time” hiring strategies but what they don’t realize is that this causes the machine to stop or slow down and with growth as your main goal, this is not a good position to be in.

The other aspect to strategic planning on a HR front is to figure out who is responsible for what.  I totally understand that people at startups need to be a jack of all trades at times and pick up whatever work that needs to be done.  I am not saying that a person should not have multiple roles, but you still need to be clear on who is ultimately responsible.  A startup has very little ‘fat’ compared to a large organization (or at least that should be the case) and when accountabilities are lost, there will be a huge impact on the startup.

Founders need to recognize their own capabilities from Day 1

At a certain point in the lifecycle of the business, the founders no longer need to be responsible for wearing multiple hats. Typically somewhere between the year 1 and 3, the founders become more of delegators than executors. This means they are hiring a Head of Sales and a Head of Marketing, etc. This is also the time when it’s valuable for founders to know their own strengths. For example, a CEO of a sub-20 person startup often needs a much different skill set than a 20-100 person company or a 100+ person business. Being self aware of that helps founders grow their businesses. Alternatively, as companies scale, it allows founders to narrow their focus on what they do best. It’s important to be self aware of these factors before scaling, though, so the core values of the business and other sensitivities aren’t compromised during transition points.

-Arteen

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When marketing, it’s easy to get lost in the importance of customer acquisition and pay less attention to the customers that one already has. A smart business will blend the two together, spending even more energy on customer relationship management (CRM), or retention, than they do on acquisition. This is a formula for success, resulting in higher profit and not only a larger customer base, but a stronger one as well.

Why acquisition matters

Just because retention is most important doesn’t mean that acquisition doesn’t matter. Acquisition is needed to begin, maintain and grow any company. Here are just a couple of reasons why acquiring new customers is vital to any brand:

• More customers = a bigger business. The most obvious reason that acquisition is important is because any company needs new customers to survive. For this reason, acquisition is especially important to young businesses and those looking to expand their audience.
• Acquiring new customers likely means cutting into the competition. Grabbing the attention of a new audience doesn’t only mean that a company is making money off of their business, but it also probably means that their competitors are not. Eighty-nine percent of consumers begin doing business with a competitor after leaving a company due to poor customer service. That means that acquiring consumers could mean a company is snagging them from a competing brand.

Why retention matters more

While acquisition is certainly important to any business, building brand loyalty and keeping existing customers is absolutely crucial. That’s why companies like Preact and Retention Science both focus on helping businesses amp up retention rates (or “Preact” to keep their already existing clients). Here’s why:

• It costs less to maintain an already-existing customer than it does to grab the attention of a new one. While the costs behind customer retention are far more complex than the costs surrounding custom acquisition, it actually costs less to market an already-loyal consumer.
• Retention efforts simply reach farther than acquisition ones. Plain and simple, it’s easier to target an already-existing customer than it is to target a new one. The odds of making a successful sale to a loyal consumer can sit between 60% and 70%, but the chances of selling to someone new decrease to between 5% and 20%.
• Therefore, retention efforts typically make more money than acquisition ones. Not only does building brand loyalty make more money by costing less and requiring fewer resources, but also, loyal customers generally spend more money on each purchase. A new e-commerce buyer averages a checkout buy of under $25, but a returning one is likely to spend closer to $50.

So how can a company improve retention rate?

Improving retention rate takes a bit of rethinking and reshaping, but is ultimately a goal that all companies can achieve. The top three things great companies do to retain their customers are:

• Respond to customers in a timely matter. In many cases, when it comes to customer retention and satisfaction, response time matters even more than the actual response. In fact, 33% of consumers would prefer a quick response, even if it is an ineffective one. Shoot for hold times lower than three minutes and social media feedback within 60 minutes.
• Engage with your customers. Just because a customer made a purchase doesn’t mean your job is done. By engaging with them in an active way, you can drive up their brand loyalty, guaranteeing they return again and again. To engage with your customers, hold contests (both online and in person), ask for feedback through surveys and suggestions and then actually listen to the feedback and use it to shape your company’s direction.
• Customize and personalize. Customers like to feel that they’re appreciated. They want to feel like a person, not another dollar in your bank account. Plus, according to the 80/20 rule of business, 80% of your business will come from 20% of your customers. That means that it’s probably worth your time to get to know that 20% pretty well. Acknowledge them by name, throw in freebies wherever you can and never underestimate the impact of a “thank you” or a handwritten note.

By really honing in on these three skills, you have the ability to amp up retention and run a much more profitable business.

The bottom line: retention wins every time.

In an ideal world, a smart business would embrace both acquisition and retention, while placing a strong emphasis on retaining their customers. By building brand loyalty, businesses can cut back on marketing costs and resources in addition to actually drawing in a larger profit. That’s why, while acquisition is a key part of business, retention should sit at the very center of any business model.

Keeping customers happy is your biggest asset as a business. If you’re not yet sold on the idea, consider that a 2 percent increase in customer retention has the same effect as decreasing costs by 10 percent. Not only that, but it costs over six times more to get a new customer than it does to keep one.

Clearly, it’s in every company’s best interests to keep their customers happy. Having this knowledge is a great first step, but implementing the idea and then maintaining customer satisfaction requires a few simple steps.

So how do you actually keep customers happy?

1. Keep Track of Customer Activity

Without insight into how your customers are behaving, how do you know what they want? Tracking is a great way to actually see what they are looking for.

To start, it helps to answer the following questions:

• Which pages are their favorites on your website?
• What links do they like best?
• How long are they looking at certain products before they move on?

Be sure to identify potential churn early on. Learning how your customers behave allows you to tweak your products, services, and even your website toward their needs.

Tools such as Preact allow businesses to learn about their customers. Preact provides useful data for marketing and advertising purposes, allowing you to make more informed business choices.

See the rest here in Tech Cocktail!

A thriving two-sided marketplace is one of the better businesses to run. Operational costs are relatively low (especially when compared with traditional eCommerce), the marketplace itself is highly scalable, and the network effect of a large marketplace inherently discourages competition. The real challenge for entrepreneurs, however, is striking a balance between supply and demand, particularly during the initial stages of the marketplace’s growth. Fundamentally, this is a chicken-egg problem – limited demand discourages quality suppliers, while a lack of quality suppliers impedes demand generation.

Building a defensible two-sided marketplace, thus, means striking a balance between finding enough buyers to keep sellers interested, and attracting just the right type of suppliers to give your marketplace some legitimacy.

Balancing Demand and Supply

Building up supply is arguably more difficult than generating demand in the initial stages of a marketplace’s growth (the situation gets reversed once the marketplace matures). This is particularly true for broad, mature markets (say, taxis) served by traditional marketplaces. The only way to attract quality suppliers in the initial stages is to ensure that your value proposition is strong enough to offset the opportunity cost of investing time and energy into your marketplace. It is not unusual for founders to kickstart the supply in the initial stages themselves. Uber founders Travis Kalanick, Garrett Camp and Oscar Salazar, for instance, were the first three ‘drivers’ who tested out demand for the service. Similarly, Reddit founders created the initial ‘seed’ content for the company by posing as fake users.

Demand generation is comparatively easier (emphasis on comparatively) in the short term with a cache of early, quality suppliers in place, but it is by no means trivial and only gets harder at scale. The initial demand is crucial to keep suppliers invested in the marketplace long enough for the network effect to kick in, but ultimately the  challenge is to generate enough demand in the long term to ensure happy suppliers. This is best done with some sort of key differentiators, whether it be brand loyalty or a proprietary technology.

Below, we’ll take a look at some actionable strategies and differentiators a marketplace can adopt in its initial and growth stages:

1. Have a niche focus: Marketplaces like Etsy have been phenomenally successful by focusing on a niche market (handmade products) underserved by existing marketplaces.

2. Offer a new take on an existing model: Lyft and Uber have been successful by offering both drivers and passengers a new take on an existing model. For both these marketplaces, the opportunity costs for drivers is offset by the flexible work hours and increased demand for their capacity. Passengers, meanwhile, are attracted primarily by the convenience and lower costs as compared to traditional cabs.

3. Tackle one market at a time: Uber launched in San Francisco before expanding to other regions. Founder Travis Kalanick already had a strong social network within San Francisco, which provided initial demand. It also didn’t hurt that a number of tech publications and bloggers are located in San Francisco, which summarily helped generate word of mouth (and pent-up demand) for Uber before the company expanded to other markets.

4. Offer a better solution to underserved customers: Airbnb found its initial buyers and suppliers in the vacation rentals classifieds of Craigslist. They were clever in their approach in doing so, as well, since Craigslist didn’t offer an API. Airbnb’s service was both more convenient and safer for both sides of the marketplace that had traditionally been underserved by existing services.

Building a Defensible Marketplace

Although two-sided marketplaces are highly defensible due to their very nature, they are, by no means impenetrable. This is particularly true today due to the low costs of building marketplaces and attracting audiences. To this effect, some strategies startups can adopt to retain their market position are:

1. Leverage technology: Technology can be a significant factor in creating a defensible marketplace, especially when it cannot be easily replicated without sufficient data. Uber’s vast collection of data, for instance, gives it a significant competitive advantage over new-entrants, who cannot compete with its superior matching algorithm sans data.

2. Build Loyalty: Lyft has been particularly successful in resisting competition by building a strong culture centered on its drivers. The company regularly holds community rallies to drum up support, which pays off in the form of better brand loyalty. It also operates a private Facebook group where it encourages drivers to interact with each other.

3. Foster a Community: Pinterest founder Ben Silbermann individually emailed the first 5,000 users (it took nearly a year for Pinterest to find its first 10,000 users) and regularly held meet-ups with them. This helped foster a strong sense of community and loyalty which allowed the startup to reach scale.

Building a two-sided marketplace is tough, but by no means is it impossible. Plenty of startups have done it before, and plenty will continue to do it again despite the overwhelming odds.

–Arteen and TX

Last week, we posted what qualitative characteristics we look for when evaluating eCommerce companies. This week, we thought we’d get to the real fun and talk about the quantitative stuff.

The Quantity:

When looking at financial projections, the earlier the deal, the more likely the projections will be wrong. Thus, we put most weight in you understanding your financial model, not just your projections. Within that, you should know what your key performance indicators (KPIs) are and which are most critical to the success of your business.

Key metrics to track as an eCommerce company: 

1.  Cost of customer acquisition (CAC)

How much do you have to spend to get one new customer?  You should take into account anything you spend to bring in new clients, including share partnerships, paid marketing and cost of direct sales.

2.  Conversion rate (CR)

Of your site traffic, how many are actually buying? Depending on source, this varies from ~0.75% from social media to ~2% from search and ~3% from email. Desktop and tablets get double or triple the CRs than smartphones.

3.  Shopping card abandonment

How many potential customers put products in their shopping cart but didn’t place the order? The average is 67 percent of shopping carts are abandoned.

4.  Average Order Value (AOV)

What’s the average size of a single transaction? Of course, this is variable, but we see averages between $80-$120.

5.  Life time value (LTV)

How much profit will a single customer generate over the entire span that they are a user? Use this formula:

(# of months they will be a customer x average order value/month) – customer acquisition cost

6.  Churn

What is the rate at which you are losing customers? If you have 100 customers in April but only 80 in May, that means 20 percent of them have churned. Churn rates below 5-8 percent are ideal, but the lower the better. By dividing 100 by your churn rate, you can also estimate expected number of months as a user. For instance, a churn rate of 20 percent indicates your customer will only stick around for five months (100/20), which is not very long.

Rules of thumb we use when evaluating metrics:

1.  Gross margins near 50 percent

Because eCommerce businesses are so capital intensive, we want to make sure you still have at least half of your revenue remaining for operating expenses, selling, general and administrative expenses (SG&A), etc. after taking out the cost of goods.

2.  Lifetime value of at least three times the cost of customer acquisition

In another words, the amount of revenue a single customer will generate for your business over the entire span of them being your customer should be at least three times greater than how much you have to spend to get that customer.

3.  Size of your raise that lasts at least 12 months, if not 18

For example, if your net burn (revenue minus total expenditures) is $50,000 per month, you would need to raise $600,000 for a 12-month runway.

 4.  Reasonable conversion rates

You should have reasonable expectations for conversion down each step of the purchasing funnel. If they’re much different, you should have solid reasoning to justify why they’re different. Reasonable rates for email marketing are as follows, partially from Monetate reporting.

• 15% email open rates
• 20% click through on those opens
• 8-10% add to cart rates
• 67% cart abandonment (meaning 33% follow through with purchases)
• Following that entire funnel through = ~1% traffic to sale conversion

 5.  Realistic revenue expectations

Unrealistic expectations are a red flag for us. Anything greater than 20 percent month over month top line revenue growth is often unrealistic, with the exception of the occasional extreme outlier.

As an early stage venture fund, we focus on a few sectors to be effective: eCommerce, SaaS, marketplaces, and ad tech. For each, we evaluate the people and process, but there are a few things we focus on. Starting with eCommerce, I’ll break down our approach intro two blog posts: for now, the quality; then, the quantity.

The Quality:

As a company grows, operations become more important as eCommerce businesses need to run incredibly efficiently in order to retain any of their contribution margins since they’re high variable cost businesses. So, we use these rules of thumb to evaluate those variables.

In operations:

 1. Businesses that transcend fads

We look to invest in companies that are here to stay. I think of them as utility companies because they are things people would be purchasing anyways. This way, you don’t have to convince consumers to buy something, you just have to convince them to buy it from you.

 Ex. We wouldn’t invest in a company that sells bell-bottoms online, but coffee? Yes.

 2. Life cycle of company

eCommerce brands typically have seven or eight-year life cycles before they go out of fashion. We look for companies that have found (or will find) product market fit within two years, can scale growth for two or three years after that, and then continue in maturity for the rest of their lifecycle.

3. Capital efficient business models

We look for companies that are innovative in figuring out low cost ways to mitigate overhead and maintain efficiency. That includes inventory. What are warehousing costs and what’s your payment cycle like? Maybe you don’t have to warehouse tangible items but you need to pay your supplier 10 days in advanced of sales. This is important to know for net working capital needs.

Ex. In its first year, Zappos bought inventory from its suppliers only after they transacted a sale, therefore not having to hold inventory or rent excess storage space.

4. End-to-end fulfillment and manufacturing process

Supply chain and shipping can make or break an eCommerce company. While getting favorable shipping rates is hard at first for low volume startups, we want to see you have a plan for reducing costs and increasing margin in the future.

5. Marketing strategy

eCommerce companies are typically business to consumer (B2C), and therefore need an audience. What strategies do you plan on using to get eyeballs to your website? Some successful examples we’ve seen are partnerships with complementary brands, paid social/search marketing, referral discounts, and tracked email marketing campaigns.

In people:

1. Passion and reason

We look for founders who are passionate about what they’re building and have a good reason to do so.

2. Seasoned founders

eCommerce is a hard sector to be successful in. Questions we ask ourselves are: have they done it before? Was it in the same vertical? If not, do they have industry expertise in this vertical? If they were previously unsuccessful, how is this different than last time around? What’d they learn?

3. Key performance indicators

We want to make sure entrepreneurs understand what will tank their business vs. what will propel its growth. Do they know the levers that control these indicators?

4.  Presentation and understanding of metrics

Be honest about the successes and the struggles you’re facing. Pay attention to the notion of vanity metrics vs. actionable metrics. For instance, short-term revenue or user spikes don’t matter if they’re just paid for and unsustainable. Usually, sophisticated investors will be able to see through this. We look for virality and engagement of users more than just existence of users. Your best asset is a loyal and a highly engaged customer base.

That’s it for now, subscribe in the footer and look out for Part 2 on the quantifiable metrics we look to track.

–Arteen

1. Act in your portfolio company’s best interests

As investors, we often come across companies whose products or services we would personally use. We get excited at the thought of obtaining them for free or at discounted prices if we choose to invest in the company. From requesting free lifetime subscriptions to skipping waitlists to get the latest products, I’ve seen investors request for anything and everything under the sun — and even to go as far as to include it in contracts.

My take on this is simple: company and customers come first before investors.

I have also noticed that some investors lobby for advisory shares before they are willing to become board members or investors in the company. Entrepreneurs, beware. The investment community frowns upon creating separate classes of investors where some benefit more than the rest do.

Your best supporters are the ones who share your vision, and not just because they are getting special treatment on the side. It needs to be in fair balance.

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