The bad things keep sticking around and irritating us, whereas the good things are quickly taken for granted. The bad things are often easy to describe, whereas the good things are sometimes just the absence of a bad thing — the absence of some irritation.

This is a fundamental asymmetry, and it has lots of implications, big and small. For example, a big implication is the development of human society and technology. Because we are more prone to noticing bad things, and bad things keep bugging us, we try to fix bad things and make them go away. So humans invented tools (to stop hurting their fingers), agriculture (to stop hunger and laborious hunting/gathering), medicine (to stop their family members from dying), writing (to stop forgetfulness) and the internet (to stop the slowness of paper communication). Over history, humans have continuously taken stuff that is bad, and tried to make it better. Now that we have all these good things (tools, agriculture, medicine, writing, internet), we mostly take them for granted and don’t think about them any more.

(Some things that humans invented turned out to have bad side-effects besides their intended good effect. Take weapons as an example: intended to stop the hungry neighbours from stealing our food, but the idea got taken a bit too far. But that’s a different story.)

There are also other, less grandiose consequences of bad things being more noticeable. For example, when I was writing music and song lyrics, I found it comparatively easy to write about themes like conflict, struggle and sadness; writing about good things, however, was much harder. It would often just sound trite, banal and uninteresting.

How do you articulate those things that are good? Part of the point of this very essay is to see if I can write about things being good without just being incredibly boring. And what do I do? Complain about the fact that it’s hard to express things that are good. I complain. I am irritated that bad things are easier to write about than good things. And so I write about that irritation, thereby locking myself in a self-referential loop.

How annoying. Let’s talk about the good things again.

An observation. If bad things are much more noticeable than good things, that means that it’s very easy to lose sight of all the good things. In fact, it probably means that we are surrounded by lots of wonderful things that we’ve simply forgotten about. It might even be that the vast majority of things around us are good, and we are just failing to notice them!

We need to consciously remind ourselves of the good things from time to time, to avoid getting too bogged down in the bad things. That cannot mean getting complacent; it just means enjoying and appreciating life.

For example, I am writing this essay on a mobile phone (good) connected to the internet (good) while sitting in the sunshine (good) in a park (good) in San Francisco (good). I am wearing comfortable clothes (good) and don’t have any stones in my shoes (good). I live in a peaceful age (good) in a peaceful society (good). I am educated (good), healthy (good), don’t need to worry about being able to afford the rent (good) and I have a wonderful family (good). I look forward to sending this essay to Rita (good) to see what she thinks. (Hopefully it’s not too bad.)

But actually, if explained properly, most of the legal and financial stuff isn’t that complicated. The legal documents do a terrible job of explaining, because they define everything in legalese prose. Graphs make it much clearer, as Leo Dirac has shown in his wonderful graphical explanation of liquidation preferences. You should go and look at that presentation.

I’d like to explain a different financial concept, namely the valuation cap on convertible notes. It took me several hours to get my head around it, so I’d like to save you those hours.

The pros and cons of convertible notes

I assume you know what a convertible note (aka convertible loan) is: instead of buying shares in your startup, the investor just gives you the money on a loan with some nominal interest rate. And you promise that when you raise your next round of funding, the loan converts into shares as if they had put that money in during that second round. Since the investor took additional risk by backing you early, they get a discounted share price (they get more shares than someone who puts in the same amount of money in the second round), and that discount is fixed and agreed upon beforehand. It’s typically between about 15% and 30%.

The good thing about convertible notes is that they require less paperwork (and are thus faster to get done), and — in theory — don’t require you to set a valuation, because the share price will be determined in the next round. However, many investors don’t like them. If the company is really successful (as everybody hopes it will be) and the valuation in the next round is high, then the investors don’t get any of that increase in value — they just get their fixed discount, and that’s it.

With some big-name investors, the company’s value goes up simply by being associated with the big name. Naturally, the investor will also want to benefit from that increase in value, because otherwise there’s not much incentive for them to help.

Enter the valuation cap, which appears to now be a standard term of convertible notes, in Silicon Valley at least. The cap is the convertible note investor basically saying: “If things go ok, I’m happy with my fixed 20% discount. But if you do really well, I want us to treat it as if I had bought shares in the first place.” (That way they benefit more from the success.)

So you went for a convertible note hoping that you wouldn’t have to set a valuation for your startup. Well, with the valuation cap you don’t strictly have a valuation, but you do have a range of valuations: the company is certainly not worth less than X, and not worth more than Y.

In effect, someone has now got to decide on a valuation, which is a notoriously unscientific thing. How do you come up with reasonable numbers? You need to somehow build an intuition for what this stuff means.

How to determine your valuation cap

The best way to think about it is to start with some guesswork numbers, consider a range of different scenarios, and work out the consequences. Then you can decide which consequences are unacceptable, and work backwards.

Let’s work through an example. Say you’re a small startup team raising your first seed round, and you expect to raise a Series A from VCs sometime in future. Your input variables are:

• the amount you’re raising on the convertible note (say $500k),
• the conversion discount of the note (say 20%),
• the pre-money valuation cap of the note (say $4m),
• the percentage of your company which the VCs will take in your Series A (say 30%),
• the amount of money you expect to raise in your Series A (say somewhere between $1m and $5m).

There are a few other parameters (like the interest rate on the loan, and the time between the seed round and the series A), but they ought to have only a minor impact.

The biggest unknown here is the amount you’ll want to raise in your Series A, so let’s look at a range of scenarios for that value, and take the other variables to be fixed.

There are two consequences of the numbers which are useful to think about:

1. What share of the company do the convertible note investors own after the Series A?

We assumed above that after the Series A, the Series A investors own 30% of the company. But how much do the seed investors own after converting their note into shares?

Without the valuation cap, the seed investors end up with an ever diminishing share of the company as the valuation increases. The effect of the cap is that the convertible note investors are guaranteed a certain share of the company, even if you get a Foursquare valuation.

That minimum share is: (1 – [series A investor ownership] ) * [amount raised on conv note] / [valuation cap]. (The first factor takes into account the Series A dilution.) In this example, the note will convert into a minimum of (1-0.3) * $0.5m / $4m = 8.75% of the company’s shares.

2. What effective discount are the convertible note investors getting relative to the Series A investors?

If you didn’t have a cap, you would simply give a fixed (say 20%) discount when the note converts into shares. But when you have a cap, and your Series A valuation hits the cap, you’re fixing the price for the early investors, while the incoming Series A investors might be paying a lot more per share. So you are effectively giving a greater than 20% discount in that case.

I find this graph interesting, because it’s basically a measure of “how annoyed the VCs are going to be about the convertible note”. — Imagine you’re at the theatre, and you know that for the same ticket you paid 2 or even 3 times as much as the guy sitting next to you. You would not be happy, because it just doesn’t feel fair. If your valuation goes substantially above the cap, there can be a big difference in share price.

Of course, if your startup is awesome and investors are desperate to be part of your round, this probably won’t be an issue. And of course, maybe such a large discount is entirely fair if your Angel investors add a lot of value beyond the money they put in. But it’s a factor to keep in mind. At least with a graph like this you can start thinking about your numbers usefully.

Postscript

None of this gives you an immediate answer to the question “what should we write on our convertible note term sheet?”, but at least you should now be able to think about valuation caps from a few different angles.

Disclaimer: neither am I a lawyer nor do I have much experience with this stuff, so my explanation may be horribly flawed or simply wrong. (If you find a mistake, please let me know.)

You can download the Excel spreadsheet which I used to generate these graphs. An interesting alternative way of looking at this would be to assume a fixed Series A amount, and instead work out what happens when you vary the valuation cap. I’ll leave that as an exercise for you, dear reader.

Incidentally, our awesome startup, Rapportive, is raising a seed round at the moment. It’s filling up quickly, so please get in touch soon if you may be interested. The terms may have certain similarities with my example here, or they may not — I couldn’t say. ;-)

Update (11 June 2010): Packed the Excel spreadsheet in a ZIP file to fix download problems.

He could recognise me because we had exchanged emails, and he had therefore seen my photo in Rapportive next to my email.

This is our social future. We’re busy creating it.

This particular story begins about a year ago. I had just finished a few web development contracts, and had started to build my automated web testing tool, Go Test It. At the time I thought Go Test It was going to be a small, simple product which would take a few months to build and then mostly look after itself. (In retrospect: Hahaha!) I wasn’t sure where it was going to go, but I wanted to keep my options open, so I also applied to do a PhD in Cambridge.

I had to propose a PhD topic, and I made up something ad-hoc. I realised that most interesting things are created by individuals, not organisations, and that the reputation and personal network of those individual people is key. And I saw a problem: most things happen online, but fragmented across lots of different websites (including private databases such as CRM systems), so the information is barely useful. I wanted to pull this together and analyse it; I saw this as a route to learning more effectively, by using my network of professional contacts.

To make it sound more academic and less startuppy, I padded the PhD proposal with a bit of blah-blah about machine learning, natural language processing, citation analysis and social graph analysis. But of course my plan was to turn it into a startup eventually. I got my place in Cambridge, got the research funding, moved back into college — then realised that doing Go Test It and a PhD at the same time was madness, changed my mind, and withdrew from the PhD just a week after I had started. Oh well, interesting experience. I hope I didn’t waste too many people’s time.

Around that time I was talking to Red Gate, who were interested in acquiring Go Test It, and we closed that deal in November 2009. The plan was that I would stay there for 10 months to hand it over and get it standing on its own feet. We embarked on a big customer development push to figure out who our customers really were and what they really wanted, and we learnt a lot. It was good.

Rapportive comes into being

Other things were happening around that time. My friends Rahul and Sam were interested in doing a new startup, having worked together at mo.jo before. I had talked to them about my ideas, originally intended for the PhD, of “fixing CRM” by integrating it with social data, and we started thinking about turning it into a startup sooner rather than later.

Rahul came up with some user interface ideas and started coding them up in January; Sam joined in and engineered the backend. Our plan was that I would stay full-time on Go Test It, and fund the other two from my earn-out until October 2010, which is when Go Test It was to be fully handed over to Red Gate. Then I would join them full-time on the new startup. It sounded like a good plan.

Rahul and Sam put together a prototype of Rapportive in a few weeks; we showed it to a few people and they seemed to like it. We put up a simple one-page website, with a few pictures and an install button, so that we had something we could show to potential investors. It wasn’t much. We hadn’t even written a privacy policy because we were expecting it to only go out to a small number of people.

And then… OMGWTFBBQ

What happened then was a tweet by our friend Pete to Zee of The Next Web. I had never imagined that a single tweet could be so powerful. Zee loved what he saw and wrote it up immediately. Within a day we also had rave write-ups on ReadWriteWeb (“stop what you are doing and install this plug-in!”), then Lifehacker and WebWorkerDaily and dozens of smaller blogs and news sites… thousands of people raving about us on Twitter… and within that day, over 10,000 users signed up.

10,000 users in one day. That’s like a fairly large stadium full of people using our software. I had never worked on anything with more than a couple of hundred users before. It’s hard to describe how that felt.

We were doing nothing but frantically commenting on blog posts, replying to tweets, emails and Skype contacts, and scaling up our servers. Thank goodness for Heroku, which made the scaling incredibly easy. We had a few periods of slowness and had to temporarily disable some features, but we never went down. Our servers were continuously handling over 20 requests per second, but we were taking care of our users and giving individual responses to everyone who needed one.

We got a tremendous amount of love from our users, both for the product and for responding swiftly and helpfully to any queries. The vast majority of people who originally signed up are continuing to use it now, and new people are signing up every day.

All of a sudden, our time is incredibly precious. We want to continue to develop Rapportive quickly and continue making something which people really want. We are moving at a very rapid pace, because every day, we have the opportunity to make tens of thousands of people happy.

So… what about Go Test It?

This success, great as it was, put me in a difficult situation. I was still full-time on Go Test It, and we were just ramping up development to build several big, important features which our customers really wanted. And at the same time, Rapportive needed me more every day.

We had always been very open with the directors of Red Gate as to what was was going on with Rapportive, and so we discussed what we should do. Eventually we decided that Rapportive needed me most, and Go Test It wasn’t yet ready to stand on its own feet, so we would shut Go Test It down gracefully.

It was a very hard decision, probably one of the hardest I have yet had to make. Red Gate, I and all the others who had worked on it had put a lot of time, effort and money into Go Test It. I was also emotionally invested; after all, this was my first own product. But the opportunity offered by Rapportive was just so disproportionately huge. Killing Go Test It quickly and painlessly was the right decision.

Fortunately the damage was quite limited. Only a small number of customers were using Go Test It regularly, and we found alternative solutions for them. We had a vesting schedule, so the majority of the money from the acquisition went back to Red Gate. There were a few other people working on the project too; they had to find new things to work on, but they are all very talented so it’s not difficult for them to find work. And most importantly, for me at least: I managed to stay friends with everybody involved. So I think we achieved a good outcome overall.

Onwards and upwards

So here we go: I’m now a full-time co-founder at Rapportive, and together the three of us are going full steam ahead. We have tens of thousands of people who love what we are doing. We have investors knocking on our door. And we have bucketloads of plans and bright ideas combined with the energy and passion to make them happen.

Life never moves in straight lines; it is full of unexpected surprises. But hey, most surprises turn out to be good ones if you make the most of them. And that’s what we’re doing right now.

We’re in San Francisco and the Bay Area from now until mid-April, so if you’d like to meet us in person, please drop me a note — we’d love to hear from you!

Although there’s still a long way to go, we have learnt a lot, and we are getting a much clearer idea of where we need to go in future. And I feel that I am developing another startup skill which will no doubt be valuable in future.

I will be writing about our customer discovery process and things we have learnt in a series of blog posts on the Go Test It blog. A slightly provocative teaser from my first post of the series:

A startup’s purpose is not to make money (at least not initially). Nor is its purpose to build a product (although it won’t go far without a product). No, the real reason why a startup exists is to learn about potential customers and to define a market.

Start reading the new series on the Go Test It blog, subscribe to the Go Test It RSS feed and follow me on Twitter to keep track of new posts.

I’m sure much has been written about this already, but I’ve not really read any of it. Instead I made up some principles based on my own bit of experience and a bit of common sense, and maybe you will find them useful.

So let’s take a look at a negotiation from the point of view of the seller. When you’re selling something, you want to charge as much as you can get away with. The higher the price, the better for you, i.e. the higher the monetary benefit of the sale to you.

The first bit of money makes a big difference — maybe you really need it so that you can pay the rent, otherwise you’ll get kicked out of your house. Within this range, having more money is clearly a lot more valuable for you. However, as the amounts increase and you have secured an acceptable standard of living, I would argue that the benefit of the money to you slows down. Frankly, a top-paid investment banker would barely notice the difference if their salary or bonus was increased or decreased by 50%.

But nevertheless, although it gradually flattens a bit, the line is always increasing. If you can get more out of a deal, it’s a better deal. At first glance anyway.

However, that’s not the end of the story. When I am negotiating with someone, this is usually someone I actually want to work with, and I want to stay friends with them. You don’t want to charge so much that they will simply walk away. And if you’re in a strong position where the buyer doesn’t have much choice (eg. because it’s something urgent and they don’t have time to find someone else), you don’t want to abuse your position, as otherwise you will get a bad reputation as someone who takes advantage of others.

Therefore, you should be taking your relationship with the buyer into account. How indignant they will be about your price will depend on a lot of factors (the market value of what you have to offer, how much you charged them previously, how much they can afford, etc). But in general there will be some sort of function describing how happy they are depending on the price (BogoGraph alert!):

Here I plotted in blue the buyer’s “goodwill” (not in any financial sense, just in the sense of “how much they like you”). If you charge too much, they will obviously hate you, so the graph goes downhill very rapidly beyond a certain point. You probably don’t want to go there. I think it is also possible to charge too little, which conveys the message that what you have is not particularly good and not worth very much; but that won’t offend your buyer nearly as much as overcharging them. So I’d say that the graph first goes up a little bit, and then goes down a lot.

How do you figure out the shape of that curve for your buyer? That’s hard. You need to get a few data points, for example you might try asking them for a pretty high price and observing how upset they get. But you’ve got to be very careful — don’t abuse their trust and don’t waste their time. The longer you spend trying to measure the blue curve, the lower it gets overall (i.e. the more irritated they get with you). It’s better if you can use external things as reference points — how much an alternative solution would cost them, how much they have paid for comparable things in the past, the size of their budget (which they probably won’t tell you but you might be able to guess indirectly).

The value you get out of making the sale is twofold: on the one side the money you get out of it, and on the other side the buyer’s goodwill (with all of its intangible benefits, such as keeping open potential future deals, recommendations, referrals, general happiness and warm fuzzy feelings). You want both, so let’s just add the two curves together:

The red line is simply the sum of the blue and the black, and represents the total value you’re getting out of the sale. Some things to observe:

1. There is a very clear maximum for the total value. This is what you should be aiming at.
2. The price at which the seller’s value is maximised is always higher than the ideal price for the buyer (i.e. the red line’s maximum is further to the right than the blue line’s maximum). Of course the buyer would prefer to pay less — if that is not the case, you’re definitely charging too little.
3. The blue graph is like quantum mechanics: it changes when you measure it. Keep your negotiations short, simple and clear. Don’t keep changing your mind, because that just reduces goodwill and thus the total value. Keep in mind that the whole point of this exercise is to stay friends!
4. The optimal price depends on your weighting of blue curve vs. black curve — the less you care about the buyer’s goodwill, the higher the optimal price.
5. Even if you are playing hard-nosed, it’s a game of diminishing returns. By pushing harder you will get a bit more money, but the buyer will also get a lot more indignant. The harder you push, the smaller your marginal gains.

This brings us to an interesting concept: you can trade in buyer’s goodwill for more money by adjusting how much you care about how the other party feels. There is a return on the indignation of the other party, and it’s up to you to choose what you want this return to be.

It depends on your character and on the strategic value of the particular deal. I generally work with quite a low return on indignation, i.e. I value goodwill quite highly and won’t readily trade it for a bit more money. That’s because:

1. I don’t find it fun to be hard-nosed, so I’ll much rather be nice (assuming the other party is also nice), and
2. I think in terms of long-term value, and I believe that goodwill stays around for a long time, so I’ll much rather invest in building good long-term relationships than try to extract the maximum monetary value in the short term.

That’s my approach, and I’m sure others will think differently. But at least, with a framework like this, you can be conscious about your return on indignation.

By the way, if you’re into pricing products which are not individually negotiated — quite a different topic — you should definitely read Don’t just roll the dice by Neil Davidson.

Over Christmas I finally had time to read The Four Steps to the Epiphany by Steve Blank. I had heard from a few people that it was the best book in the world for startups, but of course you take that sort of recommendation with a grain of salt. When I finally got round to ordering it, my first impression was not very impressed. The graphics are misaligned, the typography is ugly, there are plenty of typos, the cover picture is cheesy, the CafePress binding is flimsy. All in all, not a good start.

Well, don’t judge this book by its cover. Despite those apparent flaws, it is absolutely brilliant. And yes, if you have any sort of startup ambitions, you should go out and read it immediately.

In fact, maybe the book is deliberately ‘unprofessional’, because that would be consistent with a theme which runs through the entire book: focus relentlessly on what really matters and what really adds value. What really matters to me with Steve Blank’s book is purely its content (which is clearly articulated and deeply insightful); professional design or editing wouldn’t have changed this book’s value to me. Similarly, what really matters with a startup is to discover and learn what customers need, how the product fits into their lives, and how you are going to get it into their hands. ‘Professionally’ executing a strategy comes later. First you’ve got to learn and discover what the strategy is going to be.

This sounds trivially obvious, but it is not.

Let me digress for a minute. Something else I read recently is The Fable of the User-Centred Designer by David Travis (a short but beautifully written eBook — well worth reading but quite different from the Four Steps to the Epiphany). It made me realise how badly we had gone wrong with Go Test It. Steve Blank’s book further strengthened that feeling. Ok, we built a product which works alright. We did a few informal usability tests (looking over people’s shoulder while they use it for the first time) and we got some useful feedback from the beta tests. And clearly the result was promising enough that Red Gate wanted to acquire it.

Here is my confession: I cannot truthfully say that we really engaged customers in the process. I had some ideas about use cases and I did a few pencil sketches of the user interface before it was implemented. But did I actually go out to potential customers and test my ideas on them? Not a single bit! We thought about the ideas for a few minutes by ourselves, nodded our heads, and then just went ahead and hacked it together.

I have no excuse whatsoever for ignoring our customers like I did. Hell, we even had a poster from the Usability Professionals’ Association hanging in our office for a while, detailing the steps of a user-centred design process. (Some years ago I thought our company was going to be a usability consultancy — that was before we got into web development and ultimately into building Go Test It. Hahaha! By the way, that’s why this blog is called Yes/No/Cancel.) And nevertheless I totally ignored it. We were not doing anything like user-centred design, let alone Customer Development as proposed by Steve Blank, which is a lot further-reaching.

The only thing which saved us was that I was basically building a product to solve my own problem. I had worked on a big, JavaScript-intensive web app project, and had felt the pain of getting it to work in different versions of IE. So I had an idea of the kind of tool I had wanted to make that project less painful.

So: building something which scratches your own itch is better than building something which you don’t even need yourself. But it’s still a pretty bad starting point, because you are only one data point. How do you know that you’re not an outlier? In our case, I was even a pretty bad data point. I had only worked on two significant commercial web app projects — not exactly a great deal of experience. I had never worked in a proper web agency, or a larger software company, or an established e-commerce retailer, or in fact any company which looked remotely like the type of company we’re trying to sign up as customers.

What we should have done — and I understand this now — is to follow a Customer Development route from the start, alongside building our product. Before the coding started, I should have at least made my hypotheses explicit, tested them on my target market, and refined the product idea. Basically, I should have read The Four Steps to the Epiphany a year ago and then followed it.

In my defence, it’s difficult when you are a sole founder. In principle you could multitask between Customer Development and Product Development, but I think the two activities require very different mindsets, and the context switching overhead between the activities is huge. Therefore I suspect that a sole founder doing both will take much more than twice as long compared to two cofounders who specialise in Customer Development and Product Development respectively. Hence it’s extremely tempting for a technical founder like me to pretend that the Customer Development side doesn’t exist, and focus exclusively on the product.

Well, late insight is better than never. Amir is joining me on the Customer Development side of Go Test It, and we have a lot of catching-up to do. In 2010 there will be soul-searching and maybe some changes of plans, but I am really looking forward to it, because I am confident that we can figure out how to turn Go Test It from something ok into a product which you simply must have.

Today we announced that we are selling our startup to Red Gate. Investors refer to this as an exit: at this point they typically sell their shares, so they get the money back which they invested some time before — or rather, they are supposed to get quite a bit more money back. I had one investor, Peter Cowley, and in total, he got more than 15 times his money back within 2.5 years: that’s a hell of a lot better than if he had stuck it in a savings account!

A few exits are huge (think Google buying YouTube), many are medium-sized, and many are small. This is one of the small ones: although I’m getting some money out of it, it’s certainly not making me rich. However, I am very happy with it: the hard work of the last few years is paying off.

For the founder (that’s me), it’s not really an exit: I have to and want to continue working hard on Go Test It for another year or so. As Simon from Red Gate put it, they need me to continue making the product better, and they need time to get everything out of my head and into someone else’s head. (Do they really want everything out of my head? Even those childhood memories of listening to the Queen cassette? Well, if they want them, they can have them.)

Anyway, the reason I started this post with a bout of nostalgia is that this is pretty much how I feel today. It’s like a 10-year-old proudly playing back his first attempt at making spooky ghost noises on a cassette recorder. He knows that it’s not perfect, and that his work will change the world only a tiny little bit, but he learnt a lot, and right now, it feels like the greatest success and the most important thing in the world.

The aspect of learning is probably the most important one for me. I learnt an incredible amount by starting a company and taking it to exit, and I expect to learn a lot more over the coming year: how to take a product from “it works pretty well” to “it is absolutely amazing”; how to work with more than the bare minimum resources I have been used to; how to scale the business, attracting and retaining lots of happy customers.

That name “My first Sony” is evocative: it is oriented towards the future. The “first” implies that there will be a “second” and a “third”; of course they want you to buy many more Sonies during the rest of your life. But not only that: the “first” of something signifies a turn of events. From now on you are sonified. Before its first Sony, the child could only store sounds in its head; from now on, it can record them on cassette. Before, it could only listen to music and audiobooks when the parents gave permission to use the hi-fi; from now on, all available cassettes can be listened to at any time. Even secretly under the blankets.

My first exit is a bit like that: it also is oriented towards the future. I can’t predict what the future will bring, but evidence suggests that entrepreneurs tend not to be satisfied with just one successful startup, but want to try it again and again. But even if I do start another company, and even if I do have another exit, there will always be something special about that first one. The one which proved that I can do it.

Of course, saying that I built this company is about as true as saying that Vespasian built the Colosseum. I bet he didn’t lift a single stone himself. Therefore, at this point – clichéd though it may seem, I mean this very genuinely and sincerely – all I want to say is a huge round of thanks to everyone who has helped me along this journey. None of this would have been possible without you. Thank you to:

• Simon and Neil, joint CEOs of Red Gate: you have built a company with a fantastic culture and great people, and I respect you deeply.
• Peter, my mentor, advisor, investor and friend;
• Conrad, Sam, James and David, who helped build it;
• Rahul, who helped evangelise it;
• Patrick, who came up with the name;
• all the open source projects which are the foundation of our work, particularly Selenium, Windmill, Ruby, Rails and Scala – we will show our gratitude by contributing as much as possible back to the community;
• the Accidentals and the Springboarders, who form such a supportive startup community;
• our clients, whose business funded much of the development of Go Test It to this point;
• all the Go Test It trial and beta users, for your valuable feedback;
• everyone who has supported, encouraged and inspired us;
• my friends, for bearing with my obsessive-compulsive attitude to work;
• my family, because no mountaineer can reach the top without a solid base camp;
• Rita, for your endless supply of smiles.

…

Ok, well, that was nice and romantic. Anyway – let’s get back to changing the world!

The interview is for the Startup Success Podcast, a series of shows providing a wealth of useful information and inspiration for startups. In this episode, Patrick Foley talks about his visit to the Microsoft Professional Developers Conference (PDC), and I talk about Go Test It – what it is, how it works, why we built it, where it is going in future. There’s even a special discount in there! :)

Head over now to the Startup Success Podcast and listen to the episode! (The interview with me starts at about 15 minutes in.)

Ok, the elevator pitch is pretty straightforward: Go Test It helps web developers to test automatically whether their site works correctly in different browsers. The technology works well and lots of people are using it successfully.

But how much does that really tell us? Is it really the web developers who need us, or should we aim at the testers, the user experience managers, the web content administrators, or the sysadmins? Are those people in big enterprises, small web consultancies or are they freelancers? Do they use PHP, Ruby on Rails or ASP.NET, and which JavaScript framework to they use? Do they have a dedicated QA team or do the developers do the testing themselves? Does their work have to be signed off by a client or are they doing it for themselves? How do they currently test their application, and how would we fit into their workflow? Do they develop websites for a particular industry, e.g. education, finance or healthcare? Do they need a big consultancy contract, do they require the product to be customised, or do they just want a straightforward self-service sign-up over the web?

It is simply not possible to serve all different market segments and niches at the same time. You’ve got to choose: resources are limited, and you’ve got to pick your battles wisely. But I am guilty of not properly thinking through the segmentation and figuring out the best way of targeting a particular niche.

For the Business of Software 2009, Joel Spolsky organised three startup workshops aimed at covering the main areas of difficulty faced by software and web startups: marketing, product pricing, and finding your first 100 customers. Exactly those areas in which I am guilty of negligence.

Neil Davidson and Simon Galbraith of Red Gate were in charge of the “finding your first customers” workshop, and they asked me to help them design the workshop. Since my startup is one of the companies in Red Gate’s “accidental incubator”, and it’s at the stage of finding the first 100 paying customers right now, Neil and Simon suggested that we use Go Test It as a case study for the workshop.

What we wanted to do is to ask a number of key questions about the market positioning of a product and aspects of the sales process — crucial questions for startup founders, but also questions which are easy to ignore if you focus too much on the technology. By discussing a case study in the workshop, the participants could practise thinking about and answering these questions in a fresh and unfamiliar context, and develop tools and techniques which they can apply in their own companies. We chose questions that are relevant to any early-stage B2B software company.

The workshops worked out really well, and so we would like to release the materials we created for this workshop under a Creative Commons license and make them available to startups everywhere. You can download the worksheet (PDF). I have also written up how we structured the workshop and what we learnt in the process.

Below I have added some notes to clarify what we mean with each of the questions. I give several illustrative answers for each, but please remember that they are not multiple-choice questions. The whole point of the exercise is that you come up with your own answers!

1. Sales objective: what are you hoping to get out of your customers?

   At first sight this seems a pointless question: of course you want your customers’ money! However, think about it a bit harder. Maybe getting some great case studies and testimonials is worth even more than the money, because they will help attract more of the right sort of customers. Maybe you really want feedback to help improve the product (feedback from paying customers is worth much more than feedback from free-riding users, because paying customers really care!), or maybe you want to learn about the sales process — what does your customer’s org chart look like, what are their key external relationships, and who are the key people you need to get onto your side? The things you can learn from a customer are potentially worth a lot more than the cash they hand over to you.

2. What is the pain point addressed by the product?

   A standard question, but worth revisiting from time to time, because the answer may not be as obvious as you think. In the case of Go Test It, the obvious answer is “needing to make sure that the site works in all browsers”. But ask yourself: why does it need to work in all browsers? To provide a good experience to all users, so that they continue using your site even if they are using an obscure or buggy browser? Or maybe it’s a matter of meeting a compatibility warranty given to a client, or passing certain acceptance tests? Is it a tool for people to cover their back within their organisation?

   Or maybe the customers currently do manual cross-browser testing, and their real pain point is actually the release cycle duration (very slow in manual testing), or the staff requirement (manual testing is too expensive), or staff motivation and turnover (manual testing is repetitive and boring, leading to low job satisfaction)?

3. What is the sales process?

   Startups often worry a lot about marketing (figuring out who to target and how to get on their radar), but neglect the following step: now that you’ve got people’s interest, how do you convert them into paying customers? Giving them a form to enter their credit card number is well and good, but what about people who trial the product but never quite get round to signing up to the paid version? Will some follow-up emails be sufficient, or do you need telesales people to get on the phone and talk to the customers? Do the customers require help importing their data into the system or even an integration project? Maybe you need to give demos or seminars at customers’ premises, or even learn to play golf?

4. What do you want your marketing to achieve, and how could you measure it?

   Your end goal is probably “get lots of paying customers”, but there are various possible intermediate goals along the way. Depending on your strategy, different things may be important. Do you want to maximise the number of free trials to which people sign up, or the number of newsletter signups, the number of Twitter followers or community members? Or would you rather focus on a small number of customers and optimise for high-quality leads and maximise level of usage? Do you want to go “viral” and maximise the number of referrals from each customer while minimising the time to referral?

   Intangible but maybe equally important aspects of marketing might be promoting a positive brand image, building a good reputation, and encouraging users to become passionate evangelists for the product. You might still try to measure these kinds of things by monitoring Twitter for keywords and informal surveys, but they are difficult to measure quantitatively. Whatever you want your marketing to achieve, remember that your resources are limited, and hence you should probably focus on two or three achievable and measurable goals.

5. What will you do to achieve your marketing goals?

   This is a question about marketing channels: how are you going to get noticed? Social media and online communities, comprising blogs, Twitter, LinkedIn, Facebook etc. are probably the most hyped these days, and for some market segments they are indeed an excellent marketing channel. But you could also consider networking in the right circles, PR (including connecting with influential bloggers and getting them to write about you), attending conferences and trade shows, creating publicity stunts, competitions and much more. Hey, even advertising isn’t dead yet.

6. How will you allocate money and time over the next 3 months?

   This does not have to be a detailed budget, but a quick sketch of a pie chart will help you to think consciously about your priorities and make them actionable. How much of your resources should be allocated to engineering, sales activities, various marketing channels, learning from customers, etc.?

7. How will you price the product?

   It’s easy for engineers like me to spend a lot of time thinking about pricing, because it’s more within our engineering comfort zone than most of the other questions on this worksheet. Yes, it’s important (that’s why we included it), but only in conjunction with the other answers. This is our only multiple-choice question, encouraging you to answer it quickly and move on.

   Do you want to publish the pricing on the website for everybody to see, or do you want prospective customers to contact you for a quote? Will you have a fixed price list, or will you negotiate pricing individually per customer? And the most tricky: if you can’t do flat-rate pricing, how will you split pricing into bands? By number of users? By length of tests? By level of usage? By availability of features?

8. What will you change about the product?

   Once you have settled on a particular market segment and strategy, certain limitations in the product will become apparent: maybe some additional features are needed, maybe the technology needs to be presented differently in order to fit with the users’ point of view, maybe some unnecessary features can be removed. The important point is that product changes should be informed by the market, not just a preconception of what users will want.

9. Top 3 things you must do in the next 3 months?

   This could be anything: marketing, sales or engineering activities. The key is just that these tasks must be actionable: it must be clear how they can be done and they must be feasible now. “Build a community of 1,000 people working in this field” is not actionable, but “set up a Facebook page, blog about it and invite all of our friends to it” is.

10. If your users are superheroes, what is written on their T-shirts?

    As a final question, remember that users are human beings too. They don’t particularly care about your product as such, but they probably care about things like doing a good job, looking good with their peers or boss, having a sense of belonging, getting to go home early, and making a difference. Your product should turn your users into superheroes: give them exceptional powers which make them proud! So proud that they will want to wear your product motto on their T-shirt. What will it say? (Hat tip to Kathy Sierra, inspiration for this question.)

If you can answer all of those, you will have covered a lot of ground and will have a pretty good idea of how your product fits into a particular market segment. And in case that wasn’t enough, here are three bonus questions from our drafts which didn’t make it into our final worksheet:

11. Which key factors determine whether a potential customer will convert?

    This question complements the sales process (question 3 above). If the sales process is about the actions you can take to convert interested people into paying customers, then this is about setting the right environment for conversions. What do customers care about? Is it the ease of integration with their workflow, the user experience, the amount of learning required, the level of support, references from other customers, key features, integration with systems they already use, reassurance that your company is not going to disappear overnight, or anything else?

12. What underlying need is satisfied by the product?

    We have already talked about the pain point above (question 2), which defines why there is a need for your product. However it can be insightful to look behind the pain point and figure out why it exists: the “need behind the need” in the words of Paul Kenny. When a customer buys this product, are they really buying reassurance (security, peace of mind, covering their back)? Or are they buying ego (competitive advantage, ability to overcome difficult problems)? Are they interested in convenience (making their life easier), saving money or reducing risk? This underlying need should determine the light in which you present your product and how you pitch it.

13. What would you consider to be success, and how would you decide whether to abandon the project?

    This is an interesting one: not many people talk about criteria for success and failure. Usually success is unbounded — you always feel like you could do better, no matter how well you are doing. And failure is something that is not talked about, as if merely contemplating it would bring about a jinx or induce an unwanted pessimistic vibe. However, if you have a quantitative criterion for deciding when to cut your losses, you avoid giving up too early just because you’re feeling down.

With all these questions, keep a few principles in mind:

• Resources are limited, so you should focus on the things which are likely to be most useful.
• “Just try it out” and “talk to our users” should be part of any strategy, but they are not strategies in themselves. You’ve got to know what you are looking for and what questions to ask the customer.
• Argue why the actions you chose are the most appropriate, given the product, the market and any constraints.

Download the worksheet (PDF) and an example we filled in (a contrived example based on the fast food industry — not model answers, just to illustrate the kind of answers we’re looking for). Please also see my separate post on how we ran the workshop.

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Photo credit: John of Austin on Flickr; Creative Commons license.

Update (2009-12-18): Added scanned example worksheet.