Five things a VC wants you to know about network effects


Monthly Archives: November 2016

Five things a VC wants you to know about network effects

This is why the DMZ recently jump started its monthly investor series, Capital Catalyst, to help entrepreneurs maneuver through the current fundraising environment. Our first official session was on network effects. Often underutilized or not carefully executed, network effects are a key component in what venture capitalists look for when considering whether to invest.

It’s important for entrepreneurs to fully grasp what network effects are and how to gain them positively, especially from an investor’s standpoint. Network effects are straight forward: increases in usage lead to direct increases in value. And although it may seem like an obvious component in developing a successful company, many entrepreneurs are missing some key details.

This is why we invited Angela Kingyens and Boris Wertz from Version One Ventures -a $35 million fund that backs startups across North America- to break down the layered concept of network effects, how to best utilize them to grow a business and more. We’ve broken down the top five takeaways from the session:

    1. Have a strong founding team According to Version One, it’s the combination of domain expertise, talentand passion that makes a strong founding team. As a founder, you need to have the knowledge and experience within the market you’re tackling, have the talent to execute those plans efficiently and of course, exhibit the passion and drive to build and scale your company.
    2. Leverage network effects The basic concept behind network effects is that the value of the network increases the more users you gain. As a result, your company is able to build momentum and create shields against new potential entrants into the market, and those larger existing rivals. Companies that sufficiently and positively use network effects to their advantage are what Version One Ventures is looking to invest in According to Version One Ventures, network effects can be unlocked by connecting people and through data at scale. A great example of such effects is Uber: the more drivers they onboard, the more ground they were able to cover, the more pickups they were able to make (simultaneously driving wait times and pricing downwards), leading to faster pickups and increased number of users, which in turn lead to a greater demand for more drivers. As you gain more users and the value of your product/company goes up, you’re then able to build a better market strategy and scale your business in different directions using the data.
    3. Use the bottom-up approach The bottom-up network driven approach targets the user base first, as opposed to the traditional approach that targets the larger clients at the top first. This gives your startup a better understanding of the market, validating your product, as well as giving you leverage when targeting the other side of the equation (the larger companies/clients).
    4. Target a market that people care about Version One highlighted that they’re ultimately seeking companies that are targeting a market in high demand (and relevant). At minimum, this early-stage fund is looking for a startup that has minimum viable product (MVP) with the potential to grow on a global scale.
    5. Solve an important problem in a unique way Last, but definitely not least, Version One (like many other investors) are looking for a startup that is able to stand out from the vast number that flood the tech industry. Therefore, it’s important to provide a one-of-a-kind value proposition and solution.

Innovation in education: Why Canada needs it now more than ever

From small towns to big cities, entrepreneurs all over the world are creating an economic and social impact that continues to improve the livelihood of millions. How so? Small street vendors in Bangladesh are introducing mobile payment and microfinancing into their businesses. Right here in Ontario, we’ve reached our highest level of women entrepreneurs and a much more equal distribution of startup founders across age and income groups.

With entrepreneurship becoming more opportunity-motivated, people around the world are finding ways to create, build and share their innovative ideas. If this is turning into our new normal, are we doing enough to make sure that our youth are equipped with entrepreneurial skills at a post-secondary, high school or even elementary school level that reflect the needs of our modernized job market? A key piece to our future generation’s success is missing from the majority of our K-12 classrooms – entrepreneurial and innovative education. It’s never too early to encourage youth to think with an entrepreneurial mindset. And in order to drive change to the curriculum, it takes key players, from government to school boards to private sector to veteran entrepreneurs to get involved. This is what my next piece in the Huffington Post delves into. Read about it here.

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The four pillars to make sure your startup stays on track

Building a tech company is a pressure filled experience that requires founders and their employees to have a great work ethic, be multi-talented and open to change, all while executing against sound business fundamentals. Often founders look to the billion dollar unicorns for inspirational and guiding examples for what business methodology they should consider following for their company in the hopes of finding a path of least resistance or a proven path to success. In reality, there are a multitude of potential business blueprints that can provide founders with guidance and insights with respect to how they can structure their organization, build their teams or establish their go-to market strategies/

Here are four important attributes that will help startup CEOs and founders establish a strong foundation from which to build their team, their marketplace and their company.

Time management

For tech founders, one aspect of time management that is often overlooked is attending external events (invitations aplenty for entrepreneur meetups, speaking engagements, you name it) whereby there are no strategic initiatives attached to the event that correlate with the corporate goals. Often founders talk themselves into the value proposition by remembering the great connections that were made, the branding/exposure their company received, the wonderful speakers that they heard, or the size of the audience that they had a chance to be a panelist in front of. But it’s important to take the time to properly gauge the value of every event by properly considering the amount of time required to support going (travel, costs, preparation required, total time out of the office, etc.) and what that means from the perspective of lost productivity. Your time is valuable, and you’ll never get back the hours you dedicate to external events – so make them count.

Detailed planning

You have a talented team, or maybe you are the talent. You have the hustle, you’re serious, you dedicate long hours, you have MVP established and you have the personal aptitude to do amazing things. Most companies that are well poised to take the next step in their corporate maturity and revenue growth also have one additional ingredient that they leverage as their secret weapon: a go-to-market plan and strategy. It’s a plan that is succinct, clear in action items, built on (the right) measurable goals and that can be tracked. Everyone at the company knows who’s accountable for which pieces, like who’s going to drive client engagements and secure revenue. The plan helps to set in motion a framework that you can edit, pivot and benchmark success against. Don’t be afraid to build and execute simultaneously. The market doesn’t wait for those who are slow to perform – don’t let others out-execute you or your company.

Measurable goals

Once the plan is created and your team is engaging with clients, driving traction and working towards closing revenue, it’s very important to have structure as it pertains to corporate milestones, goals and objectives. This can help measure success, build team alignment and chart the course for corporate strategy to determine which pivots or tweaks need to be made to your go-to market plan. Information is king and the more you have, the better your measured strategy will be. Your goals should cover a very defined view of being specific, measurable, achievable (debated depending on your level of aggressiveness), relevant to the company and narrowed to a particular time frame from the standpoint of them being yearly, or quarterly or monthly goals. In the view of emerging tech companies, often quarterly goals (broken down monthly) help to produce very focused and ultra aggressive seven day ‘sprints,’ which can be extremely effective for combining planning, execution and measuring achievements within a short period of time.

Alignment of activities

Often overlooked as a strategic pillar within the day-to-day operations of a young tech company because of the ‘hustle’ and busy calendars that everyone has, aligning activities can often be the carbon monoxide of your calendar if you’re not paying attention. Meaning, most organizations equate effectiveness to their levels of activity. The person who makes the most outbound sales calls or who is able to send the most emails is clearly superior to everyone else in terms of speed and aggressiveness. Not so. Activity is nothing without the proper focus and discipline. Often startups CEOs and founders will begin their week with high hopes and big plans, having a functional strategy with goals and milestones in place that has them brimming with confidence. Then Friday afternoon hits and they do a quick review of the mountain of emails, meetings, calls and texts that were reviewed, sent and shared, and ‘the week that was’ ends up as ‘the week that could have been.’ All that activity didn’t align to anything, and unfortunately if there’s one thing that stands out above all the rest, it’s that startups don’t have the luxury of wasting time.

Committing to coast-to-coast innovation

Canada is charting a forward-thinking path; a path that fuels innovation and opens new opportunities for economic growth. And as we continue to grow, our prosperity depends on the progress of not just a couple cities, but every city and town coast-to-coast.

This past summer, I had the opportunity to travel to the east coast’s provinces of New Brunswick, Nova Scotia and Prince Edward Island. During my visit, I witnessed the work of several small, but impressive tech hubs that are fostering innovation – something that the east coast is establishing a reputation for.

A recent Entrevestor report shows that there are almost 400 startups in Atlantic Canada, including the likes of Proposify and Radian6, which was acquired by Salesforce – two examples among many in a vibrant Atlantic Canadian startup community. Because of the growing movement outside of metropolitan areas, our national startup ecosystem is developing, encouraging more diverse forms of innovation and empowering people throughout the country to express their ideas through tech.

As this continues, there is a clear effort from our leaders -in business and in government- to head bold opportunities for economic growth. But there should also be efforts made by tech hubs throughout the country to continue partnering with one another and create mutually beneficial opportunities and help Canadian companies scale.

Incubators like Venn Innovation in Moncton, Planet Hatch in Fredericton, Volta Labs in Halifax and Charlottetown’s new Startup Zone are strengthening the pathway to job creation and economic prosperity in the region. And the DMZ understands that partnering with emerging startup ecosystems like these will allow entrepreneurs to have greater access to national and international markets.

This is why we’re focusing on finding ways to better support the diverse and tight-knit startup sector in regions such as the east coast to continue growing and scaling Canadian companies that think globally, but are headquartered in our cities and regions coast-to-coast. By expanding our existing national effort in creating soft landing opportunities, staff exchanges, strategic knowledge sharing and other initiatives with tech hubs and post-secondary institutions, we’re not only creating strong ties among our national ecosystems, but helping each other become active producers of technological innovation that have a social or economic impact at home and abroad.

Canada has all the ingredients to be a global leader, which includes the talent, leading post secondary institutions and an incredibly supportive community. Our way forward relies on diversifying our efforts to support future generations of innovators in all provinces and territories. When this becomes a key component on a national scale, we will continue to see made in Canada startups become the best in class.

Six things to consider before hiring your first sales rep

Once startups land a few customers, they often face the point where they wonder: “As the founder or CEO, I’m the only person responsible for sales on my team. I’m thinking about hiring a sales rep because I just don’t have the time to focus on sales and I want to grow faster. What should I look for?”

While having a few paying customers is great (and I applaud you for getting there!), it doesn’t necessarily mean you’re ready to bring on a salesperson to scale for growth. Before you hire anyone, it’s important to ensure you’ve actually built out some type of working, repeatable process for getting new customers.

Here are six things to consider before making your first sales hire.

1. Are you ready to add distance between you and your customers?

The best part of being a founder running sales is that you can use every sales call as an opportunity to engage in customer discovery. As you try to bridge the gap between the product you’re building and the market you’re building for, outsourcing these conversations and customer interactions can be a huge crutch. The true risk here is that the impact of this can go beyond sales and into product development as well. As an early-stage company that’s still finding product market fit it can be a huge risk and can ultimately slow down your entire company.

2. Do you have a working sales process?

Have you actually built out a working sales process (even if it’s hacked together initially for 5-10 deals) that you can then hand off to a new sales rep? This doesn’t have to be complex, it can be a basic sales funnel, but there should be some type of consistency to generating leads and closing deals. The best way to check is to look back at the deals you’ve closed and map out this basic process, even if it is just on a whiteboard initially. If you look at your closed deals today and the process to find and close them looks totally different across all of your deals, then you don’t have a working sales process just yet.

3. Do you have measurement tools in place?

Have you put some measurement tools in place that allow you to effectively capture data on your deals, track your sales activity and monitor results? Having a CRM is typically just the starting point, and often, spreadsheets are used in the early days. This is fine when it’s just you as a founder, but before making additions to your team, invest the time in researching how to best use your existing CRM to monitor both pre-sales activity (i.e. lead generation, lead enrichment, opportunity progression, etc.) and post-sales results (i.e. revenue, onboarding process, engagement, etc.). You’ll need this to track your progress or else you’ll be flying blind when it comes to managing your new sales rep.

4. Have you set targets and realistic goals?

Have you set internal benchmarks for yourself (that you’ve actually been able to meet) that you can then use to define sales targets for the new sales rep? For example, as a founder, let’s assume you’re able to send 100 emails, talk to 10 prospects and conduct two demos on a weekly basis, knowing that you’re only spending 50 per cent of your time for sales. Then once you have a fully dedicated sales rep ramped up, your sales rep should be able to do twice your activity with 200 emails, 20 prospect conversations and four demos. There is a lot more to defining sales targets and sales compensation, but in the early days it’s particularly difficult when you have virtually no historical data. Every salesperson deserves being given realistic targets, and if done correctly, it can be a huge motivating factor towards sales productivity and growth.

5. Are you documenting?

Have you effectively documented the knowledge that you’ve gained on your customer’s pains, industry trends, and product value proposition? Is this documentation good enough that you can use it to teach it to someone with virtually zero experience in sales or your industry? It doesn’t matter if you’ve convinced the number one sales rep from your competitor to join your team. It’s imperative that once you make a sales hire, there is some type of structured training to transfer your knowledge over to them. Far too often, I see companies bring on a sales hire, do a bit of product training, and then just give them a bunch of leads to work. This is a recipe for failure. When making a sales hire, put your new teammate in the best position to truly succeed.

6. Thinking “sales” is actually a role

Do you actually know what you’re looking to hire for? Hiring a “sales rep” doesn’t actually mean anything because there are different types of salespeople suited to specific parts of the sales process. Are you looking for someone to help with lead generation? Or do you need help doing demos and closing deals? Does your licensing model even justify having a dedicated sales person? Before finding a solution, you need to have a clear definition of the problem you’re trying to solve for. This is just as true in building a product as it is in making new hires to your team. Know what the bottleneck to your sales growth is and then decide what you need to do (or whom you need to hire) to fix it.

The common theme is if you haven’t figured out all (if not most) of the above for yourself, then there’s a good chance you’re not ready to add a salesperson to your team. Any founder can learn some basic sales skills, and there is a tremendous amount of information available online to help you build out your initial sales playbook. You absolutely can do it for yourself. This will not only help you avoid making a bad sales hire, but it will also help make you a better sales leader when you’re ready to bring someone on in the future. Like most other items in a startup, build out your initial MVP, get it working and then start investing money and resources to make it better.