Selling virtual goods - a popular revenue model

 

Selling virtual goods has become a popular revenue model for games, online services and social networking sites replacing or co-existing with other models such as usage fees, advertising, premium services or sales of user data. Recently Fortune reported that the market in China for virtual goods is larger than the market for online advertising with Tencent, China’s largest IM+Avatar+SNS service, generating 1 billion USD in revenues in 2008, 90% from virtual goods.

What are virtual goods?
Virtual goods are non-physical objects (i.e. rights) that are purchased and exchanged on the Internet represented by pictures, animations or three-dimensional objects inside online platforms, communities and games, controlled by rules. According to Joshua A.T. Fairfield, an expert in the law and regulation of e-commerce and videogames, virtual property are designed to share three legally relevant characteristics with real world property: rivalrousness, persistence, and interconnectivity. Rivalrousness lets the owner exclude other people from using owned objects, persistence protects the investment by ensuring that it lasts and interconnectivity let's other than the owner experience or interact with the objects.

There are three main categories of virtual goods:

Decorative Virtual Goods: Similar to branded physical goods Decorative Virtual Goods are used to express individual personalities, gain status, impress on others, and to give a sense of belonging. Items can be virtual pets or furniture in an online hang-out or clothes, shoes, jewelry or other accessories to dress up an online character in an online game.

Functional Virtual Goods: In online games Functional Virtual Goods can be used to provide new functions, convenience or gameplay options for the player to improve the user experience. The items are functional in the sense that they help the owner to advance in the game and convenient in that users can take shortcuts to save time or lower risk. It can also be to alter the gaming interface, enabling short-cut keys or tools to enhance the visual experience.

Virtual Gifts: Digital flowers or a box of chocolates might not smell as nice or taste as good as real ones, but often the gesture is what matters the most. Virtual Gifts are given away daily at social networking sites and dating services and people are paying as much as $10 to send a virtual flower to the object of their affection. In games, occasions to buy virtual gifts can be extended from birthdays and Valentine’s Day, to include a number of occasions based on the fiction of the game. For virtual items such as flowers that have a physical equivalent, there is also the possibility for the operators to provide real offline gifts.

Virtual goods as advertising
Brand owners and marketers are taking notice of the development and are starting to use virtual goods as a substitute for traditional advertising just as product placements in movies. When the Sex in the City movie was promoted, New Line Cinema gave away free virtual Manolo Blahniks shoes on Facebook. During the first day members gave more than 500 000 shoes to their friends accounting for more than 220 million viewings. Last week Britney Spears announced that she will launch a line of branded virtual goods on Facebook. The gifts that are sold for $2 include virtual birthday cakes, which members can buy for themselves or for friends.

But it's only kids who are buying, right?
According to a recent study by analyst firm Frank N. Magid Associates 12% of Americans Bought Virtual Goods in Past 12 Months. As can be seen in the picture below the largest share is women and in the ages between 25-34, 17% of the women purchased virtual goods in past 12 months.

Why are people buying virtual goods?

In discussions about virtual goods I often get the question why people would spend their hard earned cash on objects that have no tangible substance, a discussion that often ends up in talking about brands, knowledge and money as such, that are all intangible. Why did you buy that expensive Swiss watch when you can get the same design with more functionality for a much lower price?

Basically people buy virtual goods for the same reasons they buy physical goods.

• to make an experience more entertaining
• to express individual personalities
• to have a sense of belonging,
• to impress on others
• to explore new things
• to save time
• to lower risk
• to have power
• to collect items they like
• to resell the item and perhaps make a profit
• to give it away and make someone else happy

Value Proposition Versioning: Time vs. Money
In online games one basic idea is that some people have all the time in the world while others might have all the money in the world. The first group of players spends hours, days and weeks finding rare in-game items, earning in-game currency and leveling up their characters. The second group might instead use real money to buy in-game items, exchange for in-game currency or get a character that is already leveled up. According to estimates more than 400 000 people worldwide (primarily in low-cost locations) were employed to perform something called Gold Farming, doing mundane actions over and over in order to collect in-game currency and items that are later sold to other players.

There is of course a continuum from players not spending a dime and players buying lots of stuff. What is interesting is that the vast majority is playing for free, subsidized by a few that are paying much more than they would with for example a subscription based revenue model. More about Value Proposition Versioning here. An example of players buying lots of stuff was mentioned by Adam Caplan at Super Rewards in this video:

"We went back over the last 6 months, looking at the highest monetized individual on the Super Reward platform and we found an individual who spent US$ 30000 across two games in 6 months. You need to have a model that can capture those outliers, and no one can tell me in this room a pay-to-play or a monthly subscription model that can capture US$ 30000 of value from one individual." Adam Caplan, Super Rewards
Digital Product Life Cycle Managemet
In product life cycle management a product's lifetime is sometimes shortened intentionally to encourage customers to make repeated purchases and enable repetitive sales. This can be through quality deterioration or artificially by means of fashion cycles, technology development, new standards etc. For virtual goods there is no technical reason why virtual goods could not last indefinitely, so shortening of product lives is always rather artificial and in some online games items degrade with time or usage, sometimes vanishing completely, sometimes items have expiration dates after which they vanish. Another common method to increase sales of virtual goods is to limit the number of items a person can have at a time, forcing them to either dispose less needed items or purchase additional pockets for more items. In some games, such as Habbo, the operator offers to buy back items from the user for a fraction of the original purchase price.


New opportunities for Business Model Innovation
The opportunities for monetizing virtual goods are growing and providing new possibilities for business model innovation, not only in games and social networks. Virtual item stores are in their infancy but last week I witnessed an exciting live demo of a very realistic virtual 3D shopping centre made by MindArk, that operates, develops and market Entropia Universe.

Who will be the Amazon of virtual goods? Amazon…?

How to Make Money Selling Virtual Products from Home

By Angela Yurchenko

If you own a mobile device and live in the USA/Canada, you’ve probably purchased virtual products like apps, iTunes, or a Netflix subscription at least once this past month.

In an era when most of our needs can be met virtually — from remote work and socializing to dating and entertainment — reality has imperceptibly shifted into the virtual realm as technology caught up with our needs and wants. No wonder the virtual goods market, currently at $52 billion and growing, is exceeding our boldest expectations.

The digital economy also gave rise to more side hustles than ever before. A decade ago, making a few bucks online meant dusting shelves for college textbooks left unchewed by our dogs and crossing fingers for a customer via eBay.

Today’s online marketplaces are booming with 24/7 demand, and much of it for virtual goods.  With as little as $0 starter investment and little to no legal formalities, entrepreneurs can now find their own best way to sell virtual goods.

Ready to jump on the bandwagon and find out how to make money selling virtual goods? Below, we’ll fill you in both on the “what” and “how” of the process.

Virtual products to make and sell from home

Virtual products (also known as digital products and digital goods) are products you can sell to other internet users via download. This can be done through your website, blog, social media profiles, or online marketplaces.

The perks of virtual products are primarily a lack of long-term commitments. Unlike a provider of virtual services, you won’t be stuck tailoring your work to a client’s custom requirements. Instead, the customer will pick out the product right for them and use/edit it on their own.

Here are the top trending ideas for virtual/digital products you can start making from your swivel chair.

Design

Small businesses and marketers are always on the lookout for original illustrations and vector icons to use in place of stock photos.

Specifically, they’re looking for:

• stock illustrations
• vector icons
• icon sets
• infographic templates
• photoshop templates
• animations
• 3D rendered images
  

If your hobby is graphic design, you can easily make extra income by selling custom designs or illustrations on platforms like Shutterstock. Payments start at 25 cents per image download which may not sound like much…until you consider that one single image can tick you extra income for decades.

Skills and equipment needed: Drawing/art background. Knowledge of graphic design basics and platforms like Adobe Illustrator and  Adobe Photoshop.

Ebooks and Guides

If you have something to say to the world, use your spare time to turn it into an Ebook and find your readers without printing and shipping costs. On a smaller scale, you can also make money selling PDFs and handy guides.

Digital ebooks come in many shapes and sizes from fiction to poetry, but for business purposes, stick to these exceptionally popular formats:

• life coaching/self-help books
• recipe books 
• how-tos and “dummy guides” on business management, investment, sales, marketing, etc.
• email marketing and social media post templates compiled into handy PDFs and guides.
  

Skills and equipment needed: Writing background or solid skills. Basic knowledge of MS Word and a platform like Epubee to convert the word document into an e-book or iPages for Mac. Advanced users: a single solution like Kitaboo for creating, publishing and distributing e-books with fantastic multimedia.

Writing

If writing a whole book or even PDF guide isn’t your piece of cake, how about monetizing articles and blog posts? There are several ways to sell your writing as a virtual product and get instant payments:

• Blogging on Medium— enter Medium’s referral program and start gathering earnings from your blog posts on Medium. The only catch is you’ll only earn from articles accepted for distribution by Medium editors. Earnings range from $0 to $9000 per month depending on your output and popularity.
• Ghostwriting — on platforms like Upwork, this can range from novels to blog posts, to academic essays.
• Writing for magazines/publications — Magazines pay up to $500 dollars per fiction/nonfiction story, articles, and essays. Carefully research the publication and adapt your writing accordingly if you want to be featured.
  

Skills and equipment needed: writing background or solid skills; ability to work on deadlines and self-manage your time.

Pre-recorded voice greetings/messages

Small business owners are constantly googling for personalized voice greetings, messages, and IVR responses. By designing and recording custom professional greetings, you can meet the demand of one or several industries, age categories, or niches.  

You can specialize in:

• Humorous messages
• Creative messages
• Industry-specific messages
• Bilingual messages
• Custom messages
  

Find more ideas of unique voice greetings.

Skills and equipment needed: Creativity; good diction. Quality mic and software to record/mix the greetings on your laptop

Apps

It’s been over 10 years since mobile apps have taken our daily lives by storm. While the debate between enthusiasts and skeptics is stronger than ever, the figures speak for themselves: according to App Annie, 2018 has seen a 16 billion increase in app downloads over 2017 stats.

Designing your app has become easier than ever, with some platforms allowing users to begin and publish even without coding experience. Due to the huge demand, exceptional creativity remains a must if you’re about to enter this field. 

Skills and equipment needed: Programming or engineering background; knowledge of iOS/Android mobile development; ability to brainstorm your target audience and find a gap in the market.

Editable Video Content

Video bloggers and small businesses on a limited budget need editable video content to ease their video production processes. Template content, such as intro and outro clips are in demand by this audience, as are editable clips with source code.

While many generic-type clips are available for free online, by making and compiling several dozen original clips around a specific theme you can sell your videos to bloggers worldwide. 

Try focusing on a specific category of video bloggers like:

• travel bloggers
• fashion bloggers
• food bloggers
• animal bloggers
  

Skills and equipment needed: tech background a bonus; HD video camera; movie editing software

Stock photography

Stock photography sites like Shutterstock, 500px prime, Dreamstime, etc. can showcase and sell work without giving you the trouble of finding personal clientele. However, any (human) models you work with will need to sign a license agreement allowing you to feature them on stock photo sites.

Most popular trends for stock photography:

• People doing specific tasks
• People socializing, relaxing, etc.
• Images depicting emotional states
• Nature (sky, water, landscape, sunset)
• Travel
• Money
• Tech and gadgets
  

As a twist, businesses selling products and services can also use stock photography for marketing. A great example is how Square PoS is advertising its services on Unsplash via free stock photos.

Skills and equipment needed: Preferably optical zoom camera; Photoshop skills

Downloadable courses

Do you possess knowledge that you’ve always wanted to share with the world?  Are you good at teaching and explaining things? Whatever challenge you have struggled with and overcome in life — from business insights to programming skills to living a meaningful life— it is unique experiences that listeners are after, not academic briefs.

Here are the most in-demand formats for e-courses:

• Single course for download
• Set of courses for download
• Course subscription (monthly/quarterly/yearly)

As an example, mompreneurs can explainhow they got into business and provide step by step lessons to aspiring female business owners. Corporate marketers, salespersons, business or financial consultants can become personal coaches for the massive audience of wanna-be entrepreneurs. Healthy living or cooking enthusiasts can find their audience too!

Skills and equipment needed: Video camera or smartphone; video editing software like iMovie

How to monetize your virtual products

Building a business with a virtual product is much the same as building any business: it’s tough and it takes time. The inspiring business owners we get to read about aren’t the lucky ones who won the lottery: they’re just the small remainder who went on doing the job through the thousand little inconveniences that made others shrug and give up.

Here are 3 practical strategies to help you follow their lead.

Go for the Freemium pricing model

In a world where so much is available for free, customers are more apprehensive than ever about buying blindfolded.  However high-quality your virtual product is, customers may pass it up for something more accessible and testable.

This doesn’t mean you should put in so much hard work for free. If you’re going to sell your virtual product via your website and social media sites, a great bet is to attract clients with a freemium product model.

With a freemium virtual product model, clients can get a limited-feature, basic version of your product for free, and then upgrade. This can mean “hooking” customers with a course, video clip, or pamphlet they can download for free to get a taste of your unique product.

Provide the very best sample of your work that shows just how unique the rest of your products are.

Build a website

Since your product is 100% virtual, a website is the virtual store that will sell your product. Make it as attractive and convenient as you would make a physical store. 

When in doubt, evaluate these top criteria proven by web design research to attract and engage visitors:

• Minimalistic design – Give visitors lots of white space on your site and focus their attention on specific calls to action.
• Concise “About Us” page – a unique story told in the language your target audience speaks
• User-friendly navigation – help visitors navigate intuitively (including on mobile devices), so they don’t bounce from your site.
• Contact information on the homepage –  44% of visitors leave a business site without upfront contact information [SAP IGL] Grab attention with а Click to Call button on your homepage.
• Mobile-friendly site – this little perk helped 62% of companies increase their sales [SAP IGL]. Pick up your mobile devices and check for yourself how fast your site loads (and how easy it is to navigate).

Prioritize communication

As a business selling virtual products, you don’t have the power of face-to-face interaction with customers. Neither can you engage them on that charismatic gut level. Not unless you shift your communication paradigm.

When you’re selling virtual products, customers will need to talk to you via phone, chat, and website. A virtual phone system (VoIP) is a simple solution that covers all these channels and works perfectly for entrepreneurs selling virtual products.

Best features of VoIP for virtual business:

• Toll-free number — since a virtual business isn’t pinned to any locale, customers will appreciate both your professionalism and the nationwide scope of your virtual product with a toll-free number.
  
• Privacy — instantly tells you whether that unknown number is a business call or a personal one, so you respond accordingly.
  
• 100% mobility — VoIP forwards calls to as many devices as you own (smartphone, tablet/iPad, PC/Mac, IP desk phone, etc.). Find out more about call forwarding.
  
• Web and social media integration  — Learn how to integrate your virtual product’s website, business Facebook, and Twitter for simpler communication with customers.
  
• Contact book —  a business contact book that’s also a mini CRM lets you keeping track of all business clients.
  

A virtual phone system provides you with a pro-level business image and takes care of communications across all devices and platforms. Find everything your virtual business needs right here. 

Final word

With little investment, few risks, and the ability to create and sell without leaving your house  (or your day job), designing a virtual product may be the perfect passion project for a rainy fall afternoon.

What’s stopping you from starting right now?

https://www.mightycall.com/

The 5 best marketing channels for small businesses and startups

 

How to select the 5 best marketing channels from 30+ alternatives

Small businesses have particularly limited resources whether it is people or budget, so it's crucial to select the most cost-effective communications to invest in. That means, free and low-cost marketing channels. In this guide, we will help you identify the best channels using two simple frameworks, so that you're not starting with a blank piece of paper or screen and can work through the options.

We'll review both online and offline techniques starting with 30+ channels to consider and then at the end, as a summary we'll help you zoom in on the top 5 to make it more manageable.

Using the Marketing Bullseye to select marketing channels

The Bullseye was recommended by Gabriel Weinberg and Justin Maiers in their book Traction, a nice hook to show the challenges of gaining visibility online to drive customer acquisition. Justin is founder of search engine Duck Duck Go and as an entrepreneur involved with this and other startups as a VC, it takes the perspective of startups who are looking to gain visibility at low cost.

The 19 marketing channels it covers includes both digital and traditional channels, many of which are free. We like the simple technique of selecting the best channels summarised in the top left of the visual.

We're less keen on the structure which is in no particular order and misses some key channels, still, it's quick to scan.  Our next framework focuses on digital marketing channels which are often free - the so-called organic channels.

18 digital marketing techniques to consider across 6 media channels

There are many online communications techniques that marketers must prioritize to include as part of their communications strategy. Marketers often use paid, owned and earned media to describe investments at a high-level, but it’s more common to refer to six specific digital media channels when selecting specific always-on and campaign investments.

To simplify prioritization, we recommend considering the paid, owned and earned techniques available within six digital media channels or communications tools shown in the next visual. Combining the techniques in this way gives 18 digital communications techniques for businesses to consider. Companies with limited budget for paid media can focus on Owned and Earned techniques.

The six main media channels available to any business and paid, owned and earned media options within these are:

1 Search engine marketing

Gaining visibility on a search engine to encourage click-through to a website when the user types a specific keyword phrase. Two key search marketing techniques are paid placements using pay-per-click via Google Ads or Bing, and placements in the natural or organic listings using search engine optimisation (SEO) where no charge is made for clicks from the search engine.

SEO can be considered owned media since it involves on-page optimisation by improving the relevance of content and technical improvements to the website to improve crawlability monitored through Google Search Console. SEO also has an Earned media component where visibility in the search engines can be improved by getting relevant ‘backlinks’ from websites which effectively count as a citation or vote.

2 Social media marketing

This includes both paid advertising on social networks and organic social media amplification where companies aim to gain visibility through content shared by social media feeds and pages which are owned media. Earned social media is where a brand or social update is shared by a publisher or partner.

Social media marketing is an important category of digital marketing that involves encouraging customer communications on a company’s own site, or social presences such as Facebook or Twitter or in specialist publisher sites, blogs and forums. It can be applied as a traditional broadcast medium – for example, companies can use Facebook or Twitter to send messages to customers or partners who have opted in.

3 Display advertising

Use of online ad formats such as banners and videos on publisher sites to achieve brand awareness and encourage click-through to a target site. These are usually considered as separate investments from paid search and paid social ads since ads are typically displayed on publisher sites.

Programmatic display refers to where media and target audiences are selected by trading or bidding against other advertisers. Whereas native advertising involves paying to publish content that appears on a media site rather than a banner ad. It’s similar to when companies pay for features on pages in newspapers.

Display advertising is similar to sponsorship and in both cases, there may be a long-term relationship where a brand pays for its name to be associated with a publisher or event.

4 Digital PR

Involves maximizing favourable ‘offsite’ mentions of your company, brands, and products by other organizations and people, especially media sites or influencers such as celebrities.

Mentions may create name awareness, but have the benefit that they can also drive visits through links and support SEO through backlinks. These mentions may occur on publisher websites, blogs or social networks, and podcasts accessed by your target audience.

Guest-blogging involves writing an article for which no fee is typically charged on another business's website. It’s often a reciprocal arrangement.

Influencer outreach is used in both B2B and B2C communications. It usually refers to working with individuals rather than publishers to gain mentions through their social media, blogs or podcasts.

Digital PR also includes responding to negative or positive online brand mentions and conducting public relations via a site through a social media news centre or blog, for example.

5 Digital partnerships

Creating and managing long-term arrangements to promote your online services on third-party websites or through website content and messaging. Affiliate marketing involves a commission-based arrangement where the advertiser only pays when a sale occurs. It’s most applicable to the retail, travel, and financial services sector where an affiliate website will get paid for traffic when an online sale occurs.

Co-branding is a paid or owned media technique where two brands are featured within email marketing or native advertising. Co-marketing is similar, but it is a ‘contra’ arrangement for which no fee is usually paid when companies collaborate to share content with the aim of raising awareness and leads amongst the pooled audiences.

For example, we set up a co-marketing arrangement for publisher Smart Insights with martech vendor HubSpot where joint research reports were created to raise awareness and generate leads for both brands. HubSpot has dedicated co-marketing managers in different regions to manage this activity since they see it as important.

6 Digital messaging

Traditionally digital messaging to individuals who have subscribed to updates has focused on Email marketing, which is still a commonly used digital media channel since it is cost-effective. However, email is used less by younger audiences who are more likely to subscribe to mobile push notifications from websites and apps.

Digital messaging options include placing ads in third-party e-newsletters (paid media) or most commonly the use of an in-house list for customer activation and retention (owned media) or co-marketing techniques using other companies newsletters. Buying or renting lists of email addresses is considered as a spamming technique and not permitted under the privacy legislation described.

Your top-five marketing channels?

From reviewing the two frameworks above, you should be able to rank your top 5, but, as a summary, here is our guidance on the top 5 free channels every small business and startup should consider. It's based on published research on the best online acquisition channels and our own experience in data-driven marketing using Google Analytics to review the most effective channels.

1. Organic search 

Using Search Engine Optimisation (SEO) to taps into the search intent of people looking for your types of products and services. If there are people searching for your service and you get your SEO techniques right, this will be your number one source of visitors to your website. But it is competitive, so you will have to follow the best practices and put time into it. If you can't get cut-through, you may need to consider targeted use of Google Ads to get visibility.

2. Public relations

PR is particularly important if there aren't so many people searching for your type of services and you're looking to build awareness and generate demand for your services. You can using free digital PR techniques like guest blogging

3. Co-marketing

This isn't one channel, instead it's looking at opportunities to collaborate with businesses that you may share an audience with, but aren't direct competitors. Guest blogging is one example of this.

4. Organic social

This is sharing to social networks like Facebook, Instagram and LinkedIn. It's free and there is an amplification effect if your posts are sufficiently engaging to share.

However, social networks favour promoted ads within their feeds to monetise their audience, so as with organic search, if you can't get cut-through, you may need to consider targeted use of paid social ads to get visibility.

5. Email marketing

Another free channel for low volumes of emails, this isn't so much about gaining awareness, rather it's about supporting conversion by reminding subscribers about the benefits of your brand products and services.

Remember that all of these rely on content, so before looking to improve these channels, we recommend you also look at your content marketing strategy  and how it can best differentiate your brand from competitors.

By Dave Chaffey

https://cutt.ly/b7NmMo4

The hardest Lessons for Startups to Learn

 

The startups we've funded so far are pretty quick, but they seem quicker to learn some lessons than others. I think it's because some things about startups are kind of counterintuitive.

We've now invested in enough companies that I've learned a trick for determining which points are the counterintuitive ones: they're the ones I have to keep repeating.

So I'm going to number these points, and maybe with future startups I'll be able to pull off a form of Huffman coding. I'll make them all read this, and then instead of nagging them in detail, I'll just be able to say: number four!

1. Release Early.

The thing I probably repeat most is this recipe for a startup: get a version 1 out fast, then improve it based on users' reactions.

By "release early" I don't mean you should release something full of bugs, but that you should release something minimal. Users hate bugs, but they don't seem to mind a minimal version 1, if there's more coming soon.

There are several reasons it pays to get version 1 done fast. One is that this is simply the right way to write software, whether for a startup or not. I've been repeating that since 1993, and I haven't seen much since to contradict it. I've seen a lot of startups die because they were too slow to release stuff, and none because they were too quick. [1]

One of the things that will surprise you if you build something popular is that you won't know your users. Reddit now has almost half a million unique visitors a month. Who are all those people? They have no idea. No web startup does. And since you don't know your users, it's dangerous to guess what they'll like. Better to release something and let them tell you.

Wufoo took this to heart and released their form-builder before the underlying database. You can't even drive the thing yet, but 83,000 people came to sit in the driver's seat and hold the steering wheel. And Wufoo got valuable feedback from it: Linux users complained they used too much Flash, so they rewrote their software not to. If they'd waited to release everything at once, they wouldn't have discovered this problem till it was more deeply wired in.

Even if you had no users, it would still be important to release quickly, because for a startup the initial release acts as a shakedown cruise. If anything major is broken-- if the idea's no good, for example, or the founders hate one another-- the stress of getting that first version out will expose it. And if you have such problems you want to find them early.

Perhaps the most important reason to release early, though, is that it makes you work harder. When you're working on something that isn't released, problems are intriguing. In something that's out there, problems are alarming. There is a lot more urgency once you release. And I think that's precisely why people put it off. They know they'll have to work a lot harder once they do. [2]

2. Keep Pumping Out Features.

Of course, "release early" has a second component, without which it would be bad advice. If you're going to start with something that doesn't do much, you better improve it fast.

What I find myself repeating is "pump out features." And this rule isn't just for the initial stages. This is something all startups should do for as long as they want to be considered startups.

I don't mean, of course, that you should make your application ever more complex. By "feature" I mean one unit of hacking-- one quantum of making users' lives better.

As with exercise, improvements beget improvements. If you run every day, you'll probably feel like running tomorrow. But if you skip running for a couple weeks, it will be an effort to drag yourself out. So it is with hacking: the more ideas you implement, the more ideas you'll have. You should make your system better at least in some small way every day or two.

This is not just a good way to get development done; it is also a form of marketing. Users love a site that's constantly improving. In fact, users expect a site to improve. Imagine if you visited a site that seemed very good, and then returned two months later and not one thing had changed. Wouldn't it start to seem lame? [3]

They'll like you even better when you improve in response to their comments, because customers are used to companies ignoring them. If you're the rare exception-- a company that actually listens-- you'll generate fanatical loyalty. You won't need to advertise, because your users will do it for you.

This seems obvious too, so why do I have to keep repeating it? I think the problem here is that people get used to how things are. Once a product gets past the stage where it has glaring flaws, you start to get used to it, and gradually whatever features it happens to have become its identity. For example, I doubt many people at Yahoo (or Google for that matter) realized how much better web mail could be till Paul Buchheit showed them.

I think the solution is to assume that anything you've made is far short of what it could be. Force yourself, as a sort of intellectual exercise, to keep thinking of improvements. Ok, sure, what you have is perfect. But if you had to change something, what would it be?

If your product seems finished, there are two possible explanations: (a) it is finished, or (b) you lack imagination. Experience suggests (b) is a thousand times more likely.

3. Make Users Happy.

Improving constantly is an instance of a more general rule: make users happy. One thing all startups have in common is that they can't force anyone to do anything. They can't force anyone to use their software, and they can't force anyone to do deals with them. A startup has to sing for its supper. That's why the successful ones make great things. They have to, or die.

When you're running a startup you feel like a little bit of debris blown about by powerful winds. The most powerful wind is users. They can either catch you and loft you up into the sky, as they did with Google, or leave you flat on the pavement, as they do with most startups. Users are a fickle wind, but more powerful than any other. If they take you up, no competitor can keep you down.

As a little piece of debris, the rational thing for you to do is not to lie flat, but to curl yourself into a shape the wind will catch.

I like the wind metaphor because it reminds you how impersonal the stream of traffic is. The vast majority of people who visit your site will be casual visitors. It's them you have to design your site for. The people who really care will find what they want by themselves.

The median visitor will arrive with their finger poised on the Back button. Think about your own experience: most links you follow lead to something lame. Anyone who has used the web for more than a couple weeks has been trained to click on Back after following a link. So your site has to say "Wait! Don't click on Back. This site isn't lame. Look at this, for example."

There are two things you have to do to make people pause. The most important is to explain, as concisely as possible, what the hell your site is about. How often have you visited a site that seemed to assume you already knew what they did? For example, the corporate site that says the company makes

enterprise content management solutions for business that enable organizations to unify people, content and processes to minimize business risk, accelerate time-to-value and sustain lower total cost of ownership.

An established company may get away with such an opaque description, but no startup can. A startup should be able to explain in one or two sentences exactly what it does. [4] And not just to users. You need this for everyone: investors, acquirers, partners, reporters, potential employees, and even current employees. You probably shouldn't even start a company to do something that can't be described compellingly in one or two sentences.

The other thing I repeat is to give people everything you've got, right away. If you have something impressive, try to put it on the front page, because that's the only one most visitors will see. Though indeed there's a paradox here: the more you push the good stuff toward the front, the more likely visitors are to explore further. [5]

In the best case these two suggestions get combined: you tell visitors what your site is about by showing them. One of the standard pieces of advice in fiction writing is "show, don't tell." Don't say that a character's angry; have him grind his teeth, or break his pencil in half. Nothing will explain what your site does so well as using it.

The industry term here is "conversion." The job of your site is to convert casual visitors into users-- whatever your definition of a user is. You can measure this in your growth rate. Either your site is catching on, or it isn't, and you must know which. If you have decent growth, you'll win in the end, no matter how obscure you are now. And if you don't, you need to fix something.

4. Fear the Right Things.

Another thing I find myself saying a lot is "don't worry." Actually, it's more often "don't worry about this; worry about that instead." Startups are right to be paranoid, but they sometimes fear the wrong things.

Most visible disasters are not so alarming as they seem. Disasters are normal in a startup: a founder quits, you discover a patent that covers what you're doing, your servers keep crashing, you run into an insoluble technical problem, you have to change your name, a deal falls through-- these are all par for the course. They won't kill you unless you let them.

Nor will most competitors. A lot of startups worry "what if Google builds something like us?" Actually big companies are not the ones you have to worry about-- not even Google. The people at Google are smart, but no smarter than you; they're not as motivated, because Google is not going to go out of business if this one product fails; and even at Google they have a lot of bureaucracy to slow them down.

What you should fear, as a startup, is not the established players, but other startups you don't know exist yet. They're way more dangerous than Google because, like you, they're cornered animals.

Looking just at existing competitors can give you a false sense of security. You should compete against what someone else could be doing, not just what you can see people doing. A corollary is that you shouldn't relax just because you have no visible competitors yet. No matter what your idea, there's someone else out there working on the same thing.

That's the downside of it being easier to start a startup: more people are doing it. But I disagree with Caterina Fake when she says that makes this a bad time to start a startup. More people are starting startups, but not as many more as could. Most college graduates still think they have to get a job. The average person can't ignore something that's been beaten into their head since they were three just because serving web pages recently got a lot cheaper.

And in any case, competitors are not the biggest threat. Way more startups hose themselves than get crushed by competitors. There are a lot of ways to do it, but the three main ones are internal disputes, inertia, and ignoring users. Each is, by itself, enough to kill you. But if I had to pick the worst, it would be ignoring users. If you want a recipe for a startup that's going to die, here it is: a couple of founders who have some great idea they know everyone is going to love, and that's what they're going to build, no matter what.

Almost everyone's initial plan is broken. If companies stuck to their initial plans, Microsoft would be selling programming languages, and Apple would be selling printed circuit boards. In both cases their customers told them what their business should be-- and they were smart enough to listen.

As Richard Feynman said, the imagination of nature is greater than the imagination of man. You'll find more interesting things by looking at the world than you could ever produce just by thinking. This principle is very powerful. It's why the best abstract painting still falls short of Leonardo, for example. And it applies to startups too. No idea for a product could ever be so clever as the ones you can discover by smashing a beam of prototypes into a beam of users.

5. Commitment Is a Self-Fulfilling Prophecy.

I now have enough experience with startups to be able to say what the most important quality is in a startup founder, and it's not what you might think. The most important quality in a startup founder is determination. Not intelligence-- determination.

This is a little depressing. I'd like to believe Viaweb succeeded because we were smart, not merely determined. A lot of people in the startup world want to believe that. Not just founders, but investors too. They like the idea of inhabiting a world ruled by intelligence. And you can tell they really believe this, because it affects their investment decisions.

Time after time VCs invest in startups founded by eminent professors. This may work in biotech, where a lot of startups simply commercialize existing research, but in software you want to invest in students, not professors. Microsoft, Yahoo, and Google were all founded by people who dropped out of school to do it. What students lack in experience they more than make up in dedication.

Of course, if you want to get rich, it's not enough merely to be determined. You have to be smart too, right? I'd like to think so, but I've had an experience that convinced me otherwise: I spent several years living in New York.

You can lose quite a lot in the brains department and it won't kill you. But lose even a little bit in the commitment department, and that will kill you very rapidly.

Running a startup is like walking on your hands: it's possible, but it requires extraordinary effort. If an ordinary employee were asked to do the things a startup founder has to, he'd be very indignant. Imagine if you were hired at some big company, and in addition to writing software ten times faster than you'd ever had to before, they expected you to answer support calls, administer the servers, design the web site, cold-call customers, find the company office space, and go out and get everyone lunch.

And to do all this not in the calm, womb-like atmosphere of a big company, but against a backdrop of constant disasters. That's the part that really demands determination. In a startup, there's always some disaster happening. So if you're the least bit inclined to find an excuse to quit, there's always one right there.

But if you lack commitment, chances are it will have been hurting you long before you actually quit. Everyone who deals with startups knows how important commitment is, so if they sense you're ambivalent, they won't give you much attention. If you lack commitment, you'll just find that for some mysterious reason good things happen to your competitors but not to you. If you lack commitment, it will seem to you that you're unlucky.

Whereas if you're determined to stick around, people will pay attention to you, because odds are they'll have to deal with you later. You're a local, not just a tourist, so everyone has to come to terms with you.

At Y Combinator we sometimes mistakenly fund teams who have the attitude that they're going to give this startup thing a shot for three months, and if something great happens, they'll stick with it-- "something great" meaning either that someone wants to buy them or invest millions of dollars in them. But if this is your attitude, "something great" is very unlikely to happen to you, because both acquirers and investors judge you by your level of commitment.

If an acquirer thinks you're going to stick around no matter what, they'll be more likely to buy you, because if they don't and you stick around, you'll probably grow, your price will go up, and they'll be left wishing they'd bought you earlier. Ditto for investors. What really motivates investors, even big VCs, is not the hope of good returns, but the fear of missing out. [6] So if you make it clear you're going to succeed no matter what, and the only reason you need them is to make it happen a little faster, you're much more likely to get money.

You can't fake this. The only way to convince everyone that you're ready to fight to the death is actually to be ready to.

You have to be the right kind of determined, though. I carefully chose the word determined rather than stubborn, because stubbornness is a disastrous quality in a startup. You have to be determined, but flexible, like a running back. A successful running back doesn't just put his head down and try to run through people. He improvises: if someone appears in front of him, he runs around them; if someone tries to grab him, he spins out of their grip; he'll even run in the wrong direction briefly if that will help. The one thing he'll never do is stand still. [7]

6. There Is Always Room.

I was talking recently to a startup founder about whether it might be good to add a social component to their software. He said he didn't think so, because the whole social thing was tapped out. Really? So in a hundred years the only social networking sites will be the Facebook, MySpace, Flickr, and Del.icio.us? Not likely.

There is always room for new stuff. At every point in history, even the darkest bits of the dark ages, people were discovering things that made everyone say "why didn't anyone think of that before?" We know this continued to be true up till 2004, when the Facebook was founded-- though strictly speaking someone else did think of that.

The reason we don't see the opportunities all around us is that we adjust to however things are, and assume that's how things have to be. For example, it would seem crazy to most people to try to make a better search engine than Google. Surely that field, at least, is tapped out. Really? In a hundred years-- or even twenty-- are people still going to search for information using something like the current Google? Even Google probably doesn't think that.

In particular, I don't think there's any limit to the number of startups. Sometimes you hear people saying "All these guys starting startups now are going to be disappointed. How many little startups are Google and Yahoo going to buy, after all?" That sounds cleverly skeptical, but I can prove it's mistaken. No one proposes that there's some limit to the number of people who can be employed in an economy consisting of big, slow-moving companies with a couple thousand people each. Why should there be any limit to the number who could be employed by small, fast-moving companies with ten each? It seems to me the only limit would be the number of people who want to work that hard.

The limit on the number of startups is not the number that can get acquired by Google and Yahoo-- though it seems even that should be unlimited, if the startups were actually worth buying-- but the amount of wealth that can be created. And I don't think there's any limit on that, except cosmological ones.

So for all practical purposes, there is no limit to the number of startups. Startups make wealth, which means they make things people want, and if there's a limit on the number of things people want, we are nowhere near it. I still don't even have a flying car.

7. Don't Get Your Hopes Up.

This is another one I've been repeating since long before Y Combinator. It was practically the corporate motto at Viaweb.

Startup founders are naturally optimistic. They wouldn't do it otherwise. But you should treat your optimism the way you'd treat the core of a nuclear reactor: as a source of power that's also very dangerous. You have to build a shield around it, or it will fry you.

The shielding of a reactor is not uniform; the reactor would be useless if it were. It's pierced in a few places to let pipes in. An optimism shield has to be pierced too. I think the place to draw the line is between what you expect of yourself, and what you expect of other people. It's ok to be optimistic about what you can do, but assume the worst about machines and other people.

This is particularly necessary in a startup, because you tend to be pushing the limits of whatever you're doing. So things don't happen in the smooth, predictable way they do in the rest of the world. Things change suddenly, and usually for the worse.

Shielding your optimism is nowhere more important than with deals. If your startup is doing a deal, just assume it's not going to happen. The VCs who say they're going to invest in you aren't. The company that says they're going to buy you isn't. The big customer who wants to use your system in their whole company won't. Then if things work out you can be pleasantly surprised.

The reason I warn startups not to get their hopes up is not to save them from being disappointed when things fall through. It's for a more practical reason: to prevent them from leaning their company against something that's going to fall over, taking them with it.

For example, if someone says they want to invest in you, there's a natural tendency to stop looking for other investors. That's why people proposing deals seem so positive: they want you to stop looking. And you want to stop too, because doing deals is a pain. Raising money, in particular, is a huge time sink. So you have to consciously force yourself to keep looking.

Even if you ultimately do the first deal, it will be to your advantage to have kept looking, because you'll get better terms. Deals are dynamic; unless you're negotiating with someone unusually honest, there's not a single point where you shake hands and the deal's done. There are usually a lot of subsidiary questions to be cleared up after the handshake, and if the other side senses weakness-- if they sense you need this deal-- they will be very tempted to screw you in the details.

VCs and corp dev guys are professional negotiators. They're trained to take advantage of weakness. [8] So while they're often nice guys, they just can't help it. And as pros they do this more than you. So don't even try to bluff them. The only way a startup can have any leverage in a deal is genuinely not to need it. And if you don't believe in a deal, you'll be less likely to depend on it.

So I want to plant a hypnotic suggestion in your heads: when you hear someone say the words "we want to invest in you" or "we want to acquire you," I want the following phrase to appear automatically in your head: don't get your hopes up. Just continue running your company as if this deal didn't exist. Nothing is more likely to make it close.

The way to succeed in a startup is to focus on the goal of getting lots of users, and keep walking swiftly toward it while investors and acquirers scurry alongside trying to wave money in your face.

Speed, not Money

The way I've described it, starting a startup sounds pretty stressful. It is. When I talk to the founders of the companies we've funded, they all say the same thing: I knew it would be hard, but I didn't realize it would be this hard.

So why do it? It would be worth enduring a lot of pain and stress to do something grand or heroic, but just to make money? Is making money really that important?

No, not really. It seems ridiculous to me when people take business too seriously. I regard making money as a boring errand to be got out of the way as soon as possible. There is nothing grand or heroic about starting a startup per se.

So why do I spend so much time thinking about startups? I'll tell you why. Economically, a startup is best seen not as a way to get rich, but as a way to work faster. You have to make a living, and a startup is a way to get that done quickly, instead of letting it drag on through your whole life. [9]

We take it for granted most of the time, but human life is fairly miraculous. It is also palpably short. You're given this marvellous thing, and then poof, it's taken away. You can see why people invent gods to explain it. But even to people who don't believe in gods, life commands respect. There are times in most of our lives when the days go by in a blur, and almost everyone has a sense, when this happens, of wasting something precious. As Ben Franklin said, if you love life, don't waste time, because time is what life is made of.

So no, there's nothing particularly grand about making money. That's not what makes startups worth the trouble. What's important about startups is the speed. By compressing the dull but necessary task of making a living into the smallest possible time, you show respect for life, and there is something grand about that.





Notes

[1] Startups can die from releasing something full of bugs, and not fixing them fast enough, but I don't know of any that died from releasing something stable but minimal very early, then promptly improving it.

[2] I know this is why I haven't released Arc. The moment I do, I'll have people nagging me for features.

[3] A web site is different from a book or movie or desktop application in this respect. Users judge a site not as a single snapshot, but as an animation with multiple frames. Of the two, I'd say the rate of improvement is more important to users than where you currently are.

[4] It should not always tell this to users, however. For example, MySpace is basically a replacement mall for mallrats. But it was wiser for them, initially, to pretend that the site was about bands.

[5] Similarly, don't make users register to try your site. Maybe what you have is so valuable that visitors should gladly register to get at it. But they've been trained to expect the opposite. Most of the things they've tried on the web have sucked-- and probably especially those that made them register.

[6] VCs have rational reasons for behaving this way. They don't make their money (if they make money) off their median investments. In a typical fund, half the companies fail, most of the rest generate mediocre returns, and one or two "make the fund" by succeeding spectacularly. So if they miss just a few of the most promising opportunities, it could hose the whole fund.

[7] The attitude of a running back doesn't translate to soccer. Though it looks great when a forward dribbles past multiple defenders, a player who persists in trying such things will do worse in the long term than one who passes.

[8] The reason Y Combinator never negotiates valuations is that we're not professional negotiators, and don't want to turn into them.

[9] There are two ways to do work you love: (a) to make money, then work on what you love, or (b) to get a job where you get paid to work on stuff you love. In practice the first phases of both consist mostly of unedifying schleps, and in (b) the second phase is less secure.

https://cutt.ly/R41XTt2

Key Points:

(1) Release Early.
(2) Keep Pumping Out Features
(3) Make Users Happy
(4) Fear the Right Things
(5) Commitment is a Self-Fulfilling Prophecy
(6) There is Always Room.
(7) Don’t Get Your Hopes Up
(8) Speed Not Money …