As a small, rapidly growing business, sometimes it seems like we can’t hire fast enough. But it is my feeling that making the wrong hire is an even worse fate than being understaffed. In tight job markets, such as the Washington, DC area, hiring the right people can seem nearly impossible. In this blog, I’ll discuss some of the trials and tribulations of my recent hiring battles – and hopefully share some positive conclusions!!

Over the past year since starting iBelong, I have been having nightmare flashbacks to my experience in starting my first company almost ten years ago. It seems that life in a startup is nothing if not a balancing act – and the process of hiring is no exception. This includes balancing:

• Experience versus ambition
• Intelligence versus work ethic
• Short-term salary versus long-term reward

The above trade-offs are not etched in stone. Most top-performing employees will have elements from both sides of the equation. But in hiring for a start-up, I find that depending on the role, the optimal profile often leans toward the right side of the above equation (ambition, work ethic, and long-term reward).

In hiring for large businesses, like IBM and PricewaterhouseCoopers, it was my experience that there is a broader profile for a good fit. With the broad needs of a large organization, we could always make room for a “good person”. But in a small company it takes more than experience and intelligence to be a net positive to the organization. This is not to say that experience and intelligence are not required to make a start-up work. On the contrary, if we are looking for a dot net developer, we required candidates with experience and intelligence, as a necessary but not sufficient condition. In addition, we need someone with ambition and a very hard work ethic. For a large company, ambition may not necessarily be a pre-requisite for getting the job – and getting the job done.  

It is particularly hard in the local Washington DC area economy when recruiting to find the optimal balance of traits for a start-up. Candidates with experience and intelligence have a lot of employment options. And with the federal government hiring so heavily in the IT space, many candidates that are out there don’t need ambition and work ethic to make a healthy salary.

Given the cost of making a hiring correction in a small business, in terms of low employee morale, damage to customer reputation, and the cost of hiring and training a replacement, it is my opinion that small start-up businesses are better off being slightly understaffed than making the wrong hiring decisions.

So how do you find people with ambition, strong work ethic, intelligence, AND experience? Well, I would love to hear your opinions! It is my experience that there is no substitute for personal referrals. Every top performer I have had has come from a personal referral. Unfortunately, this process is very time consuming and doesn’t often yield the volume it takes to staff an entire business. But it has rarely failed me.

In an earlier blog, I introduced the process of rapidly developing product in a Web 2.0 world. In this blog, I am going to begin a discussion on the process of commercializing Web 2.0 technologies. In future blogs I will discuss specific successful and failed examples and how they fit into this model.

In running, investing, and working with startups, I have observed a process of commercialization that has two broad dimensions:

• Phase of the product lifecycle: The phases of the lifecycle for product development include exploration, development, and production
• Business function: The three business functions that support the product development lifecycle include product development, marketing and sales, and business and infrastructure

In the following table, I illustrate these two dimensions and summarize some detail that takes place within these dimensions.

As an idea or product moves through the product lifecycle, the business’ functional support, including marketing and sales and business and infrastructure, needs to be at the commensurate level maturity. In large companies, an infrastructure is typically in place to support a new product as it moves through its lifecycle. But given the cultural limitations of large companies, the trick is often less of supporting the product and more of cultivating a culture to encourage innovation.

Startups are typically building their business support while at the same time moving product through its development lifecycle. In starting a small company, the trick is to balance the resources invested in product development versus marketing and sales versus business and infrastructure. As an entrepreneur, I consider the process of optimizing the balance between these three functions critical to the launch of a successful business. When investment in any one of these functions gets too far out ahead of the others, it is possible that scarce startup resources are not being used efficiently. One way to look at this balance is similar to the portfolio optimization process found in the world of finance, where the entrepreneur is finding the optimal balance between product development, marketing and sales, and business and infrastructure, in an attempt to maximize return and minimize risk.

Below, I provide a few observations on balancing the maturity of each of these business functions.

Product Development

As I discussed in my last blog, the advent of Web 2.0 technologies makes rapidly delivering product increasingly more easy and affordable. Web 2.0 enables entrepreneurs to create prototypes using open source tools to conduct concept analysis on product ideas with very little investment. This enables the optimal portfolio mix to weigh more heavily into marketing and sales than has been traditional with technology startups.

Furthermore, when combining open source platforms with off-shoring, startups can also move through the development phase much more rapidly. Many startups have begun moving much of their development resources overseas to countries such as the former SovietRepublics and India while keeping high-level engineering and developing technical specifications in-house. Moving development offshore tends to be very efficient allocation of resources. Some of the lessons-learned from offshoring include:

• Finding an off-shore development shop that is familiar with your company’s choice of platform and architecture 
• Keeping turnover low on your off-shore product team to keep development efficient
• Communicate with your offshore development team that you have a ready stream of projects for your offshore team so that there is incentive for efficiency

For startups, the production lifecycle is an ever-iterating process, as the product matures. But as the product goes to production, it is critical that the product’s support is delivered commensurate to marketing. 

Marketing and Sales

With the plummeting price of technology development, more resource can be spent on marketing and sales during the exploratory phase. This enables a more precise targeting of product development toward actual clients – before the completion of the first development iteration. Below, I provide a few highlights:

• Immediately productize the technology and position as providing real, tangible value to business or consumers
• Target your first product development iteration toward actual paying clients
• Get feedback by launching your technology online as a beta
• Take product feedback seriously during the marketing process – if people consistently don’t get it, maybe it’s your product and not the audience

To focus on one area in particular, it is my observation that entrepreneurs tend undersell their technology by not immediately productizing the technology and highlighting the tangible value it can provide their clients. For example, the technology behind blogs has been out since the beginning of the internet and is not particularly complicated. But it took productizing editable webpages as “web logs” that revolutionized everything from citizen news to family vacations. This was strictly a marketing, productizing exercise that had nothing to do with technological innovation.

Business and Infrastructure

Finally, in startups, the most neglected business function tends to be business and infrastructure. And depending on the startup’s exit strategy, this neglect may make perfect sense. There’s no use in investing in infrastructure when the business model relies on scalability that can only be accomplished via an acquisition.

As a quick overview of business issues where startups can’t afford to neglect include:

• Protection of intellectual property
• Developing and implementing a fair valuation formula
• Structuring the business’ legal organization to support potential exit strategies

To focus on one of the above areas, coming up with a fair valuation of the business is critical for entrepreneurs. As a part of this exercise, it is important to work with an experienced advisor in working through the issues involved with valuation. For example, if an entrepreneur is inviting friends and family to invest in their start-up and their initial valuation is too high on the seed round they could be putting their friends and family at a disadvantage when they are ready for the next found of funding.

Unlike the dot com era of the nineties, Web 2.0 enables entrepreneurs the ability to engage in two very different paths:

• Create a traditional nineties-style, high-growth, venture-funded technology business.
• The second option for starting a business that has burgeoned is the rebirth of the traditional entrepreneur’s self-funded small business.  The Web 2.0 era affords entrepreneurs the ability to have a technology business that rapidly develops product, with that product being sold to meet clients’ needs.

Although these two options are laid out as extremes and are both worth discussion, I am going to discuss the underlined nuances of the second option.

Building a business: First, I am defining a business as a revenue-generating, profit making entity. Although this definition may seem pretty obvious, there are plenty of businesses today that break that model – YouTube.com, FaceBook.com, MySpace.com – you get the idea. In spite of these examples, the beauty of a Web 2.0 era business is that the level of capital required to build a technology-related business has declined to rival the capital requirements of starting ANY small business in the pre-dot com days. And contrary to the above Web 2.0 examples, entrepreneurs can immediately engage on a path toward profitability.

Unfortunately, the message of this new reality hasn’t gotten the wide-spread distribution it deserves. Entrepreneurs are still making their rounds to the VCs looking for bubble-level cash investments in hopes of being on next year’s cover of Business Week. And VCs are still funding business plans without clearly-defined paths to profitability, in hopes of landing the company that ends up on next year’s cover of Business Week. The model from the nineties that you can build a business AND lose money should have burst with the dropping of the year 2000 Waterford crystal ball in Time Square. My all-time favorite quote from the nineties is “we’ll make up for the loss on volume” – which they did a few months later by shutting their doors.

As recently as the past month, I heard advice given by a VC to a Web 2.0 start-up was to defer actual sales opportunities and focus on building product and brand. This scenario results in a cycle of dependency, where the entrepreneur becomes ever more dependent on funders to keep their lights on. And the funding partners, instead of having a portfolio of businesses, has a portfolio of products. This may not be a bad deal for the investor if they are looking to roll up product, but it can be a risky play for the entrepreneur.

Therefore, in starting a business, I recommend that entrepreneurs have clearly defined personal and business profitability goals that they model and make sure that these goals are in alignment with their funding partners’ goals. Worse case scenario, if they don’t hit it big on the cover of Business Week, they end up with a profitable business.

Rapidly developing product: Secondly, the era of Web 2.0 enables entrepreneurs to rapidly develop and market new products. In the Dot Com era, at a minimum, it took over $500,000 to develop prototype products. Nowadays, with combination of Web 2.0 technologies, open source, and off-shoring, entrepreneurs can develop mature product for a fraction of that price. Gone are the days of the big bang product launch – we are seeing more and more businesses rolling out as “Beta”, thereby setting low expectations, and getting preliminary reaction from the user community, and ultimately paying customers. 

After an initial beta, or proof of concept, it is desirable to then build what you can sell. It is amazing how many entrepreneurs have great ideas and begin developing their beta product – without ever having put a design prototype in front of a potential client. Some entrepreneurs have told me that they would like it to be closer to final before showing; others are afraid that they will be giving away their intellectual property. Nonetheless, my experience is that there is nothing like good old fashioned client feedback to help speed a product to market and to ensure that entrepreneurs build what they can sell.

Sold to Meet Clients’ Needs: Finally, selling a product that meets immediate clients’ needs is perhaps the most important aspect of starting a Wed 2.0 business. If you have 1) committed to making a profit and 2) committed to a rapid, client-centric development cycle, then 3) the entrepreneur needs to sell the product to the clients that informed the development cycle.

These three integrated steps makes it possible to start a web 2.0 business via bootstrapping your way to profitability. As an investor and entrepreneur, I am not making a judgment between bootstrapping versus outside funding. I am simply drawing the distinction between the two extremes.

In thinking about the options as extreme examples, the main issue that comes up through this process is the entrepreneur’s desired growth rate and perceived risk tolerance. Taking this organic, methodical path generally means a slower growth rate, but also minimizes the amount of outside capital requirements and medium-term risk. I consider the organic growth route to be less risky since more of the control is in the hands of the entrepreneur and the decision to keep the lights on is a decision made between the entrepreneur and the customers.

If the entrepreneur takes outside capital, even if the business is going according to plan, the plan could include another round of funding. And if that is the case, and the funding dries up, due to circumstances outside of the entrepreneur and their current funding partners’ control, the business shuts down, or at least goes through a significant, uncomfortable transition.  

The pros and cons of bootstrapping versus outside seed funding is a topic that spans many critical areas in starting and running a small technology business (and keeps many entrepreneurs and investors up at night). Therefore, I will be spending some more time on this issue in future blogs and sharing with you my discussion with other investors and entrepreneurs.

Well, we’ll find out soon enough. I am a co-founder of iBelong Networks, which has developed and supports the social networking platform that hosts the Amplifier Network. When Jonathon asked me to blog as a part of the entrepreneur section of Amplifier Network, I was very excited – not because I feel I have so much to share, but because I feel I have so much to learn. As this is my second startup, I consider this a masters degree program in entrepreneurship – and this forum will afford me the opportunity to sit down with some of the region’s most successful entrepreneurs, discuss lessons from their experiences, and determine how these lessons apply to my day-to-day hurdles in starting and running a technology business.

Over the course of the next few months, I will explore the topics that are top-of-mind to me and other entrepreneurs in starting, growing, and running a technology business. These topics include:

• Choosing the right business partner: This likely is one of the most important decisions an entrepreneur will make. Starting a new business has many ups, and many, many downs. And going through this experience with the right partner helps in making the right decisions, putting things in perspective, and providing motivation. In this blog, I will talk to established entrepreneurs to learn their process of choosing their business partners and the results – both the good and bad.
  
• Hiring top performers: As a small, rapidly growing business, sometimes it seems like we can’t hire fast enough. But it is my feeling that making the wrong hire is an even worse fate. In tight job markets, such as the Washington, DC area, hiring the right people can seem nearly impossible. I’ll be asking top entrepreneurs in the region to discuss their processes for hiring and retaining top talent. I’ll also ask them to share the repercussions they experienced when making the wrong hires.
  
• Optimizing the alignment of the sales and product development cycles: In a start-up, product-oriented company, it is critical to foster innovation and develop products that meet clients’ demands. And although much has changed between Web 1.0 and 2.0, particularly the dramatic decline in the cost of taking a product to market, most start-ups still invest heavily in their first round of product development prior to actually getting their first customers. But there are many paths to product development. By aligning the product development and sales cycles start-ups keep the need for funding down – you’re building what the client is willing to pay for. Of course, not all successful companies have taken this route to profitability, but I will be talking to other entrepreneurs about how they have managed this process and their point of view on taking product to market.
  
• Bootstrapping versus outside seed capital: Bootstrapping a start-up has many advantages and several disadvantages. The key advantages include encouraging the founders to develop a business model that includes revenue early in the life of the company; keeping the company focused on meeting immediate client demands; minimizing frivolous spending; and increasing valuations before seeking outside capital. The disadvantages include potentially starving the company; angering current customers due to inadequately-funded customer service; or taking too long to get product to market and losing market opportunity. Although there is no one right answer in choosing a funding path, I would like to learn from other entrepreneurs who have tackled the question of how to fund their start-ups and the ongoing costs.
  
• Finding the right funding partners: If you have decided to take outside capital, it is important to find the right funding partner. These days, the options include friends and family funding, organized angel groups and seed capital funds (such as Amplifier Ventures), and venture capital funds. There are advantages and disadvantages to each type of funding partner. Layered upon this are the unique characteristics of the specific funding partner. I will be exploring the stories and lessons from other entrepreneurs in how to choose the right funding path.
  

If you have any additional topics that we should explore or if you have experiences you would like to share I would like to hear from you. I’m looking forward to launching a great conversation with you over the next few months.