Dear Kafka: Gregor Samsa Wouldn’t Have Had It so Bad Had He Been a Lean Startup Entrepreneur

Photo by Sizemore / CC BY-NC-SA 2.0

Cockroaches are disgusting. They’re also fascinating. Everyone’s heard that if mankind had an all-out nuclear holocaust, no living creature would be left except, perhaps, cockroaches.  A recent discovery found a fossil of a cockroach dating back 49 million years. To put this in perspective, the oldest known fossil of modern humans dates back 195,000 years. Even dinosaurs date back “only” 15 million years. So, yeah, cockroaches have been around for a while.

The reason why cockroaches have been around for so long is that they are highly adaptive. In the 1980’s, scientists placed cockroaches in an apartment and exposed them to an insecticide mixed with glucose, deposited in a network of bait stations. In a little less than five years, the cockroaches had evolved: their taste buds were no longer the same. In true Darwinist fashion, these cockroaches quickly reproduced and, generation after generation, eliminated their sweet tooth for the glucose and thus the poison.

Another characteristic of cockroaches is their resilience as individuals. They can go for up to 45 minutes without air, recover after being submerged in water for 30 minutes, and survive off the glue on the back of a stamp for a month.

But what makes the cockroach interesting is not its individual capacity to survive and go on for hours after being decapitated (I’m not kidding). It is its capacity as a species to survive, reproduce, and adapt: to take one for the team. While emptying a can of Raid on a cockroach, my wife claims that she witnessed a female cockroach releasing her eggs. She says the accompanying popping sound (whether real or imagined) still haunts her dreams. Sure, you can kill an individual unit, but you’ll barely make a dent in the overall population, which will grow exponentially and quickly adapt to whatever’s out there to ensure the species carries on for millions of years to come. Now, that’s what I call team mentality.

The cockroach is disgusting, adaptive, resilient, viral, and thinks team first. I want my startup to be like the cockroach, minus the disgusting part.

A Super Founder-Salesman Can Hurt Your Startup

I know it sounds crazy: how can an asset - good sales skills - be bad for your tech startup? Because your persuasive skills may be too loud, creating a distorting noise that won't let your early customers raise their objections. What's more, a founder's strong salesmanship and drive are seldom scalable. 

Let's start with distortion. Every startup co-founder doing customer discovery and validation should know better: yapping and pushing too hard is useless during the early days of a company. You need to learn about your customer's problems, present the product/solution/value proposition, and shut up and learn. Pushing your product will not help you gain customer insight. You cannot be selling when you should be learning. This is not, however, what I am talking about.

What I am talking about is a much more dangerous phase of your startup: when you get closer to product-market fit. At this point, you will usually start "test-selling" your product and the dangers of being a super salesman can backfire. A founder's splendid sales abilities can easily distort customers' internal decision-making processes. A strong founder-salesperson could generate strong traction for a product that has not achieved product-market fit. Just think: how many times have you bought something or subscribed to a service - and later regretted it - because of a superhuman salesperson on the other end of the line?

However, once you raise outside capital and step on the gas pedal (i.e. try to scale), you could find that you have to go back to the drawing board. In fact, you are likely to blame your newly-acquired sales team, when in fact you should be blaming yourself for not fully validating your product.

That takes us to my second point: even if you decide to replace your sales team after the initial disillusionment, you cannot expect everyone to be a master closer. That's not what a scalable startup should be all about. In fact, even if you do get an insane sales team, you may end up just prolonging the pain: you will achieve new customer growth but your churn rate will be high and you will fail to scale. The pushy salesperson may sell you a product, but you surely won't recommend it to your friends, upgrade your service, or renew your subscription. In fact, you may even try to avoid his calls in the future because you know how difficult it is to say "no" to this guy.

Do you want to go back and revise your product late in the game? Probably not. Don't push. Shut up. Let your product do the talking. If it does not sell, then listen to your client's feedback and re-do your work.

But once you achieve product market fit, get the salesman. And get the best one out there.

My Jan. 22, 2014 Globest.com Article (Which I Totally Missed!)

Last Updated: January 22, 2014 10:05am ET

EXCLUSIVE

Crowdfunding: Changes and Impact on CRE

By Stefano D’Aniello, co-founder and COO of Groundbreaker | Commentary

NEW YORK CITY-In my previous Globest.com article, I defined crowdfunding as the collection of funds from multiple parties to finance a particular project or venture. I concluded by stating that technological and social pressures gradually rendered the regulatory regime from the 1930s obsolete and impractical. This forced the SEC to relax its once black-and-white advertising restrictions and turn them into a gray mess of guidance.

In 2012, Congress recognized this problem and finally put an end to the old advertising restrictions for private deals and created a regime for “crowdfunding.” The new regulatory framework would empower market participants on both sides of the equation, thereby providing much-needed relief to startups and smaller investors alike, removing some of the old barriers to entry and access to capital.

So, what precisely did the JOBS Act do? Here is an overview of the changes that are most likely to affect private real estate fundraising:

1. Gimme an “A”! New Reg.  “A+,” which was proposed by the SEC last December, would expand the scope of the seldom-used Reg. A and allow sponsors to raise up to $50 million in capital (currently capped at $5M) with a simplified registration process. Unlike current Reg. A, this new exemption would preempt state securities laws. This means sponsors would advertise and sell their deals in all 50 states without having to look up each state’s securities laws. The price to pay: registration and reporting with the SEC, investment limits (10% of investor’s net worth or income), and audited financials. The impact of this new rule on real estate will be highly dependent on the amount one hopes to raise. For smaller deals, it could be unworkable due to legal and audit costs.

2. For the ballers. Rule 144A offerings, which are limited to qualified institutional buyers (“QIBs,” which include financial institutions and other big players), can now be generally advertised. Perhaps market conventions will change, but don’t expect these sophisticated institutional markets to change radically anytime soon.

3. For the lesser ballers. Rule 506 offerings can now be marketed to the general public. The price to pay: issuers lose the ability to sell to anyone other than accredited investors ($200K in income or $1M+ in net worth) and have to verify that investors are in fact accredited. Bingo: as I will explain in future articles, this one is already changing market dynamics and is destined for glory.

4. For everyone else. Proposed crowdfunding regulations are exhaustive and cumbersome. For now, let’s just say that the impact of these regulations on real estate will likely be minimal due to the overwhelming complications that they bring (e.g. requirement to use a registered intermediary, yearly $1M limits per sponsor, audit requirements for offerings larger than $500K, and ongoing reporting requirements).

Stay tuned! I will expand on these new rules in future articles and explain how I see them affecting real estate fundraising in the years to come.

Stefano D’Aniello is co-founder and COO of Groundbreaker. The views expressed in this column are the author’s own.

For MORE insights on finance trends, check out Ackman Ziff's "Capital, Fueled by Innovation" home page, which provides Thought Leadership positions on a variety of commercial real estate trends, transactions and movement.

Copyright © 2014 ALM Media Properties, LLC. All rights reserved.

Best Practices to Handle Your Lawyer/Client

In spite if my young age, I have been on both sides of the attorney-client relationship enough to know what to expect. In fact, I have been pretty much all over the map, when it comes to it: attorney at a large firm and  as a solo practitioner; client as in-house counsel for a large financial institution and as general counsel and co-founder of a startup. Experiencing first-hand the attorney-client relationship from all these different angles has given me some unique perspectives that may prove useful for both lawyers and clients in understanding each other's motivations.

For Lawyers

1. Whenever possible, clients want fixed or capped rates. No one likes surprises and no one wants to go about auditing and reviewing your bill. Give me a price and, if I accept, stick to it. Frankly, I don't care how you get to that price, as long as I know it in advance and accept it. A good lawyer should know well how much time a certain matter should take. (But see rule 1 for clients below.)

2. Be prompt and responsive. Never miss a deadline. Always return a client's call or email. Anticipate his every demand or need. For example, got a set of comments? Give him a list of open points, identifying the nature of each issue and your recommended course of action.

3. Don't bill your education. If this is your first time doing something, then you are likely to spend time learning it. Don't bill this time. Imagine you have done a dozen similar deals. Where would you have started? That's where you should be billing. And be happy about it: you learned something new.

4. Whenever possible, save costs, but always be involved. For those at larger firms, especially, remember to always be involved. The last thing a client wants is to call his lawyer and realize he has no idea about the status of his matter.

5. No surprises. Always be on top of things and be the first to deliver the news.

For Clients

Fortunately, there aren't many "rules" for clients. They are the client after all.

1. Once you get a fixed or capped price, make sure you read the assumptions behind the quote. Make sure they are reasonable (e.g. an assumption that loan documents will not be negotiated at all is not reasonable, while an assumption that there will not be more than three turns of a document is). Be flexible if you missed the mark by a lot (e.g. your financial statements went "stale" and now your lawyer has to draft an entirely new set of disclosures).

2. Be reasonable and respectful. This is a very important rule, especially for those who, like me, are selective when getting new matters (I can only handle 2-3 deals at a time). Make sure your expectations are known beforehand, but also make sure your deadlines reflect your true needs. The worst thing for a lawyer is to pull all-nighters and work weekends to deliver a draft and then see how it gets ignored in your "to-do pile." Also, make sure you tell your lawyer at once once your deal is on halt-mode.

My Culinary Adventures This Past Holiday Season

Another year went by and, by now, I have become the official MC for my family holidays. The role has been handed down to me by my mother, who, at 72, looks and feels as great as ever, but has now tactfully decided to focus on her Neapolitan struffoli and leave me the honors of cooking in Guayaquil in December (in case you didn't know, the weather there in December is like that of a NYC subway stop in July). So, what did I do this year and how did I fare?

Christmas

For the Christmas entree, I went for Cuban-style whole roasted suckling pig. The darned thing looked adorable, as if masterfully slaughtered during its sleep. A day ahead, I rubbed it with salt and pepper and marinated it in a mix of white wine, olive oil, lime, grapefruit, thyme, bay leaves, cilantro, parsley, cumin, garlic, and onion. Instead of cooking it myself, I sent it to a bakery that had agreed to roast it in time for Christmas Eve (that's the main Christmas celebration down there).

How did it go? I give myself 3 stars out of 5. I should have roasted it myself. The pork was well done, but it should have yielded more fat and become crisper before being served. Next year, I will try following the method they use in Segovia, Spain (arguably, the capital of the suckling pig). 

But my culinary reputation was not totally damaged: the suckling pig was preceded by a langoustine risotto. Langoustines in Ecuador are not as big as the prawns we have in NYC supermarkets, but excel in flavor and freshness. The risotto was cooked in a broth I previously made (with the langoustine shells and spices) and finished off with Spanish saffron that my mother-in-law had brought over. I give this one 4 stars out of 5. 

The award for best Christmas dish, however, goes to my mother-in-law: she took some of the freshest passion fruit and mango and made a delicious mousse; perfectly suited to the weather.

New Year's 

For New Year's, I was already freezing my butt off in New York. We had a few friends over and made gnocchi. We used Idaho Russet potatoes and followed the proportions dictated by the Silver Spoon (to me, the foremost authority when it comes to getting Italian cooking right, without relying on incomprehensible phone instructions from your mother).


For the sauce, I chose a traditional Bolognese. I have done quite a bit of research and experimentation in Bolognese over the years and the more I read about it, the surer I am that there is no such thing as "traditional" Bolognese and when it comes down to it: no one can agree on anything. Tomatoes or no tomatoes? White or red wine? Milk or no milk? Pancetta, sausage, and/or lardo? Beef or veal? For mine, I used the usual onion, carrot and celery soffritto (in butter), lardo and pancetta (previously crisped), stew beef and pork shoulder (previously browned), some leftover red wine from Puglia, my own homemade beef broth, tomato paste (my wife made sure I added a bit more midway through), milk, and a touch of nutmeg. This was all simmered at impossibly low heat for about three hours. 

That, my friends, was a 5 star-dish and a memorable New Year's. Yet more proof that cooking does not come from a recipe; it comes from the heart. Happy 2014!

Questions Around a Legendary Evil Character from my Childhood on the Equator

I am spending the better part of December in my hometown of Guayaquil, Ecuador. In fact, I am writing this post in the house where I grew up (some day I will write about it and include some nice pictures).  I am seeing old friends and revisiting old places, as well as witnessing the transformation of the city that I once called home.

Mr. Satan

Last week, while working out at my old gym, I saw the man himself. I will call him PW. I first encountered PW when I was 11, when I joined a martial arts school. PW was perhaps five years my senior and was a talented fighter. At some point, PW left the school and joined a new school that taught Arnis, a Filipino martial art.

All I knew from my Sifu (master) was that this school was led by his evil uncle, with whom he had fallen out years ago. He practiced some sort of dark magic and performed rituals involving black goats. He would teach you things like how to kill people with credit cards, and not precisely by using them to hire a hit man.  My Sifu, a savvy businessman and a zealot when it came to retaining his students, was probably making a lot of this stuff up. But I remember meeting some weirdos from the Arnis school; they actually spoke of rituals, superior evil beings, and black goats (no white spots!). Perhaps that was their marketing game plan.

The legends around PW grew wilder and wilder over the years, partly owing to his younger brother, who was quite the compulsive liar (I have met quite a few over the years). It was like the tropical version of Chuck Norris Facts.

The Good Master

He pretty much fought everything and everyone in Guayaquil. Once he was done with one-on-one fights, he started fighting larger groups, doing Hollywood stunts. He jumped from a third floor to stop a group of thieves (he later proceeded to beat them up). After a while, our small town got too small for him, so he went international. He traveled to Chile, where he single-handedly beat up their “best fighter,” together with all his friends, at a bar.  Chairs and roundhouse kicks were on the menu.

But likely his most legendary tale was when he crashed his sports car (the same one he would use to accomplish feats that not even Fangio could dream of) into a bus, barely saving his life by reclining his seat as his car went under. Right after the crash, he’s said to have broken the bus floor with his bare hands and climbed up into the bus to the sound of screeching metal and the voices of “the devil!” “No, worse: it’s PW,” were his last words before beating up the driver and the passengers who dared stand in his way.

So, did he do all this? Or any of it? Did he crash his car into a bus? (But wasn’t he infallible?) To my knowledge, no one ever tried to find out. So, when I saw him the other day, it was the perfect opportunity to ask him and be the first. What the heck? He seemed happy to see me, so he may have spared my body and soul, even if the question proved annoying. But, in the end, I just greeted him as I had always done, without asking the questions that have haunted me for years.

Why didn't I ask? Probably for the same reason that I am not using his real name: I'm worried some of it might be true. (If you disapprove of my hesitation, you may want to take a look at Pascal’s Wager.)

I Am Fine: A Short Guide to Understanding a Tech Entrepreneur

Photo by Frank Tiemann. All rights reserved.

A few days before joining GroundBreaker full time, I met my friend Alex from KarmaBox for coffee at Zibetto (serious contender for best espresso in town). Alex had been in the startup business for at least a year at that point and asked me how I felt about leaving my corporate job to cofound a tech startup. I was very confident on the outlook of our startup and probably sounded like a cocky idiot, thinking I had everything figured out. I will never forget his words before we said goodbye: “Startups are anything but straightforward.” 

Just a few weeks later, his words started resonating in my head. We had just come out of stealth mode, but things were not working out as we expected. “Why are people not pouring onto our site and fighting each other to get a piece of these deals?” Ah, the naïveté of first time entrepreneurs! Reality check number one: “if you build it, they will come” only works when you raze a cornfield to play ball with ghosts. It does not work for tech startups. You need to find out who your customer is, what he wants, and then market, market, market. Building the darned thing, it turned out, was the easy part.

Then we got into the accelerator program at Haas, back at UC Berkeley. I started reading the current entrepreneurship gospel materials. I learned I was not alone on my predicament. Many first-time entrepreneurs had been there before. In fact, I had found out about my mistakes early enough to correct my course. 

I had failed to attract millions of users on day one but I was reassured that this was part of the process; the long and painful (yet fascinating) process of finding a business model that works (e.g. solves a real problem for a specific set of clients and delivers a profit acceptable to our company). To get to my final goal I had to fail many times and change the action plan each time something did not work out as expected.

This simple concept, however, is foreign to outsiders. Most people I know either perform very specific functions for established companies or have more “tried-and-tested” businesses that do not require an extensive search and validation process. When I try to explain to my friends and family that my idea has evolved from one week to the next or that I have now “pivoted” and refocused my efforts on something else or another customer segment, I notice their reactions: concern, puzzlement, condescendence, etc. “But, Stefano,” they say, “I thought your original idea was…” They seem to be holding on to my original idea even harder than I ever did.

Sooner or later, I will find out whether or not our business model is one worth pursuing in its current version, with some tweaks, or at all. I am learning a million things and enjoying myself in the process.

I hope this post is the last time I tell this to everyone: I am fine!