Startups can be a lot like first girlfriends (or boyfriends). You fall madly, passionately in love, think of them 24/7, talk, walk, eat, drink, breathe them, put everything into them and beyond, but sometimes, despite the passion, it just doesn’t work out. And, actually if you’re willing be to be brutally honest, in retrospect the person was often a serious pain in the ass.

So given that you’re going to start a startup, despite the risks of financial ruin, public humiliation, and watching years of your prime swirl down the drain, here are a few things you should consider NOT doing along the way! I realize of course, that these thoughts are going to be totally useless if that glint of love is already shining in your eye—nothing is going to stop you from trying your idea, and nothing should, least of all a blog post! But maybe if it doesn’t quite pan out and you’re still one startup away from being the next Zuck, then you might dust this posting off when you’re looking for that next big idea.

1. Don’t start a company in an ebbing tide.

Startups are inherently risky. Just look at the companies that seemed to have everything right—dream team management, great technology, plenty of money, etc. etc., and they still go belly up at an alarming rate. So given the risks involved, I think it makes a lot more sense to start a company in an industry that is clearly going to grow over the next few years than one in a flat or even falling sector. Can you build a great, successful startup in the print magazine business today? I’m sure you can. But it’s probably going to be an uphill battle, considering circulation is in a free-fall and most magazines look more like leaflets than the former thick glossy phonebooks of our salad days. The point is that in a robustly growing market, you can deliver a less-than-perfect product or service and STILL get traction. Customers tend to be a lot more patient with startups that only solve half their problem if the alternative is solving none of it.

2. Don’t do something you know 20 other startups are already doing.

This is just simple math. In virtually any startup arena, there are only 2 or 3 companies that have happy endings to their stories. The rest get pretty quickly forgotten, but believe me, they were there plugging away just as hard as the winners. If you already know there are several other teams pursuing more or less the same idea, you should ask yourself if there isn’t another sector that isn’t quite so crowded. This is especially true if there’s been some sort of catalyzing event that got “everyone” buzzing in startup world, for example, the advent of Groupon. One reasonable litmus test: if you find yourself continually defending the differentiation of your idea by narrowing it to smaller and smaller markets and use cases, you’re probably in an overcrowded space.

3. Don’t think too small.

Basic math again. Startups with small ideas are probably about as likely to fail or succeed as startups with big ideas. So all things being equal, you may as well choose a startup with … Next Page »

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Since part of my job at Redstar Ventures is to meet as many entrepreneurs as possible who might want to co-found a startup with us, I’ve swilled plenty of coffee at Voltage and Peet’s swapping ideas with many a bright, passionate, and inventive entrepreneur. Somewhere into my second gallon of cappuccino, I began to notice a simple pattern emerging in the fundamental approach entrepreneurs have to their ideas. Grossly speaking, the ideas and entrepreneurs that go with them tend to fall into one of four quadrants of the following matrix (with deference and apologies to the BCG Cash Cow)

Let’s look at the left half of the chart below first. A great example of the Technology driven / Me market quadrant (lower left) would have to be the entrepreneurs behind Rockmelt, who are building an integrated web and social media browser for, well, twenty-something hipster tech guys. In their homepage “what is it” video, the narrator and prototypical user is “a recent college grad who moved out to California to join the Rockmelt development team.” Can’t be any clearer than that—their initial target market is their own employees! I have no first-hand knowledge of Rockmelt’s early ideation, but it feels like a pretty classic tech-driven concept in the sense that it takes something people are doing already (web browsing, Facebook, Twitter) and tries to make it easier and more efficient through a unified, integrated user interface.

An example of the Technology-driven / Others quadrant (upper left) would be Radianse, a startup that uses RFID tags to track patients, workers, and pharmaceutical containers in a hospital to make sure that the right patients are being given the right drugs. The headline of Radianse’s very first press release is “Indoor Positioning Systems reach Tipping Point: Reduced cost and complexity expand application potential for healthcare.” What typifies a Technology / Others Market is that the founders are usually taking their expertise in a technology and exploring what new markets might exist for that technology. They might be completely indifferent to the market itself other than its profit potential.

Opportunity-driven concepts, on the other hand, tend to start with an identified exploitable gap, such as a new law (or loophole), economic shift, or simply an insight into a market opportunity that some other incumbent player has left open. My favorite example of a lower right quadrant company is Facebook. If we believe what was depicted in The Social Network, Mark Zuckerberg, through the Winklevoss twins, became aware of the market opportunity for social networks that were exclusive—in their case, restricted to the ivy walls of Harvard and its peers. The opportunity itself was left open by the dominant player, MySpace, whose lack of restrictions and encouragement of extremes in tackiness built a sort of unwashed masses environment that lacked appeal to the better-heeled denizens of higher education. By definition, Facebook was targeting Zuckerberg and his fellow undergraduates themselves, only pushing to other universities and ultimately the broader public once they had successfully dominated their initial market.

Lastly, the upper right quadrant in my chart belongs to Opportunity-driven concepts that again target markets that the entrepreneur is not a member of. The best example I can think of here is when Andrew Mason took his social motivation site, The Point, and pivoted some of the pieces into launching Groupon. According to Mason, he carefully studied the original group buying site, Mercata, identifying a major market opportunity in selling services as opposed to hard goods, particularly in the depths of a recession where bookings in almost every restaurant, spa, and event had plummeted. In terms of target market, choosing a name and visual design that could not allude more appealingly to weekly circular coupons strongly points to a service laser targeted towards women. And indeed, Groupon’s Female to Male ratio is an astonishing 3.3-1!

But, it’s hard to find lots of upper-right quadrant examples—mainly, I think, because there are simply fewer startups that fall into this corner. The reason behind that is fairly obvious: it’s much easier for entrepreneurs to solve problems for people like themselves, because they can use their own opinions, emotions, and reactions as a proxy for their market. Similarly, it’s a lot easier to take an existing tool and find new uses for it than it is to figure out what tool should be invented in the first place. As the proverb goes, when you are carrying a hammer everything looks like a nail. But unless you know what a nail looks like and understand that there’s money to be made in smashing them into things, it’s pretty hard to imagine inventing the first hammer. In more concrete terms, developing startups in the upper right quadrant favors entrepreneurs who have access to more sophisticated insights about market trends, demographics shifts, latent demands, and consumer motivations across a broad spectrum of industries and population segments.

Note that unlike most four-quadrant charts, it’s not at all clear that being in the upper right quadrant is the most desirable. But, with the flood of new Internet startups hitting the space, accompanied and sometimes assisted by the flood of new startup incubators (full disclosure—including Redstar!), there are clearly some conceptual areas that are seeing ridiculous amounts of overlap and repetition. The downside of the incredible connectedness of the global Internet startup community is the tendency to swarm around the same ideas at the same time. Most markets shake out to two or three “winners,” with all the other also-rans ending up as venture industry statistics. While there are huge success stories in all four quadrants, personally, I’m most interested in startups in the upper right, if only because there’s a lot more white space there and will likely continue to be for the foreseeable future.

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As Erin Kutz wrote about a few weeks ago, my fellow ATG co-founder Jeet Singh and I have recently launched Redstar, a “company that builds other companies.” Unlike most incubators and angel funds, which invest in companies that are already formed or at least well along in the process, Redstar’s goal is to create a stream of valuable startups completely from scratch. If you liken Redstar to a factory (for whatever reason, the startup business is rife with metaphor, so I will beg your forbearance for dragging in a few more by the scruff), then the inputs to our assembly line are essentially three things: ideas, people, and money. In contrast to the archetypal startup story, which invariably features a bolt of Eureka from the blue, we believe that it’s possible and even desirable to create startups more methodically, recruiting talented entrepreneurs and matching them to the ideas, fellow founders, and seed capital necessary to launch.

So the whole Redstar factory metaphor begs a very concrete question: How do you hire an entrepreneur? Aren’t entrepreneurs, by definition, people who have no inclination whatsoever to be hired, and anyways, aren’t all the good ones running stark and raving down the street? In fact, I think the best entrepreneurs know who they are from very early in their careers and are drawn, often defying all logic and reason, to the startup world to carve their own distinct paths by building and running their own operations. They’re just not assembly line sorts of people.

One of my mentors memorably advised me to invest in jockeys, not horses (those damn metaphors again). In this light, I think not so much of hiring entrepreneurs in the conventional sense, i.e. with a salary, bonus, and vacation packages, but rather in betting on a rider and then helping them choose or even breed a steed. In my experience, startups tend to end up doing something pretty far afield from the original idea (ATG’s original business plan, for example, was to build computer music systems for live rock shows—that’s why we called it “Art Technology Group”). In other words, the initial concept really functions more as a point of departure. So what we are really trying to do is invest the earliest tranche of seed funding in a super-talented person who can grow and evolve an idea with the help of some folks who have been around the track a few times before.

As for the entrepreneurs themselves who, if they are any good, are asking what’s in it for them, we’re offering a way to break out of the chicken-and-egg cycle of experience versus funding. It’s extremely hard to attract backers without a strong track record and just as hard to build a track record without ever having been backed. By investing in jockeys for several months before the race, everyone has a chance to learn a lot before the starting gun. And if it turns out the first horse just won’t run, there are plenty more in the stable to develop.

As my kids are fond of asking me, “How’s that working out for you so far?” I’ve just started a series of meetings with our first batch of potential entrepreneurs for hire, so I’ll continue to blog about what I see, hear, and learn…

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I fully realized that the third generation of shopping was upon us when Sharon Jester Turney, CEO of Limited Brands Direct, turned to me and said something along the lines of how she needed something to add the sex to the new Victoria’s Secret website. That one utterance, delivered without irony, wove together several threads that I’d been tracing since the earliest days of Internet retail. They run through the dot-com boom, and my first company’s soaring success, to the bust, which I happily mostly escaped. They then cascade through the present to the new era of shopping—Shopping 3.0—that is just dawning.

In 1995, at the birth of Amazon, e-tailing, and the great Internet bubble, almost all major and midsized retailers rushed to get online with an irrational exuberance that consumed billions of dollars and set up the ensuing crash. The Web 1.0 pundits predicted the demise of big-brand retailers because the Web was going to disintermediate manufacturers and consumers, essentially providing a sort of uber-catalog of all products made anywhere in the world, listed at the lowest competitive price. Yet as online retailing has played out over the past decade, a curious thing has happened: not only have big-brand retailers defied early death, but their online sales have thrived to the point that they now dominate virtually every category. The largest specialty apparel retailer in the world is Gap. The largest online specialty apparel retailer? Gap Online. Largest office products retailer? Staples. Largest online? Staples.com.

Yet the online shopping experience that Amazon created in 1995, and which we still live with today, relies almost exclusively on placing products in electronic catalogs on Web pages and waiting around for customers to fill out and submit their orders—a paradigm that would be perfectly familiar to the Sears & Roebuck Company at the turn of the last century. So far, online shopping has turned out to be merely an electronic extension of catalog shopping; generally speaking, customers are using the Internet to buy the same products from the same retailers that they already know and trust.

The obvious business-school lesson is to never underestimate the power of convenience and brand. The top 100 U.S. Internet retailers alone will sell $50 billion worth of goods in 2006, and their annual online growth is predicted to exceed 20% for the foreseeable future. Online retail is the fastest-growing multibillion-dollar business in the world.

So why is the CEO of the sexiest brand in the world talking about making her website sexier? The answer lies in the fact that the Internet shopping experience is finally showing signs of moving beyond the electronic-catalog model. The conjunction of a number of elements, including broadband connection speeds, rich media, social networking, and user-contributed information—a collection associated with the “Web 2.0” phenomenon—is dramatically reshaping the landscape of online retailing and will ultimately reshape the way all products are marketed and sold.

To understand this, we have to understand today’s Shopping 2.0 experience. Shopping 2.0 did not begin with the Internet. Rather, retail’s second generation was, in fact, catalog shopping, reaching back to the Sears era and accelerating tremendously as catalogs moved online. Product catalogs, whether on printed or web pages, held the transformative power of extending the shopping experience beyond the physical store and into customers’ homes and workplaces at all hours of the day.

While this extension offers consumers the convenience of remote shopping on their own schedules, it has also fractured the shopping experience into a series of disjointed phases: awareness through mass-media advertising, brand impressions, and word of mouth; selection of products through images and description, prior in-store experiences, and recommendations; the fulfillment experience of placing the order and the shipping process, the product experience itself when the item arrives and is used or consumed; and finally, the service experience of resolving any questions or problems along the way.

Catalog shopping’s separation of the shopping lifecycle has tended to create a parallel separation in the way retailers and marketers address each of the phases of the experience—even for the retailers who offer both in-store and catalog (web based or paper) experiences. Product advertising to create awareness is developed by a marketing group, whereas a separate in-store merchandising group worries about shelf space and layout. Another group manages the paper catalog, and yet another creates the Web catalog. These operations are rarely linked tightly to customer service, so when the shopper’s experience is going badly, there is no direct feedback to people elsewhere in the experience chain.

By contrast, in the pre-catalog Shopping 1.0 experience, many of these phases were compressed into a single store visit, where even the first awareness of a particular product might lead directly to purchase and consumption. Shopping for shoes in the 1.0 era represents a perfect example of the strengths of a unified shopping lifecycle: a customer gains awareness of the shoes she wants by browsing the visually rich and tactile displays, immersing herself in the products and selecting the right combination of style, fit, price, and availability. She converses with her sales representative or with a friend or even just observes other shoppers to glean cues to help guide her decision. Fulfillment is immediate, and even consumption can be instantaneous, if she walks out wearing her purchase. There is always someone to guide her and assist her with any problems, from the awareness phase to consumption.

Shopping 3.0 can be viewed as a sort of synthesis of generations 1.0 and 2.0, combining the high-touch, unified shopping lifecycle of the physical store with the convenience of the time and place shifting of the online catalog. With the continuing breakup of mass media, the Internet is becoming the dominant channel for promoting brand awareness, not only through explicit advertising and marketing, but also through the word-of-mouth buzz fostered by the Web’s flourishing social-communication facilities. Likewise, customers more frequently base their product selection on information, reviews, and recommendations found online, and on increasingly sophisticated interactive shopping experiences fueled by broadband video and audio. Finally, while fulfillment will always involve some form of delayed gratification, the online customer-service experience is being hugely enhanced by highly responsive online help services, “click-to-call” systems, and voice over IP.

These phenomena are effectively compressing the formerly disparate elements of the 2.0 shopping experience cycle into a single online channel, but with entirely new rules. Both corporate brand promotion and customer product selection depend increasingly on the interactive medium of the Web, where the voices of the marketers must compete for attention with the voices of end-consumers themselves. Even customer service is transforming from a centrally controlled business process into an open forum, full of information but also disinformation. Internet visionary Esther Dyson, commenting on the launch of my latest startup, put it this way: “You can no longer tell people about your brand; you have to let them experience it.”

As Sharon Jester Turney intuited, we are entering a new era, where online shopping will evolve from an electronic version of the Sears catalog into an open, dynamic, and social experience with the potential to dramatically increase sales volumes and profits. It’s an era where the shopping experience itself can be sexier than supermodels in lingerie, as retailers begin cross-breeding online shopping with entertainment and social networking, and digital media in ways that will surprise and delight their customers.

Online shopping will no longer be a solitary, utilitarian task built around convenience but rather a destination activity, in which consumers specifically seek out sites that offer rich, entertaining, and exciting experiences that they can share with their friends and families. The retailers, marketers, and brand managers who embrace and drive these changes will be richly rewarded with deep and lasting brand loyalty, which will benefit all of their fulfillment channels. Those who can’t make the leap from 2.0 catalog pages will be left further and further behind.

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