Mechanical Turk is Amazon’s army of pieceworkers, ready to help you blend computation with human tasks in web apps.

What I didn’t know is that MTurk is also a powerful tool for testing and refining ideas. I learned this while interviewing Dan Shapiro onstage at the Founder Showcase last week.

Shapiro is a remarkably successful entrepreneur. His second startup, Sparkbuy, was acquired by Google just six months after he launched it.

That’s after a successful go with his first startup, Ontela, which merged with Photobucket in 2009. That company took a relatively pokey four years to arrive at an exit. Of course, by most people’s standards, four years would be plenty fast.

But what makes Shapiro’s approach to starting companies so interesting is the thorough, pragmatic approach he takes to market testing.

“I’m always skeptical when I get too in love with an idea,” Shapiro told me.

So when he had an idea for making it easier to find and compare electronics on e-commerce sites, he turned to Mechanical Turk to test and refine the plan.

(It also helped that a Google business development executive he met on a plane expressed interest in the idea, but “that was just a tiny, positive indicator in the grand scheme of things,” Shapiro said.)

Mechanical Turk, a project Amazon.com started in 2005, is a brilliant fusion of human labor and programmatic computation. Using it, you can incorporate human effort into your web-based software simply by making an API call. It’s no surprise that entrepreneurs are excited about using MTurk as a low-cost way of recruiting help, particularly for repetitive tasks.

But it’s also a great, low-cost tool for doing surveys, and that’s exactly what Shapiro did.

The first part of his surveys is always the set of eight questions from the U.S. Census. That helps him determine demographics and figure out how “normal” his respondents are.

Then he follows up by asking them a ton of questions.

First, Shapiro asked 100 people to describe a laptop as if their friend was going to buy it for them. Then he analyzed the responses, categorized all the words they used, and did a second survey to measure how important each of those words were. After that, he did follow-up interviews.

What Shapiro found was that the #1 criterion for laptop shoppers was price (no surprise there). But the #2 criterion was quantity of RAM, which was a bit surprising because it is an unusually geeky metric. Who really cares how much RAM their notebook has, after all, except really techie people? After doing some interviews, he realized that what people really wanted was speed, but there was no way on electronics sites to specify “I want a laptop that’s fast enough to run PhotoShop.”

Using these answers from a series of surveys, Shapiro was able to craft a business plan for a company that would let you shop for laptops based on criteria people actually care about, such as the ability to run PhotoShop, or weight, or color. What’s more, he knew from his market research that these were the criteria customers would be most likely to respond to, so his business idea was essentially pre-tested.

“I love MTurk,” Shapiro said.

He also used MTurk in the course of business, not just for business plan testing. For example, Sparkbuy’s database of laptop attributes was built in part by an army of “Turkers.” And at Ontela, he’d put out surveys with 100 or more questions about the wireless industry, using them as a valuable market research tool.

The price is almost ridiculously low. Shapiro said he would pay about 26 cents apiece for people to answer these 100-question surveys.

Shapiro’s not a solitary genius — others, particularly academics, have discovered the value of using MTurk in research. In 2009, someone named Alex Frakking described in detail how he used Mechanical Turk for conducting surveys. He paid a bit more: about 3 cents per survey question, in an attempt to keep the hourly rate between $8 and $12.

Frakking makes an interesting point, which is that the very people who fill out your survey on MTurk might turn into some of your earliest customers. You can make that easier by letting them opt-in to a mailing list so you can contact them when you launch. “In the last big survey I did, about 20 percent of respondents gave their email for just that purpose, meaning the survey can pay for itself in leads,” Frakking concludes.

Are Mechanical Turk surveys statistically valid? Absolutely — or at least as valid as phone or website surveys.

“The funny thing is,” Shapiro told me onstage, “if you actually look at the methodologies behind the way everyone else does it, it’s just the same.”

In a 2010 study, researchers compared surveys done with MTurk to those done using the traditional sociological pool, Midwestern university students, and with people found on Internet discussion boards. MTurk compared favorably.

The study concluded “experimenters should consider Mechanical Turk as a viable alternative for data collection,” although it warned that subjects are susceptible to the same kinds of experimental bias found in other arenas. The takeaway: Design your surveys carefully.

Also, the authors warn, unlike undergraduates, MTurk workers aren’t replaced with a new crop every few years, so there’s the potential for long-term relationships between surveyers and those surveyed. So don’t be a jerk: Treat your survey respondents right and they’ll be there for you, potentially for years.

For people who are interested in following Shapiro’s lead, there’s an open-source set of tools for doing MTurk surveys, called Lime Survey. And IT World published a detailed list of tips on running experiments or surveys on MTurk.

The rest of my discussion with Shapiro covered topics such as who should raise venture capital (not everyone), his experiences selling Sparkbuy and merging Ontela and Photobucket, and his thoughts on crowdfunding. It’s worth a listen. The whole 30-minute interview is below.

Mechanical Turk image: Wikipedia

What are the chances that the ideal people for your business live within commuting distance? And even if they did, could you actually find, attract, and afford them, given that great talent has countless options?

Traditional hiring is extremely painful. But with the explosion of online work, businesses are breaking the limitations of geography, and they aren’t going back — 76% of businesses characterize online work as a long-term strategy, and 90% say it makes their business more competitive, according to data released by my company, oDesk, a few weeks ago based on a survey of over 7,000 of our clients.

It’s easy to see why: Access to talent is a critical factor in accelerating success, especially for smaller businesses. MCF Technology Solutions, a development service for cloud-based platforms, is one of millions of startups leveraging online work for this reason. MCF started with just a few designers hired online, then turned to software developers, project managers, assistants, and more. Its 15-person on-premise staff is now empowered by 19 online team members, and CEO Govind Davis couldn’t imagine it any other way. Wiith online work “I have an army,” he said. “It is a huge breakthrough for us in allowing us to grow.”

According to Staffing Industry Analysts, 50% of the Fortune 100 workforce will be contingent workers by 2020, and there is no reason most of these workers shouldn’t be working online rather than on premise.

To stay competitive, it is imperative that businesses embrace this new working model. But when applicants are no longer sitting across the table from you, how do you assess whether they are a fit for your business? Here’s how:

1) Go above and beyond your typical job description to attract the most qualified talent

Having a global pool — instead of being limited to only candidates within commuting distance — increases your chances of finding ideal talent for your role. And when workers have literally a world of jobs to choose from, the ones who actually pursue yours are more aligned with your needs.

But to tap into this larger pool of motivated candidates, you need a job description that’s even more clear than usual, to increase the chances that the right candidates with the right qualifications find your job. The best descriptions not only outline skills required, exact objectives, and any key context, but also expectations for deliverables.

2) Single out exceptional communicators

As with local hiring, we typically look at four key dimensions when determining fit:

1. Personal characteristics
2. Motivation
3. Skills
4. Knowledge

However, some additional characteristics are particularly important online. Exceptional communication skills are especially critical — the best online workers check in frequently, ask smart questions, and skillfully articulate ideas and concerns. An ability to understand projects holistically is also key, as it allows online workers to foresee potential problems and propose new ideas.

3) Test drive your favorite candidates

For online hiring, it’s common to start with a test project — a small assignment, requiring only a few hours of work, that is representative of the larger project and assesses the skills required. Test projects are low risk and extremely informative. You may even want to test multiple candidates and hire the best fit. Take your time in making the final hire, since you can complete the entire process — from fielding applications to making an offer — in just a few days.

What are you waiting for?

The world of work is changing for good, and clinging to hiring processes that worked in the past will quickly render your business extinct. Like anything new, you have to invest time in online hiring to figure out what works best for your business, but starting now will help you build a trusted online team at your own pace. You will be amazed by what you can accomplish when talent is your only criterion and geography is merely an afterthought.

Gary Swart is CEO of oDesk and has more than 17 years of experience in the enterprise software market. Prior to oDesk, he was VP of Worldwide Sales for Intellibank and Business Unit Executive for IBM’s Rational Software Product Group.

[Top image credit: Andresr/Shutterstock]

Venture capital investment is hitting the skids in China, the world’s largest Internet market.

VC investment fell to its lowest level in six years this quarter, as reported by Dow Jones VentureSource. A slew of unprofitable companies going public have deterred overseas investors, who are no longer pouring funds into Chinese start-ups.

“The reason the venture capital market dried up is because the exit market is not there,” said Tim Chang, managing director at Mayfield Fund.

According to the report, this quarter saw steep declines: a 39 percent decline in deals and a 56 percent decrease in VC investment compared to the first quarter of 2011. Information technology and consumer internet services have taken the biggest hit.

“The market has stopped believing in the fast-growth-only story of China,” said Chang.

The rise and fall of China’s entrepreneurial economy is a classic cautionary “get rich quick” tale. As early as 2003, highly profitable tech companies like Baidu, the Google of China, whet investors’ appetites. Valuations were dirt cheap; Chinese companies went public and did very well. Overseas investors smelled opportunity and by mid-2010, according to Chang, “China went into crazy, hyper bubble mode.”

Filled with confidence, Chinese entrepreneurs would joke that they only needed to scrawl a business plan onto a napkin to raise funds. E-commerce companies were the darling of the Chinese VC market; for every Zappos or Groupon in the U.S., there were thousands of Chinese copycat companies vying for domination.

Why did the bubble burst? David Chao, co-founder and general partner at DCM, said that while the Chinese economy has stagnated (the GDP growth rate slowed down significantly in the second half of 2011), international funds are reallocating some of their investments back to the rebounding U.S. market. DCM, an early stage VC firm has been investing in Chinese companies since 1999, recently taking Chinese companies like Renren, Dandang and Vipshop public in the US.

Additionally, a series of recent accounting scandals in China, leading to trading halts and lawsuits, has kept investors at bay.

“Accounting fraud committed by some Chinese public companies and corporate governance issues have made foreign investors lose confidence in Chinese concerns,” said Chao.

Investors point the finger at management teams in China, who did not set expectations and prioritize investor relations during the height of the IPO frenzy.

Still, both Chang and Chao remain cautiously optimistic about the long-term investment prospects.

The economy will bounce back when investors see a world-class company go public in China. Chang points to several start-ups that are poised for success: Vancl, the Chinese equivalent of Banana Republic, recently received a sky-high valuation recently; while 360buy, another e-commerce company, raised $1.5 billion in 2011, and continues to dominate the market.

According to Chao, entrepreneurial zeal has not abated and there is still a buoyant market in China.

“We think smartphone and iPad, health IT services, and cloud-related deals in China continue to be very interesting places to look for deals,” he said.

Shanghai skyline photo via Arend Vermazeren/Flickr

Law offices bring to mind power suits, closed-door corner offices, serious conversations, and clients getting billed for every minute of advice. Collaborative work spaces with lounges, foosball tables, communal desks, and fun networking events are the bailiwick of hoodie-filled startups. But what if a law firm started acting like a startup?

Wilson Sonsini Goodrich & Rosati, one of Silicon Valley’s top law firms for startups, is trying to be a bit more like the hip, lean companies it represents by opening a new open and collaborative workspace in San Francisco’s tech-heavy SOMA district.

“One of the goals is for it not to look like an office you’d expect to see us in. Look more like the kind of space our clients are used to working in,” partner Todd Carpenter told VentureBeat.

Partners Mark Reinstra, Rachel Proffitt, and Carpenter (pictured above, left to right) gave us a tour of the raw space ahead of their move-in. The bright ground floor office is mostly one big open space, with large street-facing windows, exposed brick walls and thick wood beams, a spot for the aforementioned foosball table and lounge, and a handful of offices with doors for confidential meetings. It’s in walking distance of many of San Francisco’s big tech players, as well as AT&T Park, the new Lucky Strikes bowling alley, and hipster chicken-and-waffle eatery Little Skillet.

The office will serve some traditional lawyery purposes — clients in the area can come in to meet with their attorneys. But the plan is for it to act more as a community hub where entrepreneurs, lawyers, angel investors, and venture capitalists can mingle and maybe even make deals. It’s not just for clients, but for any lean-startup entrepreneur who could use some advice (a.k.a. potential clients).

“We change as our clients change, and right now they are raising small amounts of money very quickly, from a totally different subset of investors than they were ten, twenty years ago,” said Proffitt. “We need to be in a place to help them.”

More and more startups are doing things on the cheap — getting smaller infusions of capital, working in the cloud and without a pricy central office space. Wilson wants to step in and help these lean startups with facilities for board and client meetings, presentations, or just a place to plop down and get some work done. The partners also plan on hosting bi-monthly events, workshops, office-hours, and other events that are “designed to bring the community together.”

This is the firm’s third Bay Area location, but the tiny satellite office will only house three lawyers full-time to start, with a revolving cast of visiting attorneys from the other offices in Palo Alto and downtown San Francisco, and no non-lawyer staff (that means they’re making their own copies and coffees). It’s a small-scale experiment (they say its in “beta”) for the 50-year-old firm, which has 180 partners total, 1,200 employees, and 11 offices in the U.S., Asia, and Europe.

In a classic startup touch, the partners are in negotiations for a large stuffed grizzly bear for the space.

NOTE: Names have been changed out of respect for “Bob’s” privacy

Most people would expect the billionaire owner of an NBA team to be kind of a jerk.

While I had spoken to Bob on the phone some months before and he seemed like a nice guy, I was still taken aback by the email that popped up in my inbox.

“Hi Francisco, I’ll be in L.A. next week and would love to get together. I’ll have a car and can drive to you if that’s easier for you.”

I thought back to all the random jokers who expected me to drive in from the suburbs or showed up late for appointments and could scarcely believe that this master of the universe was offering to drive out to meet me.

That was last September and I’ve spent the past eight months thinking about how Bob treated me, how he treated the waiter at breakfast, and how modest and down to earth he was.

I thought about what a stark contrast he was to so many of the self promoters that pass for heroes in the tech community.

Have we just been fooled by charlatans skilled at wrapping themselves in disguises of character, or does the fault lie with our own choices of who and what we believe worthy of respect?

As much as I’d like to point fingers at those that I consider imposters, I believe the fault lies in our own failure to discern actual strength of character from those who are simply skilled at self-presentation.

I once gave a talk at Harvard Business School where I asked the students, “Why are you friends with the people you’re friends with? Is it because they’re rich?” They all shook their heads “no.”

I’d like to think that their answer applies to all of us; and if I’m right, why then do we choose our friends based on qualities other than wealth while we seem to choose our heroes based almost entirely on wealth?

Shouldn’t our heroes be held to at least the same standards as our friends when it comes to character? Or has money become the great cleanser that can wash away transgressions of selfishness and vanity?

As much as I think it’s wrong to idolize money alone, I suppose it’s better than blindly looking up to inexplicable traits of popularity.

Just because someone is good at performing on stage at conferences or blogging about the secret to working less, being thinner, or acting bolder, doesn’t mean they are deserving of our respect. Who are they and what have they really accomplished beneath the veneer of claimed expertise?

There’s a scene at the beginning of Schindler’s List when the main character, Oskar, is still a proud Nazi seeking only to profit from the plight of the Jews. He says, “I’ll do what I’m good at, not the work! Not the work! The presentation.”

Today it seems as though “the presentation” is the only thing that matters and that popularity for the sake of popularity is enough to make you a person of honor.

Some of you are probably wondering what this has to do with technology or entrepreneurship. For better or for worse, much of the nation and the world look to the technology community as a beacon of the future. Unlike other industries such as oil, tech is seen as relatively pure and uncorrupt. Many feel we hold the keys to economic revival.

It isn’t unreasonable to reject these labels since none of us actually asked to bear such a heavy cross. But if we are to lead the way, I believe what and who we admire set the path for what we do. If we continue to worship at the altar of personality over character, then we should also face the truth that any admiration of the tech world as being somehow better is nothing more than a case of the blind leading the blind.

Perhaps this post is unfair and I’m simply projecting my hopes for the technology community on to everyone. Perhaps I expect too much. I am, after all, only “in tech” because I believed this was the best place to find smart people. Perhaps I was wrong.

Or, as entrepreneurs, perhaps we should hold our heroes to higher standards of character.

Francisco Dao is the founder of 50Kings, a private community for technology and media innovators. He is a former leadership columnist for Inc.com, a lifelong entrepreneur, author and former stand-up comic.

Top image courtesy of olly, Shutterstock

Not every startup succeeds. Most persistent entrepreneurs eventually find themselves with a business that is failing or going nowhere. There’s lots of advice about starting a new business and navigating a great exit. People don’t like to talk about less successful endings. But pulling off a safe landing is at least as tricky as taking off. Even if you have to land hard and crunch the landing gear, you can still avoid hurting the passengers and crew.

It’s conventional wisdom (and true) that an entrepreneur who has failed is often better for the experience. But failing badly can hurt your reputation and, in the worst case, saddle you with personal liabilities. We’ll address to major sources of trouble: Unpaid payroll taxes and fiduciary duties.

Pay the Payroll Taxes!
Fortunately, officers and directors of a failing company usually are not liable for the company’s debts. There are some exceptions, and it is crucial to be aware of them. The major exception is payroll and withholding taxes. The responsible officers of a company are personally liable for these. You must pay the payroll taxes and you must pay any amounts withheld from employees’ wages. The government will pursue this liability aggressively. Another exception is employee claims for wages, severance, sick pay, vacation pay, and holiday pay. In some circumstances, corporate principals can be liable for failure to pay employees. Paying your employees their final paychecks (and paying the government the related taxes) will avoid these liabilities.

Notice Conflicts of Interest and Deal with them
You’ve probably heard of fiduciary duties. Directors and officers of a company owe them to the company and, in certain circumstances, its shareholders or creditors. In a growing company, fiduciary duties are usually (and rightly) far down the list of concerns for the officers and directors. That changes when you’re shutting down or selling at a price that won’t make everyone happy. First, when people are unhappy (and especially when some people are more unhappy than others), they tend to point fingers and find fault. Second, a struggling business often makes desperate deals to keep going. These deals can involve difficult conflicts of interest.

Fiduciary duty is a simple concept: When you agree to act in someone else’s interest rather than your own, you have a duty to do just that. The problems mostly concern conflicts of interest rather than outright dishonesty. The law recognizes that people’s decisions are strongly but unconsciously influenced by self-interest. So if you make a corporate decision in which you have a personal interest, the law usually assumes that you decided in your favor and against the corporation’s interests, even if you don’t think you did. The trick is to notice conflicts and find a way to take yourself out of the decision or get someone disinterested to help with it in advance.

So as you wind down, keep a look out for conflicts: the “circling the drain” convertible debt round from a few principle investors, the sale of the company’s IP to one of the founders who’s willing to put up some cash for it and then have another try at commercialization, the sale of the company that will get some money to the preferred stock but none to the common.

We’ll spare you the hellish legal detail. Get good legal advice if you’re facing a conflicted decision. But two simple rules can save you a lot of legal bills:

Get Consensus
First, try to get consensus, after complete disclosure. If everyone knows what’s happening and agrees, it’s hard for them to complain later. There are two major problems with this approach. First, it’s hard to get consensus. Try. Don’t assume that people want to fight. There’s usually not much at stake, and most of the people involved are repeat players — this isn’t their last rodeo and they care about their reputations. If you can’t get everyone, it can help to get nearly everyone, if you get the most likely troublemakers.

The second problem with getting everybody on board is figuring out who “everybody” is. In a faltering startup, “everyone” usually means all shareholders (preferred and common) and all lenders (e.g. convertible note holders). You might want to reach out to other known creditors, such as landlords. Think expansively. You’re trying to cover yourself. So the old adage that it’s better to ask forgiveness than permission doesn’t apply.
If you’re going for consensus, get a lawyer. The point is to make sure people can’t complain later, so it’s important to get the wording and procedure right.

Stay Independent
The old adage “He who pays the piper calls the tune” doesn’t apply to corporate fiduciaries. Directors and officers talk about answering to the shareholders, but the law is clear: They make their own decisions in the interests of the corporation. Corporate directors don’t take orders from anyone. Corporate officers answer only to the board and superior officers.
In normal times, this point is theoretical. If directors and officers don’t listen to major shareholders, they’re replaced. When the going gets tough and the participants’ interests diverge, however, deciding independently can be crucial. A majority shareholder who wants to buy the corporate assets for nothing may scream at you that you have to do what she says because she controls the corporation. So remember that the very worst that shareholder can do to you is remove you from office. If you think about it, that’s usually a reward, not a punishment, in the context of a failing business. With a good employment contract, you might even snag a payday as you leave. By contrast, giving in could get you sued. It will feel uncomfortable, but stiffen your spine and act the way the law expects: Decide independently.

This gets us to the final question of shutting down a business. How do you wind everything down?

Four Ways Out
There are four ways to close up shop. We’ll give a general idea of how things work, but this is not a safe DIY project. Get a lawyer to help you.

1. Walk Away. One way to deal with a failed company is to walk away. If the company has minimal assets and minimal creditors, this approach can work. But if there are assets or creditors, it can leave the directors with liability (for failing to do their jobs), so it is not desirable.

That brings us to the other three ways:

2. Bankruptcy. Bankruptcy is a court proceeding. In a “chapter 7” bankruptcy, a trustee takes over and liquidates. In a “chapter 11” bankruptcy, management remains in control under court supervision. The benefit of bankruptcy is that it stops all lawsuits and creditor collection. It also allows the company to sell assets free of liens and creditors’ claims, which can increase the sales price. Bankruptcy also allows the company, with court approval, to assign certain contracts without the other contracting party’s consent. Finally, shareholder approval is not required to file bankruptcy or to sell assets in the bankruptcy. The downside of bankruptcy is that it can be a long, expensive, and bureaucratic process.

3. Assignment for the Benefit of Creditors. Assignments for the benefit of creditors (“ABC’s”) are similar to bankruptcy. In California, an ABC is a private proceeding, so no court is involved. In an ABC, the company transfers its assets to a neutral third-party in trust for creditors. The assignee sells the assets and pays the proceeds to creditors. ABC’s offer speed and flexibility. The ABC and the assignee’s asset sale are often simultaneous, avoiding any interruption in an ongoing business and preserving the going concern value. An ABC also usually costs much less than a bankruptcy. Finally, there is much less publicity. On the downside, an ABC requires shareholder approval, which can be cumbersome, and the assignee can’t sell the assets free of claims. So an ABC is best if there’s a buyer willing to proceed without a 363 sale.

ABC’s are often used to sell the company’s assets to insiders. Insider purchases raise red flags because they involve divided loyalties. The officers or directors of the seller have a duty to maximize the sales price. But if the same people are also buying, they have an incentive to underpay.

Accusations of a breach of fiduciary duty are a definite risk. An insider buyer can sometimes inherit some of the failed company’s liabilities as a “successor” to its business, if the buyer is a “mere continuation” (i.e. basically the same people using the same assets to operate the same business), or if the transaction is for the fraudulent purpose of escaping the seller’s debts.

Finally, a buyer of assets from a failed company can be exposed to claims to claw back the assets as a fraudulent conveyance. Under fraudulent conveyance law, the failed company’s creditors or its bankruptcy trustee can claw back assets transferred for less than reasonably equivalent value when it was insolvent or lacked adequate capital. The reach back period is two years under bankruptcy law and can be as much as six years under state law. Value is arguable, so fraudulent conveyance law enables the company’s creditors to surface with claims years later.

An ABC with an independent assignee can help address these concerns because the assignee can independently evaluate the fairness of the insider transaction. The assignee can market the assets to other bidders or get an appraisal to validate the price offered by the insiders. Finally, the ABC insulates the buyer against fraudulent conveyance claw backs. An ABC does not offer as high a degree of protection as a 363 sale in bankruptcy but often will be good enough, especially where the sales price is not high enough to justify the expense of bankruptcy.

4. Dissolution. Dissolution means the corporation distributes its assets and ceases to exist. Dissolution (without a prior bankruptcy or ABC) is best when there are enough assets to address known liabilities. We’ll discuss dissolution under Delaware law (which governs most venture-backed startups), but remember that state laws and company documents vary.

There are two basic ways to dissolve a corporation: The board can dissolve by itself, or it can get court approval. Either way, the goal is to pay all known claims, provide for disputed and uncertain claims, give notice to anyone known to have a potential claim, and wait some time for claimants to appear. You always have to wait at least three years before you’re done, but the actual work is usually quicker.

Most liquidating corporations, especially failing startups, don’t go the court route because it’s expensive and slow. The advantage is that court approval can insulate the directors and shareholders from claims they improperly distributed the corporation’s assets and can force resolution of potential claims. But a contested dissolution can be as slow and expensive as a bankruptcy, and bankruptcy provides better protection.

The Confidence to Move On
No one enjoys failing. But doing it right can avoid future problems and enable you to move on. As you start your next venture, you want the freedom to keep your eyes on the road ahead and the horizon beyond, not the rearview mirror.

Ethan Stone is a transactional lawyer, focused on early-stage entrepreneurial companies. He represents clients in company formation and financing (company and investor-side), mergers and acquisitions, technology transactions, executive employment agreements and other transactions. He writes the Stone Business Law Blog.

Bennett Young is a partner at Jeffer, Mangels, Butler & Mitchell focused on insolvency matters. He represents financially distressed companies, their investors and creditors in workouts, restructurings, bankruptcy and related litigation. He also represents buyers of distressed companies.

[Top image credit: mypokcik/Shutterstock]

“It’s people. Soylent Green is made out of people. They’re making our food out of people. Next thing they’ll be breeding us like cattle for food.”
Detective Thorn, Soylent Green

By its very nature, entrepreneurship involves a certain amount of throwing spaghetti against a wall.

Our “spaghetti” is called a minimal viable product, and we launch them because nobody really knows what’s going to stick. Eventually, with a little luck and learning, we’ll become better chefs, and our spaghetti will stay up more often than not.

But while watching a recent demo day for one of the countless incubators that have sprung up in the last 18 months, I was struck by a horrifying revelation. The incubators weren’t “training chefs” at all. The entrepreneurs were the spaghetti.

While the decreasing cost of launching a startup has been almost universally celebrated, one of the downsides has been a flood of would-be entrepreneurs into the Internet space.

As market forces dictate, when there is an overabundance of a certain resource, the value of that resource decreases. Eventually, a plentiful resource reaches a point where it becomes cheaper to consume and replace it than to reuse and repair it.

For many incubators, entrepreneurs have reached this point. There are now so many people out there trying to build the next app or website that it has become a better bet to throw minimal viable entrepreneurs against the wall than it is to teach them how to throw their own spaghetti.

Another characteristic of markets is that value accrues to the scarcest resource. But what resource are most of these incubators bringing? Money?

In the current frothy market, money is relatively easy to raise for qualified entrepreneurs. For those with lesser qualifications looking for an advantage, incubators are often touted on the basis that they are a launchpad to greater success.

Unfortunately, the track records of many of these incubators and accelerators don’t hold up. According to a 2011 study by Aziz Gilani for the Kauffman Fellows Program, 44 percent of seed accelerators had never seen a single company raise an institutional round of financing.

How about expertise? It is fairly standard practice for incubators to advertise huge rosters of mentors, but I can’t help but wonder how available or effective they are. In many cases, they seem like little more than the photos of fit personal trainers on the wall at the gym. The trainers look great, while the people working out are still flabby and out of shape because they don’t actually get much guidance.

Obviously, incubators run the gamut of quality. Only an idiot would suggest that programs such as Y-Combinator and TechStars aren’t legitimate. But what about the rest? At second- and third-tier incubators, the question of their value becomes increasingly difficult to justify.

For example, one new incubator in Los Angeles plans on graduating over a hundred “companies” annually. To give you an idea of how absurd this is, the largest angel network in Southern California receives fewer than 1,000 raw pitches per year. This includes crackpot, non-tech-related pitches. When you factor in the competition for talent posed by more credible programs in the area, it simply isn’t possible to find more than 100 solid teams to incubate from this pool. With such massive throughput, how much guidance and training is each team actually receiving?

Here’s the bottom line for would-be entrepreneurs: If you’re considering an incubator, think about what you’re getting for your 5 percent or 10 percent in equity. Ask yourself if the program will really improve your situation or, like an art degree from state college, the presumed mentors and experts in the program are really just selling you on a worthless credential.

Much like Detective Thorn’s horrifying discovery that Soylent Green was actually made out of people, the recent incubator boom masks a similar dirty secret. At many of these places, entrepreneurs aren’t being trained as chefs as much as they are being turned into spaghetti and tossed against a wall while the incubator starts boiling another batch.

Francisco Dao is the founder of 50Kings, a private community for technology and media innovators. He is a former leadership columnist for Inc.com, a lifelong entrepreneur, author and former stand-up comic.

Before signing up for your local startup accelerator or incubator, there are a few things you should keep in mind. Is your pitch perfected? Does it matter which group you join? Is there a right or wrong time to sign up? We asked these fifteen entrepreneurs for their nuggets of advice on navigating the world of startup accelerators.

Do your research to find the right fit

You should do your homework on any accelerator you’re considering. What do they offer? What are some of their success stories? What happens to companies that don’t succeed? How often do their teams get funded? Depending on the accelerator you join, you’ll get very different answers to those questions. Make sure to not only talk to the accelerator but also past companies, both successful and not.

Jason Evanish (@Evanish), Greenhorn Connect

Don’t be a perfectionist and accept the guidance

I think these groups are really important to early-stage startup attempts — the mentorship, community, and exposure they offer far outweigh any equity you might share with them in return. Don’t get caught up in trying to build something perfect; focus your efforts on customer development and proving your assumptions, so they can help you move that learning into a solid first product.

Derek Shanahan (@dshanahan ), Foodtree

Accomplish something on your own first

After having a detailed discussion with TechStars graduate and Contently.com co-founder Shane Snow, my takeaway was to have built an impressive resume of personal accomplishments to show you’re capable of actually building a real business. Incubators and accelerators want to train entrepreneurs, but they need to make sure you’re coachable and have actual potential to become a real star.

Danny Wong (@blanklabel), Blank Label Group

Be prepared to immerse yourself and go all in

You need to dedicate your time into this — it’s an endeavor that requires focus 24/7. Also, look at the opportunity as a time to find the right co-founder, strategic partners, and to be honest and upfront with the organizers about what you need. The more you give, the more you get!

Ash Kumra (@AshKumra ), DesiYou

Prove that you are committed

Demonstrate commitment and focus on results; incubators and accelerators invest in people and teams more than markets. It’s important to have a disruptive idea, but the drive and capabilities of the team are much more correlated to success than the size of the market or details of the business plan. They want to see a smart, dedicated team that is passionate about executing.

John Harthorne (@jharthorne), MassChallenge

Don’t settle for any incubator, find the best

If you are thinking of applying to an incubator or accelerator, be sure to find the best. Even if you have to give up a larger portion of your company, it will be worth it for the amount of growth it will help you with in comparison to a lesser organization. Also, look for synergy and people whom you work well with — you want to feel welcomed into your new home.

Louis Lautman (@louislautman), Young Entrepreneur Society

Make sure your goals match up

All incubators and accelerators are not created equal. Some incubators focus on landing funding, others focus more on helping you build a revenue-generating firm. Make sure your goals align with that of your program.

Doreen Bloch (@DoreenBloch), Poshly Inc.

Reach out to alums

Before applying to an accelerator program, I would talk to alums of the program to make sure they had a good experience. It also might help if you could get some time to validate your idea for a business before jumping into one of these programs. Make sure the “proof of concept” even makes sense.

Patrick Curtis (@WallStreetOasis ), WallStreetOasis.com

Perfect your pitch

Many incubators are looking for the entrepreneur to make some type of pitch, so it’s important to practice, practice, practice. The more excited that you can make them about your concept, the higher likelihood that you will get accepted to the accelerator.

Lawrence Watkins (@lawrencewatkins), Great Black Speakers

Paint a picture of success

When creating your pitch, keep in mind that you want to convince the judges that your startup is truly going places. It’s going to be so successful that they will want to attach their name to get behind it. Show them that you’re going to be successful no matter what, so it’s in their best interest to have you affiliated with their program.

Stephanie Kaplan (@stephaniekaplan), Her Campus Media

Tell a great story

Remember, people are investing in you more than your idea. Businesses are fluid in the startup stage. Which means your personality and background is what really counts. While pedigree or experience matter, your curiosity, obsession and commitment matter more. Character trumps credentials. What’s the riddle you’re trying to solve? How have you overcome failure? Make them believe in you.

Michael Margolis (@getstoried), Get Storied

Master the art of explaining your idea clearly

Good entrepreneurs know a lot about their business and their market. But can you communicate this expertise in a way that resonates with decision-makers in the incubator and accelerator programs? Start by reading “The Art of the Start” by Guy Kawasaki and learn the “business of business communication” in the startup phase.

Kent Healy (@Kent_Healy), The Uncommon Life

Timing is everything

Think about what you aim to get out of the incubator or accelerator program in mind. People tend to assume that these are great kickstarters, and they can be, but it all depends on timing. Joining one at the wrong stage of your cycle can be feedback overload, or slow your growth in other ways. Sometimes you need to collect input and test your idea, and sometimes you just need to build.

Caroline Ghosn (@carolineghosn ), The Levo League

Don’t join on your first venture

Entrepreneurs are going to make mistakes and get things wrong more often than not. I suggest getting as much accomplished in the real world before applying for incubation. The more you can do before you need the help, the better your terms will be and the more serious they will take your application.

Lucas Sommer (@audimated), Audimated

There’s life after an accelerator

These are great opportunities, but your business must happen with or without them. It’s easy to get caught up in the excitement and the aspiration of being accepted to a “prestigious program” — after all, it’s validation that you’re on to something! But if things don’t work out, the show must go on. Your goal is to create a company, so don’t lose sight of the bigger picture.

Tony Navarro (@hoostony ), Streamcal

The Young Entrepreneur Council (YEC), an invite-only nonprofit organization composed of the world’s most promising young entrepreneurs. The YEC promotes entrepreneurship as a solution to unemployment and underemployment and provides entrepreneurs with access to tools, mentorship, and resources that support each stage of their business’s development and growth.

Image via tobimcfly/Flickr

On the surface, value propositions seem incredibly straightforward. I’d argue that this is why, in practice, they’re often given such short shrift.

In reality, getting a value proposition right requires some focused thinking and structured analysis, some of which I’ll preview here. Given my particular background, much of what I recommend will have a bias to B2B startups — though, in many instances, I think that you’ll find applicability to virtually any endeavor.

I recently lectured to a group of students and aspiring entrepreneurs as part of my series of talks at the Harvard Innovation Lab (feel free to presentation slides). For this particular session, we examined the DNA of a value proposition by stripping it down to its foundational elements and reassembling it, workshop-style, around a variety of new business ideas.

But before we dig in, let’s define a value proposition.

In its simplest terms, a value proposition is a positioning statement that describes for whom you do what uniquely well. It describes your target buyer, the problem you solve, and why you’re distinctly better than the alternatives.

One of the classic mistakes of building a value proposition is diving headlong into the solution definition phase before really understanding the problem you’re looking to solve. To understand whether it’s a problem worth solving, I recommend exercising four U’s:

• Is the problem unworkable? Does your solution fix a broken business process where there are real, measureable consequences to inaction?
• Is fixing the problem unavoidable? Is it driven by a mandate with implications associated with governance or regulatory control? For example, is it driven by a fundamental requirement for accounting or compliance?
• Is the problem urgent? Is it one of the top three priorities? In selling to enterprises, you’ll find it hard to command the attention and resources to get a deal done if you fall below this line.
• Is the problem underserved? Is there a conspicuous absence of valid solutions to the problem you’re looking to solve? Focus where there’s whitespace, not scorched earth.

Problems worth solving yield a decisive “yes” to the majority of these questions.

Next, ask yourself whether the problem is blatant and critical. Problems that are blatant and critical are far more acute that those that are latent and aspirational. Blatant and critical problems stand in the way of business. They put careers and reputations at risk and whiten knuckles. Latent problems are unacknowledged, which means they often require costly missionary selling. Aspirational problems are optional, which is the hardest of places for a B2B startup to sell. Though in B2C, they can be drivers as people look for things like status or fashion.

Now that you’ve determined what problem you’re solving and validated its criticality, it’s time to define your solution. The most urgent question to ask is: What is your compelling breakthrough?

Think of 3D. What unique combination of discontinuous innovation, defensible technology, and disruptive business model are you bringing to bear and what makes it truly compelling — not just to you and your colleagues, but to your most skeptical customer?

Discontinuous innovations are the opposite of marginal improvements; they offer transformative benefits over the status quo by looking at a problem differently. Defensible technology offers intellectual property that can be protected to create a barrier to entry and an unfair competitive advantage. Disruptive business models, which are discussed in depth here, yield value and cost rewards that help catalyze the growth of a business.

Groupon is a good example of a disruptive business model that has changed the face of price-based promotions by using crowdsourcing principles to aggregate demand around deals.

As an investor, I look for non-disruptive disruptions — that is, technologies that offer game-changing benefits without requiring any modification to existing processes or environments.

When VMware popularized the hypervisor, it did so with a non-disruptive disruption—all benefit without much in the way of adoption hurdles. The same is true for Akiban, one of my more recent investments that’s innovating in database technology to yield 10-100x improvements in the speed of relational data access without any changes to applications or risk to data. That’s a non-disruptive disruption.

Non-disruption is critical because the gain you deliver will be discounted by the pain of adopting your solution, plus the inertia of vendor risk that every startup levies by virtue of being small. This means that you must deliver an order of magnitude improvement over the status quo to make the cut.

If you can’t deliver a 10x promise, customers will typically default to “do nothing” rather than bearing the risk of working with a startup. That’s the harsh truth.

Now that you’ve defined the problem you’re solving, evaluated the gain/pain ratio and discovered a problem truly worth solving, you’re in a good position to build your value proposition.

At the center of that value proposition is you. What problems do you understand uniquely well? What can you deliver uniquely well? What sort of disruptive business model can you bring to bear? Be true to yourself and play from a position of strength. A little self-awareness can go a long way in crafting a value proposition with power.

Credit is due to my colleague Adam Berrey for his thinking on the importance of segregating needs.

Michael Skok is a general partner at North Bridge Venture Partners. His investments include Apperian, Akiban Technologies, Acquia, Unidesk, and Demandware (NYSE: DWRE).

This sponsored post is produced by MicroVentures.

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