As of this post, they have raised $176,165 from 4,860 backers and still have 15 days to go.  I maintain that aside from tapping into the current anti-Facebook zeitgeist among the tech elite, their success is partially fueled by a pricing/bundling strategy that cleverly (or accidentally) includes t-shirts that signal hard-to-fake social proof of geekiness at a good price.

I have updated my two quick-and-dirty graphs on how pricing/bundling these sorts of social signals/proof (read: t-shirts, in this case) may help with raising micro-capital below.

Enjoy!

Data table below:

The way it works is this: people who create projects to be funded by micro-capital on Kickstarter offer differing levels of sponsorship.  The more you pledge, the more you get.  In this case, if you pledge $10, you get a CD (with the source code), a note from the Diaspora team and a bunch of stickers.  If you pledge $2,000, you get the same as well as phone support, hosted service and a computer.

They seem to have done a few things right, either intentionally or unintentionally.  (Most likely a combination of the two.)  They appear to be riding a recent upswell in anti-Facebook sentiment with regards to privacy (or lack thereof) in a select minority of techie folks.  Their video pitch seems to have hit the right chords (moxie, passion, hard-core geekiness), which appears to resonate with many of the same people.  Lastly, I think their dandelion logo/look is, in a word: cool.  (Get it?  Seeds of a diaspora?)

But that is not what this post is about.  This post is about how to raise micro-capital via clever pricing and bundling strategies.

Now, check out this chart I slapped together.  It shows the Number of Backers per Pledge “Bucket”.  One might expect, very reasonably I would add, that the number of backers declines as price increases.  In other words, you observe the classic, negatively sloping Demand Curve you learned about in Econ 101.  As price increases, demand lessens.

But here it doesn’t quite do that, does it?

Now, take a look at the chart below, and see how that translated into revenue.  Shooting from the hip, one might expect, in terms of revenue by pledge bucket, to see a bell-shaped/normal distribution.

But we don’t, do we?

So in this case, the secret of their success is a pricing/bundling strategy that uses t-shirts as social proof of geekiness.  Or another way to look at it is:  the Diaspora team has utilized Kickstarter to sell +$40,000** worth of t-shirts!

My gut tells me that the Diaspora team hit some sort of nerve that has nothing to do with the potential success or failure of their project.  People think the project is cool and sticking it to The Man (i.e. Facebook), whether or not these guys succeed or fail is almost irrelevant.  So, if I think the project is cool and if the project is likely to provide me substantial geek street cred — well then, what better way to demonstrate my geekiness/validate my support for Diaspora then by sporting a Diaspora t-shirt.  And looking at their de facto marketing materials, the t-shirt is likely to look good.

And if I want that t-shirt, I’d better pony up $25 for it — which, incidentally, seems like a fair price for a t-shirt.  And apparently, I am not the only one who thought that way.

Lessons learned:

• If you can harness yourself to a growing/popular social trend, you may benefit in an extraordinary manner.
• You need to think of pledges/sponsorships in terms products, pricing and value.  In other words, WIIFM (What’s In It For Me?).
• People get value from feeling that they have done their part (sticking it to Facebook), even if it doesn’t amount to anything concrete (aside from a t-shirt).  You can and should capitalize on that.
• Don’t forget about reference pricing.  My reference price for a generic “cool” t-shirt is around $20.  Meaning, that is what I would expect to pay in a store for a t-shirt that was adequately “cool”.  The Diaspora t-shirt, in that light, seems like a bargain.

Full Disclosure:  The only reason I noticed this pricing strategy was because I actually pledged $25 because I wanted a t-shirt (and I think about pricing stuff all the time).

For the record, I actually don’t think that a self-hosted peer-to-peer social network will get off the ground in circles other than amongst hard-core geeks.  As someone mentioned on a Quora thread, no one actually wants to host their own social network on a server under their bed.

But I still think these guys are worth backing.  And are cool.

Lastly, I don’t think this sort of hyper-success is easy to replicate, if at all — but that doesn’t mean you shouldn’t think about your pricing/bundling strategy if you are trying to raise micro-capital.

Before I forget, you should check out the pricing page for book Brant and I wrote.  Not only should you check it out, but you should go buy a copy of our book.

——–

Data table here:

**Actually more since anyone pledging at $25 and above gets a t-shirt.

***The actual numbers in this post are already outdated, but conclusions are the same. Will update later.

We’ve had the pleasure of speaking with Jeff Smith (Smule), Fabrice Grinda (Zyngy, OLX), Ranjith Kumaran (YouSendIt), and Bruce Moeller (DriveCam).  We’ve condensed their experiences into case studies which are featured in the book.  However, there was so much great material, we simply could not include all of it.  Therefore, I’d like to take this opportunity to share an insight that came out of our interview with Bruce that we found quite edifying, one that goes to the heart of the Customer Development methodologies.

Background:  DriveCam uses video technology, expert analysis and driver coaching to reduce claims costs and saves lives by improving the way people drive.  From the DriveCam website:

DriveCam’s palm-sized, exception based video event recorder is mounted on the windshield behind the rearview mirror and captures sights and sounds inside and outside the vehicle. Exceptional forces such as hard braking, swerving, collision, etc. cause the recorder to save critical seconds of audio and video footage immediately before and after the triggered event.

[Emphasis mine.]

Bruce shared an interesting story about how assumptions made in the lab, based on data and “sophisticated” math undertaken by “sophisticated” analysts, fared in the real world of cement mixer trucks.  Remember, the DriveCam device’s core feature is to record audio and video when triggered by exceptional forces such as swerving.  When DriveCam went after the cement mixer truck market, they calibrated their devices based on the assumption that cement mixers would flip only if subject to a large sideways g force.

Seems reasonable, right?  After all, cement mixers are big, heavy trucks, and not to mention, filled with, well, the eponymous cement.

Turns out, not so reasonable after all.

Bruce recounted that when one of their first customer’s cement mixer trucks flipped over, the DriveCam device had failed to record what had occurred and what may have caused the accident — the customer was irate and Bruce was more than a little embarrassed.

Turns out that (outside of the lab!) cement mixers trucks can flip at very low speeds (1-2 mph) while at normal g forces when encountering things in the chaos of the real world, very ordinary and common things such as soft road shoulders.  Bruce’s customer knew this and was counting on Bruce and the DriveCam team to know this as well.

Lesson learned:

“My philosophy is you don’t know what you don’t know and if you were ever right in a given moment, and if your guesses were ever true it would be serendipitous.  You must attack your assumptions at all times. My basic tenet: question yourself, because the world is ever-changing.”

-Bruce Moeller

For more insights that speak directly to the Customer Development processes, please purchase The Entrepreneur’s Guide to Customer Development:  A cheat sheet to The Four Steps to the Epiphany.

The Sean Ellis 40% rule-of-thumb was quickly invoked as were other ideas.  However, I thought it worthwhile to share one insight that came from an experienced start-up entrepreneur at the table.  While we were talking about triangulating on the various signals available to an entrepreneur as to what constitutes Product-Market Fit, he recounted a story — really an accidental natural experiment — on how he unequivocally learned his start-up hadn’t achieved Product-Market Fit.

To wit, his site had gone down for a few hours, and he hadn’t known about it.  In the interim, there had been nothing but silence.  None of his users had squawked or had made it publicly known that the site was down and they were angry/frustrated/furious/going to switch providers/fed-up-with-this etc., etc.

This lack of frustration/noise is a data-point.  In this case, it meant his start-up had a ways to go on iterating to finding Product-Market Fit.

As a contrast, we might choose to look at what happens when Twitter goes down.

So, for the more intrepid of you out there, perhaps try “accidentally unplugging” your servers and see what happens.  (Clearly, this has significant risks such as alienating users, but it may be a useful signal to know when you don’ t have Product-Market Fit, if you were wondering.)

BTW, I believe Dave McClure has advocated a very similar idea with regard to features.  If I recall correctly, he suggests removing features from a web app and waiting to hear if users complain loudly.  The intensity of the complaint is likely correlated with the usefulness of the feature.

One thing that often strikes me about conversations regarding start-up success is the pervasiveness of the narrative fallacy and hindsight bias.

We can go to Wikipedia’s entry on Taleb for a definition:

Narrative fallacy: creating a story post-hoc so that an event will seem to have an identifiable cause.

Allow me to illustrate.  What caused YouTube to grow at phenomenal rates in 2005/2006, eventually leading to a $1.65 billion acquisition by Google in 2006?

Was the cause:

a)  YouTube had a better UI/UX than their competitors?

b)  YouTube, at the time, decided to largely ignore blatant copyright violations (unlike their competitors)?

c)  the External Player and the viral widget-ization of their platform? (Obvious, right?  We’ll come back to this in a moment.)

d)  YouTube was simply in the right place at the right time?  (Growing popularity of social networking, ubiquity of broadband)

e)  YouTube made novel and smart technology choices by adopting Flash 7?

f)  Mix and match any of the above.

g)  None of the above.  Other.

All of those reasons pulled from a case study story appear entirely plausible, even logical, to me.

That noted, I don’t how accurate any of them really are.  Did/does YouTube have a better UI than the rest of its video-sharing brethren?  Were they the first/only to encourage video-embedding?  Did they have the best underlying technology?

Even if we assume these to be accurate, we still don’t know whether or not they had any sort of causal relationship with YouTube’s growth.

Back to the original question:  What caused YouTube to grow at phenomenal rates in 2005/2006?

My answer:  I don’t know (BTW neither does Brant).

Viral Coefficients and Viral Cycle Time

Just recently I came upon an excellent and interesting post about YouTube, Viral Coefficients and Viral Cycle Time.  After a persuasive discussion of why one should minimize Viral Cycle Time, the author (@BostonVC) notes:

This [an extremely short Viral Cycle Time] explains why YouTube exploded at a faster rate than ever seen before.

Perhaps I am being overly pedantic, but I think it might be more accurate to state:

This explains how YouTube exploded at a faster rate than ever seen before.

In my eyes, the distinction between ‘why’ and ‘how’ is non-trivial and needs to be recognized to avoid distortion by the biases hardwired into my brain.  ‘Why’ implies causation, while ‘how’ implies manner.  And I am of the opinion, that we don’t know why YouTube popped, but we may know how it did.  Again, I repeat, this is non-trivial.  Knowing the difference goes to the heart of the Customer Development methodology.

Please understand me, I am not saying that any of the possible causes I listed above may not have caused YouTube’s spectacular growth, I am simply saying we don’t know if they did.  Not only that we don’t know, but pretending to know, while natural, is not cost-less.  As start-up founders in efforts to duplicate such astronomical success/growth, all the while pretending to know its true cause, we are prone to draw the wrong lessons, likely to result in wasted money, and more importantly, time.  Not to mention the proverbial blood, sweat and tears.

This is why I am of the mind that founding (and investing in) a start-up with the intent of enjoying a future extra-normal financial success is best likened to maximizing one’s exposure to positive Black Swan Events.

As defined by Taleb:

What we call here a Black Swan (and capitalize it) is an event with the following three attributes.

First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility.

Second, it carries an extreme impact.

Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.

I stop and summarize the triplet: rarity, extreme impact, and retrospective (though not prospective) predictability.

One could argue that startup founders are trying manufacture positive Black Swan Events, but if we accept Taleb’s definition, this would be a contradiction in terms.  (Nivi at Venture Hacks writes about how raising money for your startup is tantamount to searching for Black Swans.)

For the moment, let’s assume Taleb and I are right.  We cannot manufacture Black Swan Events, so then how do we, as startup founders, maximize our exposure to positive Black Swan Events?

First and foremost, I posit that we would be better off by thinking about startups through such a lens and accepting the sad fact that we, as humans, are born with cognitive biases (such as the narrative fallacy and confirmation error).

These cognitive biases are evolutionary adaptations that served us well for day-to-day activities prevalent during the Paleolithic, but unfortunately, aren’t appropriate for understanding the nature of technology startups.

Second, by rigorously but not dogmatically, employing Customer Development framework and methodologies which are intentionally constructed such that they correct for and recognize the existence of these distorting cognitive biases.

As Steve Blank writes:

The mistake isn’t having a vision and taking risks.  The mistake is assuming you are a Black Swan and continuing to ignore the facts as they pile up in front of you.

Not to mention ignoring a lack of facts as well!

If you haven’t read The Black Swan yet, I suggest reading it (a thoughtful review can be found here).  The implicit philosophical overlap and synergy between The Black Swan and The 4 Steps to the Epiphany are stunning.

In the meantime, I hope you have prosperous 2010 and hope you are exposed to a positive Black Swan Event sometime soon!

Thank you for your participation in the survey, especially if you were kind enough to tweet about it.  (While the raffle is over, if you haven’t responded, the survey is still open.) The purpose of the survey was two-fold.

First, we thought it would be interesting to see a little detail about who is involved with Customer Development. You can see those results here.

While the survey results add a bit of color to who is implementing Customer Development methodologies or thinking about doing Customer Development, I wouldn’t draw any hard conclusions from the data.  BTW for the those who read 4 Steps to the Epiphany, n ≈ 33.  For those who didn’t read 4 Steps to the Epiphany, n ≈ 28.

Second, we are thinking about tools, templates, and other resources to help people understand and implement Customer Development in their business ventures. Stay tuned, for in the coming months, we plan to make some of these resources available to you.

Almost forgot!  Our two winners of the random raffle are: Dave Concannon and Kevin Donaldson.

Thanks again to everyone.  Happy holidays!

maybe your product focus should be what your current customers don’t ask for or what your lost customers wanted.

I invited “CustDevGuy,” author of the “Fake Screenshot/LOI” customer development case study, to write up a continuation of that story, which illustrates an easy trap to fall into when interacting with potential customers. Here’s his story:

——————————————————–

Hi there.

This guest-post is a follow-up to my original Case Study posted at the Lean Startup Circle.  (Thanks Brant for lending me your digital soapbox.)  I wanted to further flesh out an important insight that came out of conversations about my ongoing Customer Development experiences as well as address a common fallacy that keeps popping up in conversations and email threads with regards to what Customer Development is and isn’t.  The fallacy being that customers will simply hand over the Holy Grail (read: Product/Market Fit) if you go and chat a bit with them.

The insight I would like to share, one that with hindsight appears entirely obvious, is that an entrepreneur should always keep in mind, customers have their own agendas which may not have your best interests, as a start-up employing Customer Development methodologies, at heart.  Not only may they not have your best interests at heart, they may actively and skillfully manipulate you to serve their immediate needs to the detriment of your goals of product/market fit and scalability.  This is why I, like Brant, am skeptical of the maxim:

Early customers are often more visionary than the startup they work with for that product.

IMHO, if you employ any Customer Development processes you must take into account that, as Brant writes,

Customers are inherently egocentric and have a limited view.  Their motivation is to solve problems that will increase their market share, increase revenue, or decrease expenses.   They certainly don’t wish to solve their competitor’s problems, though you would be happy to solve both.

…

The danger in relying the customer’s vision is that in truth, the customer is not always right.  Their limited perspective and selfish (rightfully so) objectives means they will, if it is in their best interests, change your product to fit their needs. If you have several customers doing this, and you opportunistically give each customer what they’re asking for, you will face an untenable situation that will prevent you from scaling the business.

And that is exactly what this post is about:  my experience in following a customer (partially) down a rathole.  To recap, we used Letters of Intent (“LOI”) as follows:

On the third visit, we pressed those who saw merit in the idea to sign a legally non-binding Letter of Intent.  Namely, that they agree to use it for free, if we deliver it to them and it is capable of X, Y and Z.  And not only do they use it, but that they intend to purchase if by Y date at X price, if it meets their needs.

The LOI

The language of this plain vanilla LOI is below.  Obviously feel free to use, but we’d appreciate a link back to this post if you do.

Letter of Intent

START-UP agrees to provide its XYZ platform on or before DELIVERY_DATE to CUSTOMER without charge or fee, which will provide the following features:

• Functionality XYZ (one sentence description)
• FunctionalityABC (one sentence description)

START-UP recognizes the sparseness of detail in the aforementioned features and therefore agrees to update CUSTOMER on development progress on the following dates:

• DELIVERY_DATE minus six weeks
• DELIVERY_DATE minus four weeks
• DELIVERY_DATE minus two weeks

In exchange, CUSTOMER will avail itself on the aforementioned dates to provide feedback and guidance as to functionality and requirements.

During and after the development process, CUSTOMER agrees to fairly evaluate the product for use as their XYZ platform for a free trial ending DELIVERY_DATE plus four weeks.  Additionally, CUSTOMER agrees to use START-UP, at a 12-month rate of $XYZ/month, as their XYZ platform if START-UP satisfies their needs.  It is the intent of CUSTOMER to enter into a formal agreement with START-UP, by REASONABLE_DATE.

Due to the sensitive nature of the discounted pricing, CUSTOMER hereby agrees not to disclose pricing information and the terms of this Letter of Intent to any other person or entity that is not an employee or associate of the CUSTOMER.

Agreed and understood by:

Designated START-UP Representative

Designated CUSTOMER Representative

Nota bene:

1) We could have titled this a Memorandum of Understanding (“MOU”) as opposed to an LOI, but we wanted to strongly signal that they are demonstrating intent to buy by signing something called a Letter of “Intent”.

2) Brief description of functionality.  This is is simply to get both parties on the same page and set expectations.

3)  Development process updates.  This was to ensure us face-time with our customer.  Should our customer get busy, we didn’t want to be easily forgotten or ignored by having all our communication relegated to email and phone.

4)  Pricing and price discovery.  Our next LOI recipient got a significantly higher price.

5)  Intention discovery.  Do they actually want to buy our product?  Well, let’s test it very plainly with “It is the intent of CUSTOMER to enter into a formal agreement with START-UP, by REASONABLE_DATE.”  We have de facto started the sales cycle.

6)  Terms.  Can we sign them up for 18 months?  24 months?  3 months?  Month-to-month?  Per usage?

7)  Disclosure.  This is our effort to keep our customers from chatting with one another about the terms of the LOI as we go about price and intention discovery.

On Our Way

They signed this LOI and we were golden, eh?  So what happened?  As it turns out, much of the information we received via the LOI was valuable with one small massive hitch.  In our efforts to listen to and engage the customer, we allowed them to effectively control and drive our vision.  The customer didn’t care at all about ABC functionality, but wanted XYZ.  Not only did they not care about ABC, they quite accurately surmised that we would move Heaven and Earth to build XYZ for them to get their business, but we would probably only do so if they feigned interest in ABC. In our schoolchild-like giddiness in getting the LOI signed, we overlooked what are now obvious signals to that effect.  To wit, we allowed ourselves to get played.

Mea culpa.  Mea maxima culpa.

We thought that ABC was our unique value proposition, after all ABC got us our initial meeting with them, but we would give them XYZ to get our foot further in the door.  Plus, how difficult could providing them with XYZ be?

Very difficult.  As in very, very, very difficult for two guys bootstrapping a start-up.  But what is even more important, providing XYZ put us on a completely different trajectory in a different industry with different customers and different products and different technology and different competitors.

Resolution

Fortunately, we failed in providing XYZ.  (You read that correctly.  I did use the word “fortunately”.)  And by that time, we realized we didn’t want to go into the XYZ business and we also realized that this specific customer was not a particularly good earlyvangelist.  By that I mean, relative to our other earlyvangelist customers, they took up an inordinate amount of time and resources which could have been deployed elsewhere for significantly better ROI for our Customer Development efforts.

So we “fired” them, and in doing so, our suspicions were confirmed.

The email trail went something like this:

Customer:  We’d like to revisit this 2010. Do you think the XYZ will be fully functioning then?

Me:  Sorry XYZ didn’t work.  BTW I also wanted you to let you know we are super busy doing ABC for other people and have revised our prices.  We’d still love to do ABC for you without XYZ.

Customer:  Great to hear that you are doing well.  We’d love for you guys to do XYZ for us.  When do you think you’ll have it ready?

Two people talking right past one another….funny, eh?  BTW some of you are probably slapping your foreheads right now, “D’oh!  Doesn’t this idiot see?  Forget ABC, and just do XYZ!  That is what your CustDev processes are telling you.”  All I can tell you is that XYZ requires a few orders of magnitude more time, money, talent, skill and luck than we have right now, while ABC lends itself better to bootstrapping, and is, not to mention, more interesting from my POV.

Lessons Learned (shamelessly borrowed from Steve Blank):

• Simply talking to customers and taking feature requests is not Customer Development.
• LOIs are great, and I will continue to use them, but Garbage In, Garbage Out still holds true.
• Customers will not actively hand you the Holy Grail (read:  Product/Market fit) because they don’t have it, nor do they care about it.
• Customers do have their own self-interested agenda (rightfully so, as Brant points out above) and will quite gladly subordinate your interests to theirs.
• The art and science of Customer Development consist of being able discern when, how and why a customer’s agenda is aligned with your own agenda/vision.

Update: If you haven’t done so, please take our State of Customer Development Survey.