Monthly Archives: July 2014

It’s All Been Done Before

2 Replies

Whenever I start a new project, it always starts with excitement. New ideas are always exciting because, as ideas, they seem perfect and carry with them the promise of learning new things. That excitement lasts right up until I finish the first working prototype and have enjoyed the glow of having built something new. Then, reality sets in and I do a Google search for similar projects only to find…

It’s already been done before.

Or, at least something very similar. Seeing that my idea was not, in fact, novel is always disappointing. Worse, to see that others have not only had the same idea but spent much more time working on it is even more disheartening. This cycle repeats for literally every project I’ve ever done, yet I keep working on these projects and also having new ideas and starting new projects. Why?

Everything has been done before.

It’s true that there are some areas of physics where new things are being done. There are biologists who discover new species and new archaeological sites unearthed. But these are at the cutting edge of science today and happen very rarely. In the world of product development, there are few unique ideas. Even if your idea is novel, it is likely that someone, somewhere else has the same idea. That should not stop you, however.

What matters is not the idea but the execution.

Anything can be improved upon, and that’s your opening. Google did not invent the search engine, they made it better. Facebook did not invent the social network, they made it better. Uber did not invent the car service, they made it better. For each of those companies, not only did they not invent a new kind of product, they were not the only ones trying to improve on existing products at the time they got started. What they did was act on the idea better than anyone else.

While others may have the same idea, can they match your focus? Can they match your passion? Can they match your work ethic? Having an idea is cheap, what you do with your idea is what gives it value. If you believe in your idea, make it impossible for others with the same idea to compete with you by being the best at turning that idea into reality.

So, who cares if everything has been done before? Anything can be improved. That’s where you come in.

 

 

The Profitability Challenge

4 Replies

Here’s a fun weekend experiment for you, something I call the $20 Weekend Challenge: Take a $20 bill out of your wallet on Friday. You task for the weekend is to turn that $20 into $40 by Monday, doubling your money. You are welcome to use any legal means at your disposal, but heading into a casino or buying lottery tickets doesn’t count. You have to turn that $20 into $40 without gambling. It sounds hard, but it is worth it, I promise.

640px-US_$20_Series_2006_Obverse

So, what does this have to do with building a business?

Cash and Business

A common refrain in business is that “cash is king”. Most people say that to mean your company does not exist if you don’t have enough cash to pay your bills, but it is also true that your business is designed to take in some cash and output more cash. You are trying to build something impossible in the world of physics: something that produces more than it consumes.

This is much harder than it sounds, as you likely know if you tried the $20 Weekend Challenge. If you are accustomed to working for a salary, you are used to exchanging your time for money which is very different from building a business. Having a job requires little thought on your part since your salary is (usually) guaranteed and your time has flexible value. Building a business, however, requires a lot of thought.

Let’s do a simple thought experiment to prove that point. Your typical employee at a high tech start up company costs between $100,000 and $150,000 depending on your location so let us assume $125,000. No, that’s not all salary, it includes benefits, payroll taxes, accounting costs, etc. (as a business, the salary can be only half the cost of an employee).

Depending on your business model, let’s see how many customers you would need to pay for that employee.

Business Model: Advertising

In advertising you are paid per every 1,000 ad impressions you show (CPM). CPMs vary wildly so let’s assume you make a $2 CPM (which is not bad). Assuming that 20% of your users are active on any given day and those active users generate 2 ad impressions, you would need 286,200 active users every day to support the cost of one employee.

Business Model: Subscription

In a subscription model, you make money through the monthly fee you can charge active customers. Let’s assume, your product costs $50/month to maintain a subscription. That means you need 210 paying customers every month to support the cost of one employee.

Business Model: Selling Products

When you are selling products, you get a one-time fee for the cost of the product. Let’s assume you sell your product for $100 and it costs you $90 to make it, leaving $10 in net profit per sale. You would need to sell 240 units every week to support the cost of one employee.

And remember, all of that only covers one employee.

The $20 Weekend Challenge

When thinking in these terms, I hope the value of the $20 Weekend Challenge becomes clear. In order to pay for a single employee, you have to have a lot of customers. To pay for your entire team, you need a large number of customers. To pay for your team, your offices, your lawyers and eventually make a profit? You need to have all the customers.

You need to take your money and almost double it to simply pay your bills.

Building a profitable business is hard because the cost structure that goes along with companies is high. Some companies claim they are profitable when they achieve Ramen Profitability, but that is really a false milestone. If you can’t afford to pay yourself a living wage, you are not really profitable.

If this makes starting a business intimidating, good. It should be intimidating. It should seem almost impossible. However, I bet when you first started thinking about the $20 Weekend Challenge it seemed pretty hard too. The only way to see if you can do it is to give it a try.

The Run Rate Trap

2 Replies

One of the best ways to think you are the only company not doing well is to go to a networking event and ask other founders about their “run rate”. You’ll hear that 6 month old companies are on a $50M run rate or that a three person startup is on a $100M run rate. Clearly there is a magic bean stalk that everyone else knows about except for you.

In finance, a run rate is an estimate for the full year value of a financial metric (e.g revenues) which is made by extrapolating from a shorter period of time (e.g. a few months). For example, you can use a run rate to estimate the annual revenues for a store by taking the first three months of the year and multiplying it by four to get the revenues for all twelve months. However, that assumes the rate of growth of store sales stays flat and if the business is growing, it’s better to assume the rate of growth, say 10% month to month, stays the same and estimating annual sales from that. It’s a quick way to understand the annual size of a business based on a snapshot of data.

Unfortunately, run rates are as error prone as they are simple. The faster your growth rate and the more volatile your finances, the less accurate a run rate estimate will be. When we extrapolated the annual revenues for a store from the first three months of the year we did not take into account the Christmas rush in December which can generate 50% of a store’s revenue.  If that was the case with this store we would have underestimated the annual revenue of the store by 50%.

If you take too small of a snapshot of data, or worse you cherry pick the data, your run rate estimate can be wildly inaccurate. Estimating the annual revenue for a store from only one day is impossible, and if that one day is Black Friday then your run rate estimate will be orders of magnitude higher than reality.

Which is exactly what your friends at the networking event were doing. The pressure to succeed is strong and it is tempting to bend the truth to make things sound good. Cherry picking a few good weeks or months of revenue and calculating your run rate from that is one way to bend the rules. Yes, it is technically possible that you will make $50M this year but that is hard to tell from the $3.5M you made in the first quarter even if you are growing 25% month over month. More than likely you will hit some bumps in the road and not quite get to $50M this year.

Not everyone uses their run rate to mislead you purposely, but in the world of fast growing companies the run rate is very often misleading anyway. Use it with care or at least with a dose of skepticism. So, the next time you hear someone’s run rate is an order of magnitude higher than yours don’t worry. They might just been telling you what they want you to hear.

Reverse Pitching

2 Replies

Recently, I have been helping  a lot of companies by pitching their 7184240743_a9fc6fbaca_zbusiness back to them in a process I call Reverse Pitching. I put together a investment or sales presentation of the company, from scratch, and present it to the founding team of the company. They act as the customer and I act as the company, trying to sell them on the vision and the business.

Wait, why would I want you to pitch me my own company?

Well, before I explain why it’s useful let’s cover what Reverse Pitching is not:

  1. It is not trying to show the company how to pitch themselves. I could never recreate the passion and vision that drive the founders to build the business from the ground up. If you are pitching your company, it should come from your heart in your own voice.
  2. It is not an attempt to convince the company they should change their business. It would be amazing arrogant to assume that I know their business better than they do and hence can improve their business through a simple pitch.
  3. It is not practice for raising investment. If you want to get ready to raise investment, you should practice your own pitch on a test audience as much as possible. Having me pitch your company back to you will not help.

Okay, so then what is the point of Reverse Pitching?

The goal of having someone else pitch your company back to you is to hear about the business from a fresh perspective. I am never as familiar with the industry as the team, nor do I understand the nuance of how the business operates. However, that naiveté means that the pitch they hear from me is very different than the pitch they would present themselves. It gets the team thinking in new ways about how to move forward.

Reverse Pitching is a great antidote for developing tunnel vision, which is common during the product development stage of your company. Nothing shocks a team out of their comfort zone more than hearing someone else talk about what they are doing in a new way. It opens their eyes and introduces new ideas, even if they disagree with everything in the Reverse Pitch.

I find that Reverse Pitching becomes useful whenever a company is preparing to make some large strategic decisions. Those decisions might be fundraising, product launches, rebranding efforts or new growth efforts. At those points it can be useful to ensure that you are not just making decisions based on momentum, but that you have thought about how your strategy is viewed by others.

If you are currently building a company, I encourage you to ask one of your advisors or investors to do a Reverse Pitch. If they aren’t willing to, drop me a note as I’d love to help.

Image courtesy of Erik Anestad on Flickr, made available via Creative Commons.

Who is in charge?

1 Reply

In the early days of starting Flurry, my co-founders and I made all of our decisions by  consensus. It wasn’t hard, since we had similar opinions and were spending all of our time in development which we knew very well. The camaraderie of working together late nights and building something new fueled the excitement we had about our new path of entrepreneurship.

After about six months, we had a working product and were thinking of raising our first angel funding. One of our friends, a venture capitalist, offered to listen to our pitch as practice before we presented to potential investors. We spent a long time putting together the perfect pitch for our business and practiced it until it was second nature. When we pitched our friend the VC, he listened to the pitch, asked questions along the way and seemed generally impressed. Until, at the end, he derailed our entire company with a single question.

“So, who is the CEO?”

That question hit at our biggest weakness which we shared with most first time entrepreneurial teams. But before we talk about why, let’s talk about making decisions.

Democracy vs. Dictatorship

Democracy and Dictatorship are both ways of making decisions for groups of people. Democracy requires a majority to agree before a decision can be made which means a democracy makes fewer decisions, but will avoid making very bad decisions. In contrast, a dictatorship consolidates all decision making power in a single person allowing it to make many decisions very quickly, but with a higher chance of very bad decisions.

For a government, avoiding very bad decisions is the primary concern and the cost of not making any decision at all is often low so democracy thrives. However, in the military where there is a premium on making decisions quickly and it is dangerous to make no decision at all,  dictatorship is used. The decision making framework needs to match the needs of the organization making decisions.

Companies are much like armies, where the premium is on making decisions quickly. You have limited time to execute your plan before you run out of funds, your competition picks up or the market moves. Making a decision quickly and doing something, instead of endlessly debating, is critical to your success.

Companies need CEOs

When we were getting started in those early days, we put off the decision about who was in charge because we were friends first and co-workers second. While I carried the CEO title, I did not act like the CEO nor did everyone treat me like a CEO. This was a dangerous thing to do, as I have seen teams fall apart after 6-9 months fighting about who should be the CEO and I am glad we survived.

Had we been clear about the CEO authority day one we could have set up the right decision making frameworks from the beginning, and avoided any chance of decision paralysis if the team disagreed on what to do. As it was, we had to change the way we made decisions which slowed us down during a critical period of the company.

Note that just because the CEO has ultimate decision making power does not mean they make all the decisions. A good CEO delegates decision making to his team as much as possible, and the best CEOs make sure their teams feel ownership of all decisions even if they don’t make themselves. Still, it is not always possible to make everyone happy with every decision which is the hardest part about being a startup CEO.

Who is the CEO?

I am glad that our friend asked “Who is the CEO?” because it forced us to confront the question of authority very early in the life of our company. It was also a wake up call to me, as the CEO, to step up as the leader I should have been all along. The team also needed me to become that leader, as it allowed us to move more quickly and overcome some of the challenges we had faced.

And it prepared us for the even harder journey ahead.

This post originally appeared on the FounderDating blog as a guest post.

 

Location, Location, Location

2 Replies

 

city

It amazes me how many people cling to the romantic notion of starting a new business in their garage. Garages are typically full of stuff (including your car), poorly lit, and cold due to a lack of insulation. Your garage is also attached to your home which means you’ve chosen a location for your business based on where you live right now.

That a dangerous mistake.

Even if you are not starting a retail store or a restaurant, location is an important factor in the success of your business. It might not seem so at first when it is just you, your laptop and a phone working from a coffee shop. However, if you are successful and need to grow then you want to make sure you are in a city that facilitates your growth. Just like natural resources fuel economic growth, your company will need business resources to grow.

Three common business resources that depend on your location are: Employees, Financing and Customers.

Location Based Employees

Assuming your business takes off, you will want to grow your team quickly. This might mean hiring engineers, artists, sales people or simple manual labor. Whatever kinds of employees your business calls for, you want to make sure you have a ready supply of candidates in your area to fill those positions.

It is not a coincidence that you find many companies in the same industry gravitating to the same city. Companies in the same industry hire the same kinds of people, and often away from each other. This creates a liquid workforce where you can quickly scale up when you are successful by drawing from employees at larger companies in the same industry.

The major drawback to being in close vicinity to many other companies in the same industry is that your employees are more likely to be poached by those companies. Ideally, you want to find somewhere with enough density to make hiring easy but not so dense that employees will switch jobs every six months.

Location Based Financing

At some point your company will require outside capital to continue to grow. Despite the global nature of business these days, most early ventures are initially funded by local investors. There is so much risk in early ventures that investors focus on the people more than the business and to do that they need to meet you in person. Of course, to be funded by locals there need to be locals that invest in your kind of business. While there may be investors in your city, if they don’t typically invest in your kind of business you will have an uphill battle to raise money.

Put simply, you want to be in a business that your city is in already. It’s easiest to raise money for a high tech company in San Francisco and for a new hedge fund in New York City but if you need to finance a new farm both places will prove difficult.

You want to be in a business that your city is in already.

The good news is that if you’ve already chosen a place with a large pool of potential employees, chances are that they work for competitors and those competitors have raised financing already. That means you might already have an educated investor community.

Location Based Customers

While you can reach customers by email, phone and even video these days there is no replacement for meeting your customers in person. Sales is still a very human activity and your ability to sit down with potential customers and understand their needs will be critical to your success. While you can’t work in the same city as all of your customers, you want to be close to enough of them to fuel your early sales and product development.

Another added benefit of being close to your customers is that other companies who service the same customers will be there as well. This means you will have more opportunities to develop partnerships (and potentially be acquired).

Moving On

The reality is that any location you choose will never be perfect. Whether to move your business, or even your home, somewhere new is a decision that you will need to make after weighing the facts. It is possible that the potential of easier financing is outweighed by your desire to be near your family, which is a very logical decision. However, realizing that limitation up front means that you can plan ahead and work harder to overcome it.

Thanks to Evan Cooke for inspiring this post. He promised me a job cleaning his yacht in exchange for covering the topic. 

Photo made available via Creative Commons by Jim Trodel on Flickr.