From the Ash's

Scalability 2.0

2007-11-16T21:02:22Z

Scalability is the question that plagues everything in business. Do the operations scale? Do the systems scale? Does the organizational structure scale? Better phrased: What does it take to scale this business?

Scale is often cited as a major determining factor in the output of various business models. Consulting, law, and accounting are examples of businesses that scale as a factor of people. As in, the company's production is directly governed by the number of employees. Since the only physical products of these industries are documents, it's fair to say that output is entirely contingent on people. Therefore, to produce more you must hire more people, which is difficult and expensive.

Contrast that with Google, the epitomy of hosted services. The company essentially provides hosted software, which is monetized through ads. It employs roughly 10,000 people, mostly developers, and serves hundreds of millions of users. That's a massive scale, although they have their own problems based on maintaining sufficient revenue per user.

Here's one way to think about scale:

Say you have a web company, XYZ.com. XYZ.com earns $1 per user per month and has 100,000 regular users. That means they're making $1.2 million per year. That's enough to support a staff of 15 at an average salary of $80,000 (assuming no other costs), or really a staff of 12 at that salary with $240,000 in annual web hosting costs.

What's the incremental cost of scaling to support 1,000,000 users? You'll have to add a couple more servers at your hosting facility, say doubling the cost to $480,000. Will you need to add more employees?

Possibly, but you won't really need more programmers, and if you run a service like Google's, you won't need more customer support staff because there's almost no tech support. Therefore, your hosted solution virtually eliminates your scaling costs. Incredible, isn't it?

]]> Scalability is the question that plagues everything in business. Do the operations scale? Do the systems scale? Does the organizational structure scale? Better phrased: What does it take to scale this business?

Here's one way to think about scale:

How do you evaluate scaling opportunities?

I've just shown you what a business that doesn't require significant inputs for scaling looks like. But how do you figure out what does or doesn't scale before starting your business? And, more importantly, how do you figure out if the revenue stream will scale to where it makes sense?

Well, that's the great question. I think the exercise I just used in the example is the quickest way to understand how business costs scale:

Take a piece of paper. Draw a box in the middle of it. This box represents your business.
Make a list of each of the things your business needs to operate (people, office space, equipment, server space, etc.). Cross off what's secondary or minimal.
Finally, ask yourself, "If my sales grow by an order of magnitude (10 times), which inputs will have to be increased to support it?"

The answers to this exercsise should show you what the major cost factors are to scaling your startup.

What about revenue scalability?

This question is probably more interesting to most readers. The scalability of the revenue stream is the crux of debate in most startup circles. And the truth is that it's pretty hard to tell. I've heard a number of top-tier VCs say, "I strike out enough that I can't afford to do anything but swing for the fences." What they mean is that their job is to understand business risks and market opportunity and they, as seasoned professionals, have a difficult time predicting the winners.

I would start with a couple of tasks (use spreadsheets!):

Determine the size of your market. Start by summing up the applicable revenues of your competitors (GE and IBM have many divisions but only 1 or 2 probably compete in your industry). Then add in any additional market segments for which you have a credible value proposition. For example, Clearwire (a WiMAX vendor) might sum the revenue of the mobile data products (Aircards, etc) of the major cellular carriers and then add to it a portion of the broadband revenue of major cable and wireline carriers, adjusting for the number of markets Clearwire serves. Clearwire might also include some of the voice revenue from the wireless carriers, as well.
Predict your achievable market share. Try to dig up some research reports on the markets you're targeting. It helps if you can get deeper than just newspaper articles (perhaps you have access to market research databases, etc). Use these reports to determine how your value proposition compares to the market drivers and restraints for each of your target market segments. These determinations should create a set of sensitivity factors that you can average to determine an overall market segment sensitivity. Multiply the market segment size by its sensitivity factor and sum the results.
The last two steps have generated an estimate of your end-state revenue size. Now, use milestones from your marketing plan to define the growth of your marketshare from start to end-state. It's helpful to graph the results.

If you're interested, you can overlay the graph you created in the last step with a cost estimate for your business, taking into account how costs scale to your customer base. The resulting graph will show how your revenues scale compared to your costs. It will be helpful both for understanding your business and for raising capital.

The point at which your revenue surpasses your expenses is your break-even, and it will determine both the amount of investment required and the risk associated with that investment. Take, for example, Sprint's Xohm service that's now in question after Carl Icahn forced out Sprint's CEO. Their scaling proposition was: "We're going to build a new network that covers 100 million people, of which we expect to take X percent as subscribers, but it's going to cost us $3Bn." Icahn was able to force out the CEO because investors felt the amount of investment required to build the network as too risky.

This graph also is a good credibility check. If you think your product or service is going to change the world, but you're an untested entrepreneur and you need one million users to break even, then you might want to rethink your business strategy to increase your revenue or reduce your expenses. After all, if it looks too good to be true, it probably is.

Venture Funding - The New Approach

2007-01-25T20:27:29Z

I just read a very interesting article, "Tech Start-Ups Have Money to Burn, but Choose Thrift", published last week in the Wall Street Journal. It discussed the recent trend of venture capital-funded companies to focus on keeping costs low, as opposed to the Dot-Com era practice of spending large quantities of cash on over-sized staffs and flashy marketing campaigns.

This change highlights the maturation of the tech start-up industry. This industry really had its genesis only 30-40 years ago. The professionalism with which companies are started today compared even with the start of Apple Computer and Microsoft in the late 1970s is incredible - those companies did not really even incorporate until years after they began, nor did they receive venture financing until they were in a late-stage and already cashflow positive.

It wasn't until the Dot-Coms that the start-up industry became prevalent enough to attract the critical mass of participants required to create a problem - and through that problem, the learning necessary to create a mature, stable industry. Ideas on how to finance and run tech start-ups had to be tested and proven or disproven. Unfortunately, this trial-and-error method - the only true way to solve a new problem (at MIT we were taught that often you can't theoretically solve a new problem until you're hacked your way through to a solution at least once) - cost an awful lot of money. However, it also created the rapid buildout and growth necessary to create a generation of seasoned entrepreneurs and investors that can provide mature, moderate-paced growth over the next 20 to 40 years.

One of the primary understandings that came from the Dot-Coms is that financial discipline (aka cleanliness) is next to godliness. Today, investment in venture capital firms is near an all-time high. Tier 1 firms like Kleiner Perkins and Sierra Capital are managing well upwards of two billion dollars, whereas just ten or fifteen years ago they were managing funds on the order of two hundred million dollars. That means that their average deal-size has to go up almost ten fold to provide the same performance returns as they did previously.

Therefore, there are a couple ways to solve this problem:

Invest in more mature companies (ie. mezzanine-stage or positive cashflow companies)
Invest the increased amount in the same companies as before, creating overvaluations or diluting the entrepreneurs' shares.
Invest in more expensive startup ventures such as biotech and nanotech that require large capital investments to develop their product offerings.
Invest the increased amount while exersizing the financial discipline to increase the average time between fundraising rounds, thereby reducing the number of rounds required for a successful company.

Some firms have, in fact, invested in more mature companies in order to "flip" them by selling them to bigger companies within 1-2 years of financing. However, this investment strategy produces lower returns, requires more deals because most VC funds are designed to run for ten years, and underutilizes the skillsets possessed by VC firms (ie. professional management advice, great rolodexes for hiring senior executives). While this approach was one of the most popular solutions in 2004 and 2005, the reduction in start-up M&A activity over 2006 suggests that VCs have already moved away from it.

Overvaluation or diluting entrepreneurs' shares lasted for far less time than the late-stage investment strategy. Such an approach just doesn't work mathematically - it kills later rounds of financing because the market wises up, or demotivates the entrepreneurs since they no longer have enough skin in the game equity-wise for it to be worth their full efforts.

Biotech and nanotech enterprises do take more time, but that also makes them somewhat impractical as start-ups. In the end they sort of fit the same VC investment approach as the silicon industry - a high capital expense (CAPEX) industry due to the cost of manufacturing machines and laboratory R&D. There tend to be fewer successful start-ups in this space, and many do their work mostly on computers where R&D is significantly less expensive. The development cycle makes it difficult for VCs to extract a liquidity event in the 5-10 year time horizon they need to make their results.

That leaves over-diluting a company and installing strict fiscal discipline practices in order to extend the duration between fundraising rounds. What this strategy amounts to is giving the start-up a war chest with which to protect itself from the unforeseen and maybe make strategic acquisitions where possible. This improves the overall stability of such start-ups and doesn't result in the long-term dilution of entrepreneurs shares because it's roughly equivalent to getting two rounds of financing at once.

In addition, the improved stability of the start-ups improves their overall chances for success, which changes the risk profile for the VCs. By pursuing this strategy they can reduce their risk while keeping returns and their deal-rate steady, as well as capitalize on their unique competency in start-up management.

While we have yet to see how this new funding strategy will play out over the long-term, first impressions suggest that it is a mature strategy that possesses the insight of seasoned professionals who have learned from their past mistakes in the Dot-Com era. Hopefully, we will see this model continue to play out for the foreseeable future as companies continue to make use of the new economies-of-scale afforded by Web 2.0. At the same time, this maturation suggests that we will not see another truly disruptive technology enter the marketplace for quite a while, as the current industry is becoming so mature.

]]> Sources:

Tam, Pui-Wing. "Tech Start-Ups Have Money to Burn, but Choose Thrift". Wall Street Journal, 1-18-2007, B1.

Hang on to your Hats!

2006-08-15T13:19:22Z

After a volatile month, it seems that everything's cooled down both in the oil sector and in the Middle East (aka, the oil sector), and Wall Street's psyched. But hang on to your hats, boys and girls, because the rollercoaster ride is not over yet. In fact, it's just starting.

Let's look at why our market fundamentals are indicating that this trend in volatility and increased oil prices isn't going away any time soon.

A loose Federal fiscal policy for the last two presidents (~14 years) means that our government debt has gone nowhere but up - financed not by the U.S. but rather by foreign central banks.
Investment in hedge funds and private equity has more than tripled in the past five years.
Investment in energy commodities, especially oil, has more than tripled in the past three years.
The ratio of P/E ratios between large and small-cap stocks in the S&P 500 is way off its mean and approaching an all-time, 30-year low (which correlates with negative future returns in the S&P 500).
The index of CEO performance expectations is below 0.50, contrasted to record profit margins across most of the U.S. market.

That's quite a laundry-list of items there... so, you might ask, what does it all mean? Simply put: a high risk of stagflation! But Ash, didn't we kick that back before you were born when Reagan and Volker threw out Keynesian economics?

NO!!! We've been falling back into New Keynesian economics since the early '90s. It seems that the allure of the "tools" offered by Keynesian economics, like the IS-LM model, were too much for economists to pass up, so they "reconciled" them with the monetarism that has proven so right in the last 25 years. No wonder I dropped Macroeconomics...

New Keynesianism is just as wrong as Keynesianism was in the last century. It proves great for a while - the Go-Go 60s or late 90s - but it doesn't last, and we're about to see that again. Mid-East violence is resurgent, and the world's oil supply is stretched more thinly than it was in the 70s thanks to added consumption, not only in the U.S., but in Eastern Europe, India, and (the 800-pound Panda) China. That means that smaller shocks have bigger ramifications in the world market.

Those shocks have been exacerbated by the entry of large quantities of hedge fund and private equity capital in these markets. Thanks to a loose fiscal policy and too much money in the market, this extra capital has driven prices up beyond anything that OPEC or anyone else can control. And despite what most of Wall Street currently believes, this capital is not a result of unparalleled prosperity... IT'S A RESULT OF POOR FISCAL DISCIPLINE!!!

That's a harbinger of inflation... in point of fact, it's the textbook definition of it: Too much money chasing too few goods. The markets just haven't put two and two together yet. Why? Simply put, inflation is the hardest thing to get right. People don't believe predictions about shifts in inflation until they perceive shifts in inflation (thanks Dad for that epiphany!). That means that they don't expect it until too late.

So why am I so bearish if I'm not suppose to be believing in inflation yet? Simple: I don't have a lot of money, and I remember just 6 years ago when gas in San Francisco, California - the most expensive region for gas in the country - was only $1.75. I don't think you can tell me that the price of gasoline doubling in only 6 years is not going to create added inflationary pressure in the economy, especially not when the price of crude oil has not just doubled but tripled in that time.

What this means for the economy is a lot of pain. We haven't been taking our medicine, we've been driving big cars, running up astronomical debt on our houses (according to The Economist, the housing bubble, as a percent of GDP, is half-again the size of the dot-com bubble), and purchasing everything in sight... all while that nasty cancer has been growing under the surface.

It's okay... that's just human nature. However, it's coming time for the Chemo to start. We might lose our hair for a while, maybe we'll pull it out, maybe it'll fall off, but it'll grow back eventually. The question is now not if, but how long? And that, my friends, nobody knows.

The Right Stuff

2006-08-07T12:46:16Z

Recently, my father sent me a Wall Street Journal article that I had been staunchly avoiding. Feeling bad about deleting it outright, I briefly skimmed it before sending him a verbose reply explaining my rational for avoiding the piece. In fact, my actions are likely to shock both my father and many of my friends. I am an avid Journal reader and consume about as much information about personal finance as I possibly can. Why then would I refuse to read a Journal article about personal finance?

The answer is simple: BECAUSE IT'S SO WRONG!

That's right. Even the Journal's authors can be quite wrong when it comes to topics that they know little about. They just fall into the same trap that most other media outlets fall into... annointing their columnists as so-called "experts" when they really have no business talking about that subject.

Take, for example, this author's comment that one should not begin "seriously saving for retirement" until after age 30. They couldn't be more wrong. Analysis has shown that someone who puts away a fixed amount every year from 20 to 30 and stops will have almost twice as much in the bank at 65 than someone who puts away the same fixed amount from 30 until 65. That's the power of compound interest!

Good financial advice will tell you that. In fact, it's one of many questions I use to triage whether or not somebody knows they're stuff about finance.

Here's another question: when are student loans good? The answer is two-fold: 1) when you need them to finish school, and 2) when you can make a rate of return from investment that is significantly higher than your interest payments. Student loans are somewhat unique because they tend to have more generous terms than most other loans, including lower interest rates. That in turn makes it possible to use money from student loans for investments in securities, which enables you to reap the difference between the two rates (rate of return and interest rate). The caveat: don't try this unless you know how to invest... you're taking on extra risk so you need to be confident that you're not going to actually lose the money (although, better to do it in your 20s than when you have a family to care for).

The first thing that you need to ask when you're getting financial advice, is whose advice are you getting? In other words, why is this person qualified to give you advice?

Let's break it down: what types of professionals are qualified to offer advice? Bankers? Financial Advisors? Columnists? Economists? Successful Businesspeople? Successful Investors?

The correct answer is only the last two - successful businesspeople and successful investors. People like Robert Kiyosaki and Warren Buffet, who have whethered all sorts of financial changes and crises, and made hundreds of millions or even billions over decades. If you're not willing to go that course, than financial advisors may be right for you... they know what they're doing in terms of savings and helping you meet modest goals. They won't generate millionaire returns, but they'll give your kids a college education and you a comfortable retirement.

So if you're keen to start getting advice from the right people, or at least test the water, what should you do? First, take the advice of one of my best friend's fathers, a man whose made many millions in his lifetime, run down to your local bookstore, and buy yourself a copy of Rich Dad, Poor Dad by Robert Kiyosaki.

Now, I've noticed a lot of people have read this book without really reading it. So, what I want you to do is read it once kind of quickly. Then, pull out a pen, pencil, or highlighter and read it again slowly, chapter by chapter. Highlight or underline key points and make notes in the margins. Never read more than a chapter in a day, and if you want extra credit keep notes on a notepad. Get a couple of your friends who share your interest to do this with you and discuss it regularly. This method of studying will help you internalize those lessons.

When you're done, go out and buy another book from a real expert and start scouring the Internet for articles from real experts. They're out there. Robert Kiyosaki writes a column for Yahoo!Finance, Warren Buffet has produced a number of books, some successful mutual fund directors, like the Hussman Funds, regularly publish columns about investing on their websites.

The information's there. GO GET IT!!! And remember to always ask yourself: is this person really qualified to give me advice?

Meritocracy in Democracy

2006-08-06T18:00:02Z

As congress departs for its summer recess, one of the most prominent bills left on the table is the permanent change to the "estate tax". Why is this such a contentious bill, and, more importantly, why are Republicans so wrong on this one?

Estate tax has evolved greatly since its inception in 1916. However, right now it still retains its initial purpose: reducing the income divide between America's younger generations to prevent the emergence of entrenched socioeconomic classes that Europe has been plagued with for millenia. To this end, the tax has been reasonably effective: America has the highest rate of transitions between socioeconomic classes of all developed nations.

On the other hand, as we have seen with the Rockefellers, Carnegies, Kennedys, Bushs, and the like, there is a growing entrenchment of an American upper class. The Republicans current efforts to reduce and repeal the estate tax serve simply to increase this entrenchment - not to help the economy or any other purpose (look at Europe's stagnation!)

What's the difference? By taxing estates valued at over one million dollars (fluctuating wildly over the next five years), we reduce the amount of money that upper middle and upper classes can inherit without negatively impacting the transfer of monies between generations of the lower, lower middle, and middle classes - as in, protecting the American Dream. That means that we promote a meritocracy because each generation has to work anew to reach high socioeconomic stratum.

That's not to say that those children whose parents are already in high socioeconomic stratum will be even with those whose parents are not. Quite the contrary, they have access to the education and networks critical to rapid success. However, what it does mean is that these children must still work extremely hard to enjoy the same success as their parents because they are thrown into competition with more of their peers from other socioeconomic backgrounds. This competition is particularly evident in schools - the profusion of scholarships in elite private high schools and universities, as well as the judicious use of standardized tests and the notorious "tell us how poor and disadvantaged you are" essay questions means that the students accepted to these institutions are rated on their merit as well as their parents' wealth.

What do merit and competition mean for society? EVERYTHING! Economies grow through competition, hard work, and the pursuit of riches. While everyone laments the overinvestment in dot-com companies, the fallout is not as bad as everyone believes - in less than a decade, more well more than a decade's research and development was achieved and the productivity gains resulting from it will continue to propel the global economy for decades.

The evidence is all around us. The 40 hour work week exists only for a very small portion of the population. For example, I'm penning this essay on Sunday. With many companies establishing offices across the globe, it is not uncommon for people to come into the office at odd hours of the morning or night to participate in teleconferences. Work on most projects runs around the clock as offices pass off projects to each other based on their timezones. The proliferation of modern communications tools means that people bring their work home, and continue it on the road as well.

This means that Americans must work both harder and smarter in order to maintain our preeminence in the global workplace. In the face of more competition abroad, we must also make efforts to step up competition at home. Thomas Jefferson is famous for saying "The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants." The truth of this saying has never faltered. However, another, parallel, statement has emerged to be just as truthful: The tree of economic growth must be refreshed from time to time with the blood of the meritorious and the wealthy.

So what's the fallout from all of this? Well, as part of a broader effort this alteration to the tax code risks killing something all (or almost all) Americans believe in: The American Dream.

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Where Is Energy Really Going?

2006-08-03T13:34:27Z

There is no doubt in my mind that we're entering a new energy market, and that our experience in the last oil shock in the 1970s does not apply to the new rise in energy prices. This fact stems from the rapidly increasing demand in places like India and China - a demand that oil production cannot hope to meet with current energy prices - that did not exist in the 1970s. This knowledge has led a lot of people, particularly investors, to seek opportunities in renewable energy technologies. However, most of these are doomed to failure for the same reasons they were the first time, and - as noted by my friend Kurt Keville - it is important to realize that most of the old players from the 1970s renewable energy field have decided to pass on this opportunity. If nothing else, that should tell you something.

Ethanol is the darling-child of renewable energy buffs everywhere. However, it has a long way to go before it will ever be a serious force in the marketplace. Here are some reasons why:

Distribution of oil moves in a river-delta format - it starts with a fat pipe at an oil field, moves down the pipeline to a refinery, the refinery pipes to a distributor which then sends it down the tendrils to all of the gas stations... only at the end do the logistics leave serious arteries. Bio fuel must first aggregate from a number of small sources then disseminate, roughly doubling the logistics involved.
Ethanol is significantly more corrosive than gasoline, which means it is ill-suited for use in normal vehicles, even as more than a 10% additive. Aside from the corrosion, when it's concentration in fuel is greater than 10%, toxic fumes from the ethanol will seep from the fuel system of most cars.
Modern, non-flex-fuel cars are optimized for gasoline consumption. Switching the fuel will significantly degrade both the performance and the fuel efficiency (not including ethanol's reduced power-per-gallon in the next point) of those vehicles.
Ethanol has significantly less power-per-gallon, which means that you have to burn more of it to get the same performance - even in the best of conditions. It also means that a full tank won't get you as far down the road, so there have to be more fueling stations and it will take more of people's (already dwindling) time. Hybrid technologies may find a huge opportunity in improving the performance of ethanol vehicles, but this application is likely close to a decade away.
There is a chicken and egg problem inherent in this industry. In essence, the petroleum companies are asking the question: "If we build it, will they come?". Note, this isn't the case for American car manufacturers because there has been a long standing tax break to encourage them to produce "flex-fuel" cars, which is a hold-over from the fallout of the oil shocks of the 1970s.
There is not enough production capacity, nor even potential production capacity (ie. all arable land), in the world to produce the corn crops necessary to shift all vehicles to ethanol and other biofuels. Hence, the "ethanol economy" is inherently a non-starter.
Many non-vehicle technologies, such as plastics and fertilizers, require petroleum for production. Ethanol won't be able to replace petroleum in fulfilling the needs of these industries.

These seven reasons are just some of the top ones for why ethanol is a non-starter. However, other darling-children of the renewable energy crowd are also doomed to a supporting role. Solar power, which relies heavily on metals and silicon for the production of solar panels (not to mention, extremely toxic chemicals), has too low a power density to replace lots of energy generation systems. Also, throw in the fact that you have to extract the silicon and metals needed for its production from mines, which requires petroleum.

Likewise, wind power has a limited role, since the average windspeeds required for consistent power production make only a small percentage of available land well-suited to wind production. Used in concert, all of these technologies will help ease the stress on current energy supplies; however, they're not going to solve the issue. Ever.

So where does the path lie? Well, in the short term it's simple: conservation. There is incredible inefficiency everywhere in the world, borne of oversupply of power for so many years. That means that we can reap a lot of value out of getting better at keeping what we have.

What else? This is going to make me pretty unpopular: nuclear. There are new nuclear technologies, pioneered in part by my alma mater, MIT, that are completely safe and very efficient. Such technologies offer the energy densities necessary for practical use in a macroscopic application. I predict that China, and maybe India, will be front-runners in exploring the use of new nuclear technologies... Why? Simply because they need it for growth, and they have to be more pragmatic about their situation than the populations of developed nations.

I also predict that the new oil - the new driver of our economy - is something we haven't seen yet, or have relegated to the back of our minds. It's obvious with just a few BOTEs that current renewable energy technologies are not going to meet our energy needs, so it's time for savvy investors to look farther out into the fog to see what's really going to save the day.

When McDonald's Is too Expensive

2006-07-18T04:05:43Z

Congratulations son, you've graduated from college. What are you going to do now?

Well, I think I'm going to start my own company.

Oh, that's great! I'm sure you'll do wonderfully (snicker). Good luck to you!

I've heard that a lot recently, and I'll first note that the 'snicker' was added by me (creative license). I heard it mentally every time I heard people say that to me at graduation a month ago. It wasn't because I thought they were false - quite the contrary, they truly felt happy for me and wanted the best. However, I had a bit of an idea of the road ahead and I knew it was going to be a tough one.

Little did I know just how tough, nor do I think I've hit the toughest parts now. That is to say that I've just entered what most people call "The Real World". Life after college. Good bye help from Dad, hello bills.

I've always had a good head for numbers, self-discipline, and decent financial sense, which is why for the last two weeks I've been stressed to the max. I've done everything to cut my expenses to the bone - I'm even still living in my fraternity through August! In fact, I've been so thorough that I'll spend less than $17,000 in the next year - equivalent to the salary of someone making $8.50 an hour. That's barely above minimum wage here in Massachusetts!

Even still, I'm stressed to my bones. I'm working 80 hour weeks and it doesn't feel like enough. I'm bumming rides and walking almost two miles to work - whatever it takes to save money. Why? Because I'm not making a cent right now. That's not to say that I won't soon, or that I'm actually in financial trouble - I'm not - but I'm illustrating what every entrepreneur experiences at the beginning: lean times.

If you think about it, by not taking a salary now I'm just vesting my work for the future. It's painful, but it's going to pay off. Walk with me. I'm a rocket scientist from the top engineering school in the country, MIT. In my fields, IT and finance, my peers are getting paid $65k-$900k per year out of school. If we take a roughly median compensation (sans health insurance, etc.) of $80k per year, that breaks down to about $40 per hour if you were only working 40 hours per week. Of course you're not, so let's estimate it at $32 per hour (50 hours/week).

Now at $32 per hour, and working over 80 hours per week, my year is worth $128,000 in outright compensation. I know, I know - that's ludicrous. And yes it is... even working 80 hours a week someone my age would most likely not get paid $128,000 in one year. THAT'S WHY I'M NOT WORKING FOR A CORPORATION!!!

If I worked for a corporation, they'd reap the benefit of my extra work and I'd be stuck crossing my fingers that the higher-ups notice my work and promote me faster. They trade-off - security. It's slow going, but at least you'll always have a salary. However, let's say my hard work net's me the $128,000 this year. I certainly can't take nearly that much out of the business in compensation, nor do I want to -- Uncle Sam's taxes on that pay would be killer. So what gets done with the money? Simple, it's vested in the company. Actually cash assets are held by the company and reinvested into more product, more employees, more sales. And the net difference, the intangibles that I built up all year, those go into more sales too. Those are all the deals I haven't quite closed yet, all the relationships that haven't come to fruition, all the partnerships that are just getting started. Those are the real road to financial independence and developing a successful business all my own. Owning what I make with my mind, ingenuity, blood, and sweat.

So while I can't even afford to eat McDonald's most days. I can take heart in the fact that not only am I saving myself from needless calories, but more importantly I'm the complete owner of my work and that's it's vesting for the future. Talk about a hearty nest egg. There's nothing like a business to support a family, maintain a satisfactory lifestyle, and enable a comfortable retirement when the time is right.

That's what I think about when I look at my disappointing wallet and tell my friends going out on the town to have fun without me. It keeps me disciplined and focused on creating the value that I want to create and reaching the goals that I have set for myself. So take heart, strike out after your dream, and keep in mind the words of Jeff Fox in How to Make Big Money in your Own Small Business, "Scrimp the shrimp... and scrimp to succeed. Invest in your future."

]]> References

Fox, Jeffrey. How to Make Big Money in your Own Small Business. New York: Hyperion, 2004.

Almost There!

2006-05-17T18:26:42Z

So yeah, I've been out of commission on my blog for quite a while. For this I sincerely apologize. It's been tough trying to graduate from MIT, while starting a company at the same time! As I write this, I have 27 hours until my last class as an undergrad at MIT ends, since I have no finals it's the last thing before I take the walk in June.

Hopefully now that my time is freeing up a bit (at least theoretically), I will be able to write more here and finish what I started with the Basics of Entrepreneurship series.

In the meantime, while I'm preparing my next post check out Ten Rules for Success by Joel Marion, one of my generation's most innovative physical fitness professionals, on T-Nation.com that gives ten lessons for success that apply to both the gym and life in general. Great timing for grad season :-)

The Basics of Entrepreneurship, Part 4: Marketing

2006-02-20T04:09:42Z

Marketing is an intrinsic part of any successful venture. It is the link between the customer and the company - both in learning what the customers want and in promoting both the company to both potential customers and returning customers. Everybody wants to back a winner, and successful marketing helps give them just that.

But wait... I know how to market! I mean, I see it all the time on TV and in magazines and newspapers, how hard can it be?

Sorry to take you down a notch, bro, but it's a lot more and a lot harder than that... when it's done it right, it really takes work. Think about it. How many advertisements can you remember right now? I bet you can remember a couple. What do you remember about them? Can you name the companies and products associated with the ads? If you can, that's impressive. Have you actually bought the product?

That last question's a doozy isn't it? You see television commercials aren't very useful for most marketing campaigns. They're expensive and they cover too many audiences. Most magazines and newspapers are just as bad - static advertisements that are directed at no one in particular in hopes that someone who reads it will be inspired to buy the advertiser's products. Such marketing campaigns are the product of lazy decisions and following the groupthink that is so common in bureacracies and big companies.

The Five Pillars of Marketing

Truly innovative marketing encompasses developing products that solve specific needs of specific customers and convincing those customers of their need for the products so much so that they feel a need to purchase those products. Such marketing encompasses five pillars:

Know thy customers
Pursue your customers relentlessly
Incorporate customer feedback
Get referrals
Cross-sell

Know thy Customer

Sun Tzu, ancient Chinese wiseman and military advisor, is famous for saying "know thy enemy and know thyself". However, in this modern world I would say "know thy customer and know thyself". What I mean by this is that you must understand your customer and their needs and how you can help meet their needs in order to be both a successful marketer and a successful entrepreneur.

Don't listen to silly focus groups. Get in there and get to know your customers! Bob Jones, a brilliant marketer who's been leading product development of all sorts of nutrition bars over the last two decades, has a favourite phrase, "so we held some focus groups, but we threw out the moderator and actually asked our customers questions". It's great! He means that he actually went into a room with twenty or more of his potential customers, got to know them, and really learned their pain. He got to know the interesting tidbits that none of his competitors knew. For instance, with one product he learned that diabetics hate being treated like they're sick. Therefore, he packaged his product like an energy bar, which gave them both the peace of mind they wanted and treated them like adults!

When you really get to know your customer, you know what keeps them up at night, and you know the tidbits about them that will enable you to hold an advantage over your competition. I guarantee you that most of your competition is not this meticulous and interested in solving their customer's problems. That's why startups exist. That's why you can steal marketshare from big corporations.

Pursue Your Customers Relentlessly

That's right! Chase them down! Don't let them get away! You need to have an integrated approach to reaching your customers, one that both establishes your credibility and fosters their desire to purchase your products. I know, I know... you're worried that you're going to overwhelm them or seem to aggressive. I have too, but think about it: is it overwhelming when you see the CEO of GE on CNN talking about his company's new approach to product development, see some advertisements on television touting GE's new products, and then receive some mailers offering you discounted prices if you make a purchase immediately?

Maybe that's aggressive. However, it seems to me that chances are the only thing you will really take note of is the mailers. You won't really remember everything else, but you may think that GE is an innovative company with good products. That's what sets the stage for the mailers. The mailers seal the deal. They answer the "why now"... "Honey, if we don't buy it now, we may have to pay more later". That's ridiculous, but it is how people think.

There are three things to consider in any marketing campaign: Why us? Why our product? Why now?

Incorporate Customer Feedback

It's important to always improve your product. Remember, if you're successful, your competitors will be trying to emulate you as best they can. That means that you have to stay a step ahead of them by continuing to be the expert on your customer's needs. Therefore, you need to actively solicit customer feedback on your products and incorporate that feedback into new versions of your products. Happy customers lead to more customers and to repeat customers, so making extra efforts to look like you're taking their complaints to heart will go a long way to increasing the number of customers you have and through that, your revenues.

Get Referrals

If your customers like your products, they'll refer you to their friends and acquaintances. That's the marketing you can't buy! What's more effective than someone's good friend saying "hey, this product works really well for me" and in the reverse "man, I really hate that product, I can't believe I wasted my money on it". These references are probably the most powerful influencing tools you have access to.

Wait. How do I have access to that tool?

It's simple: give your customers an incentive for making referrals. If your products are expensive, you can give a gift certificate or discount a payment. If they're cheap, you can offer them a free perk or a one-time 20% off card. It's amazing how quickly people will sell out their friends. Especially since such referrals are now just a way of life and not considered actually selling out one's friends (that's another topic for another day).

As your marketing campaign matures, be sure to capitalize on those referrals to bring in the easy customers. It will show in your adoption curve and in your revenues, as well as in the positive review you will generate for the product.

Cross-Sell

The easiest customers you will ever acquire are the ones you already have. If they bought once from you, they'll buy again... as long as you don't make a lousy product in the first place. If you do make a lousy product, low numbers of repeat customers may be a signal that your product is lusy and needs to be reworked.

The cost for the average bank to acquire a customer is around $350. Other industries are similar. That means that it could easily cost you $350 to acquire each customer you get. How on earth are you going to make that back?! It's going to have to be by selling an awful lot to each of your customers. And that's exactly how you should do it! People are more likely to buy from a company that they've already bought from because that company's known to them, they know what to expect. That means that it's easier for you to convince your current customers to buy more products and services from you than it is to convince non-customers to do the same.

In the case of many products you can sell a service to compliment the product. For example, Dell sells service warranties and installations to its customers. These services are easy ways to take advantage of customers that are already making a purchase. How easy is it to install a desktop pc for someone? How about providing technical support for a service contract? That money's almost pure profit. You don't need any extra infrastructure to sell those services. So remember, integrate services and products to sell more to your current customers.

]]> Your Marketing Sucks. 2005. New York: Three Rivers Press.

Primer on Autonomous Systems

2006-02-15T18:48:46Z

There are a number of disciplines that comprise a mobile robot. However, it is usually more worthwhile to approach the development of autonomous systems through understanding the basic subsystems that make up an autonomous or mobile robotic system. I wrote this primer to help bring Aero/Astro students up to speed on autonomy for a class in designing a Mars rover, and I thought it was worth posting here.

Introduction

There are a number of ways to break up the subsystems involved in an automous mobile robot. One of the easier ways is to break it down by functionality and work up from there:

Locomotion (Driving/Walking)
Manipulation
Sensing
Localization
Mapping
Path Planning (Navigation)
Decision-making

These seven disciplines are combined in different ways to form the subsystems of a mobile robotic system. (Note: the entire robot is viewed as the "system" hence all of the major components are called "subsystems" instead of systems.)

Oftentimes one can group these seven functions into two or three major subsystems: hardware control, navigation, decision-making. The hardware control handles the execution of locomotion and manipulation commands, as well as managing incoming sensor data. Navigation includes localization and mapping which feed into the path planning that does the actual robot navigation. Finally, the decision-making chooses the series of actions to pursue in order to complete the goals set for the robot.

Usually the architecture of the system is broken into three subsystems: navigation, visual servoing, and decision-making. Visual servoing is the use of a video camera to navigate tough terrain and complete mission goals such as picking up or placing objects, taking pictures of interesting features, or navigating narrow or difficult terrain.

After I discuss the three subsystems, I will cover the basics of the disciplines that are not as explicit in the subsystems, such as locomotion and sensing.

Navigation

Mapping

Mapping is creating and managing a map of the robots surroundings. As the robot collects data on the world around it, it updates the map with this data. Many robots begin with an a priori map, a pre-made map that's uploaded to the robot to give it a starting place. Other robots have a complete map that's never updated, and other start with no map at all.

The map is used by the path planner to decide how to get the robot to its goal location. It can take many different forms, two common ones are a grid or a potential field (where obstacles have virtual forces that increase as the robot nears them).

One of the challenges faced in generating maps is the management of limited data storage resources. For example, one cannot generate a map with a fidelity of two centimeters square if its supposed to span a square mile - the amount of data storage is gigantic. To work around this issue, roboticists often use a global map that's comprised of a number of smaller local maps that describe important or dangerous areas in detail.

Localization

Localization is the process of using salient features in the surrounding environment to ensure that the robot has correctly identified its position in its map. This process can be done using all sorts of methods including beacons or pseudolites, sonar or laser ranging, or visual identification. The localization procedure is used periodically to correct the errors in the robot's "dead-reckoning" or where it believes itself to be based on measurements of how far each wheel has moved.

SLAM!

SLAM stands for Simultaneous Localization and Mapping and is one of the biggest challenges in modern mobile robotics. When a robot has to generate its map at the same time that it is trying to find or correct its position in that map the errors can become enormous. There are now dozens of techniques for conducting SLAM, including using "breadcrumbs" or past sets of sensor data that are compared against the latest dataset to see if they match, thereby indicating the robot has returned to an area it has already been through.

Path Planning

Path Planning is the part of the navigation subsystem that plans a path from the robot's current location to the location it intends to go to (provided by the decision-making subsystem). The complexity of the Path Planner largely depends on the type of map that is used. In a grid map, the Planner must compute a cost for each cell of the grid, which can become complex and processor intensive. In a potential field map, the Planner just has to follow the "path of least resistance" and is very simple.

Visual Servoing

Vision

While vision sometimes will play a role in updating data in the map, it is much more important for visual servoing operations. In these operations, the vision system must be able to identify an object of interest, classify the position of the object relative to the robot, and provide enough data that the robot can "servo" or move to the object and interact with it. The vision system will often also serve as the main sensor for interaction with the target.

In some robotic systems, the vision system may be replaced by another system such as a radar system, if say the target were burried underground.

There are many different methods for manipulating data from the camera sensors to extract information that is useful for the robot. Such methods focus on picking out distinct collorations, detecting motion, and/or detecting edges of objects.

Manipulation

Manipulation is a key feature of many visual servoing subsystems. Manipulation is the use of a robotic arm to interact with the environment. Oftentimes the robot will have a set of functions it will call in order to fulfill different roles with the arm.

Servoing

Servoing is the small movements and adjustments made by the locomotion system in order to properly position the sensor or grappling arm in order to achieve its goal. This movement is different from the path planning situation, because it requires a lot of small movements or a smaller "loop" from the sensor input to the output of the motors.

Decision-Making

The decision-making plans a series of actions in order to achieve a goal. This planning includes setting goal locations for the Path Planner and deciding when to switch control of the robot between the Path Planner and the Visual Servo.

The simplest form of a decision-maker just arbitrates between the Path Planner and the Visual Servo. However, highly complex systems can do much more, including layout detailed contingency plans and failure modes.

Locomotion

Locomotion systems abstract the low-level movement commands sent to the motors away from the autonomy software. These systems usually take in a goal location in either an x,y or an r,theta coordinate system to direct it to traverse to the next waypoint set by the path planner. The locomotion system then uses "dead reckoning" based on odometry data (data on how far each wheel or leg has moved) to traverse to the next waypoint.

Sensing

Sensors are also abstracted from the autonomy software. Sensor processing is done in the low-level software and the smoothed data is sent to the mapping software in the form of line segments or obstacles. The advantages to this architecture include the ability to support many different sensors with the same interface and the ability to include a reactive layer (like human reflexes) in the sensing layer of the architecture so that the robot can stop immediately if it bumps into something or detects an object that is too close to the robot.

The Basics of Entrepreneurship, Part 3: Mission

2006-02-12T21:31:30Z

In modern-day distributed companies with employees spread across the globe, it is critical that all of the employees are on the same page. While many startups still have all of their employees geographically co-located, it is just as critical to make sure everyone is working towards the same goal. One of the best tools corporate leaders and entrepreneurs have found to bring teams together is a well-defined mission.

The Components

Well gosh, that's simple, I'll just write a sentence to describe my company's mission and we'll be done with it. Everyone will be on the same page and we'll be good to go. Eh, not quite. Does anything good really come that easy? I'm just going to go out on a limb here and say "no". There are a number of components that go into formulating a strong mission statement.

These components include your company's mission, it's core values, and the core value proposition. That is to say it's the what, why, and how of your company.

For example: Google's mission is to "organize the world's information"; Google values protecting users' privacy, providing value to users through a multitude of services, and making its services free to its users without annoying advertisements (achieved through the more aesthetic Google AdSense); Google provides value to its users by applying its search technology to improve the usefulness many common IT solutions, such as email, instant messaging, and getting directions.

The Purpose

The mission statement is important to everyone involved in the company, from its board of directors and CEO to its customers and vendors to its normal employees. To each group it means the same thing: a guiding light to aid in making decisions.

A strong corporate culture focused on a well-stated mission enables senior management to push decision-making down to lower levels of the corporate structure while still trusting that these decisions will be in the best interests of the company. It expresses to customers the type of services and products they can expect and to vendors the types of behavior that will be tolerated. It also helps identify potential strategic partners and lay the ground rules for interactions with partners.

Formulating Your Mission Statement

When you sit down to formulate your mission statement, include all of the people I described above in your planning process. If you already have a team, senior management, employees, customers, partners, or vendors, involve them in the process. In particular, solicit the opinions of your internal groups (team, employees, management) constantly. You'll probably only want to run a couple of drafts by your external groups (customers, partners, vendors) to get their input.

Your Mission

The expression of the mission is a few sentences - no more than a paragraph - that sums up the altruistic reason your company exists. If you don't have an altruistic reason your company exists and you're stuck with "my company exists to make me money", then you might as well just stop now. Think long and hard about what you're trying to do and why you're doing it. Remember, Google says their mission is "to organize the world's information" and CASHFLOW Technologies' (run by Robert Kiyosaki, author of Rich Dad, Poor Dad) mission is to "help people become financially independent".

The purpose of this section of the mission statement is to set the broad focus of your company. It explains why you're putting in the effort to build your own company rather than join a large corporate entity. This section is critical for your company's public image, motivating your employees, and guiding decisions of senior management, as well as attracting strategic partners.

Your Values

In your mission statement, you should express your corporate values. These values include both the character traits you demand of your employees, partners, customers, and vendors, as well as your professional values in how you run your business.

You should enumerate five to seven values or traits that embody all of your values. A great example of a statement of values is the Seven Pillars of Islam. It might be taboo to cite a religion in this context; however, realize that true practitioners of Islam (not those terrorist types) - spread across the globe - are all unified by their acceptance and observation of these Seven Pillars above all other rules and customs. What that means is that while leadership is highly fragmented and distributed, a large body of people can accept the same basic principles of life and live together as such (again, I'm talking about the moderate Muslims, not the terrorists).

When you're drafting the statement of your values, think of your five to seven values, then write one to three sentences to describe each. Of course you'll probably want to review and revise these, but I'll talk about that a bit later.

Your Value Proposition

The final section of your mission statement is the value proposition. This section, like the others, should be short - just a few sentences or maybe a paragraph - and to the point. It should be easily memorizable and explain how your altruistic mission is put into action to serve your customers.

For example, Google's value statement would be "we are the leading provider of search technologies", in Microsoft's case it might be "we are the leading provider of productivity software and operating systems for computing devices". This proposition is important to help you both convey to your customers and your employees what it is your company does.

Putting It Into Action

Show some of your drafts to all the people in the orbit of your company - your vendors, partners, and customers. Ask them to comment and critique your draft. This process will provide you with a lot of additional value, because it will help you connect with your customers more - they may see your value to them differently than how you see it - and get feedback from everyone with whom you work. It may catch some flaws in your attitude and performance that you hadn't seen before and also show you things that you do well that you don't know about. I guarantee you that this process, while it may be painful at times, will make your company stronger and improve your opportunity to succeed.

The Basics of Entrepreneurship, Part 2: Team Building

2006-02-09T05:09:01Z

Building a competent team is probably the biggest difficulty entrepreneurs face throughout the life of their startups. Venture capitalists are always quick to explain that they focus first on the entrepreneur and his team and then on other aspects of the business, with very rare exception.

In fact, earlier this evening I attended the MIT $50k Entrepreneurship Competition - the world's foremost university business plan competition - at which Bob Davis as the keynote speaker. Mr. Davis is currently a general partner in Highland Capital Partners, a Boston VC firm, and he was the CEO of Lycos from its inception in 1995 until a few months after it was acquired by Terra Networks to form TerraLycos. Mr. Davis made the point that he and the other Highland Capital partners evaluate startups on three criteria:

Team
Market
Product

What does that tell you? Well, simply put it means that one of the world's foremost entrepreneurs, and the people with which he works, believe that the primary key to success is to have the right team. In fact, oftentimes team members will only be suitable for a certain phase or phases of the startup and must be swapped out. Jo Tango, another general partner at Highland Capital, keeps a timeline depicting the phases for which he feels the CEOs of the companies in his portfolio are suited to run the startup company. Most of the time the lifeline of the CEO is only for two or three phases. That's not to say that they will not be able to see the company through later phases of its growth, just that they will have to grow along with the company.

So now that you know it's critical to have an A team, How do you field an A team? This question is actually made up of a number of questions, the larger of which I will go into in this article. This article will go through how to field a team, establish and maintain a culture, and attract strategic partners.

Tapping your Network

What does networking have to do with this? Isn't that what you do to build connections, sell products, or get a job? Well yes, that's definitely some of the uses of networking. However, there's a lot more power that you can derive from having strong networking skills (check out Dr. Yaneer Bar-Yam and the New England Complexity Science Institute for some cool ideas about network structures).

How YOU Network

Notice the title of this section is not "How TO Network". I'm not going to prescribe a certain way for you to network. Everyone does it differently, some people are timid, some are gregarious, many are in between. In all honesty, it doesn't matter that much aside from understanding certain basic dos and don'ts (to be discussed in a later article).

There's an old Sun Tzu quote from his famous book, The Art of War, it's simply "know thyself". That's just a small excerpt from the quote but it's important. In order to understand how to field your team, you need to understand how you meet people. For example, I go to a lot of networking events and I absolutely love to meet people and talk about everything that each of us is doing. However, I hate to be asked if I "already have a team" and would never think to ask that question of someone else. That's just how I operate, and a lot of other people operate differently.

Diane Burton, an Assistant Professor at MIT's Sloan School of Management, who's work I will cite often in this article, likes to ask four questions. She says, "use one minute for each question and write down up to five names". The topics are:

Who do you do your work with?
Who do you socialize with?
Who do you go to when you're grappling with a big decision?
Who do you go to for emotional support?

Use only a minute for each question then look at the names you've written down. How many different names did you write down total? Five? Twenty?

If you only have a few names written down, then you have a pretty limited network. Chances are it's a cohesive network where everybody is in touch with everybody else. If you have a lot of names then it's likely an expansive network where your contacts don't often know each other. Most people have something in between.

Fielding the Team

Which type of network do you think is best for building a team?

If you said expansive then you're right. If you said cohesive, I bet you have a cohesive network. The reason an expansive network is important in team building is that you want to be able to tap into the largest pool of expertise that you can. If you can find someone in your expansive network with their own expansive network that knows someone who fits your team then they'll bring a new and valuable perspective to your team that will improve your startup's chances for success.

There are lots of ways to recruit your teammates, and I won't go into them here, but I will suggest that you be honest with them from the get-go and make sure that they're excited to work with you. You need to foster that excitement throughout to keep everybody working at it.

Pouring the Foundation

Once you have the team, you should lay a solid foundation to hold the team together. That means creating a Code of Honor, a Founders Agreement, and, when you incorporate, and Operating Agreement.

The Code of Honor is a set of basic rules that everyone on the team follows. Rules such as "never abandon a teammate in need" and "never leave a disagreement unresolved". Check out Blair Singer's book The ABC's of Building a Business Team that Wins for more info about creating a Code of Honor. Another book worth checking out is Stephen Covey's The 7 Habits of Highly Effective People, which talks about building your character to improve your performance in team environments.

The Founders Agreement talks about the dynamics of the team - who will do what, who will contribute what goods and capital, and how many of the specifics of company ownership will be handled. Joe Hadzima, Chairman of the MIT Enterprise Forum, wrote a great piece on the Founders Agreement, which can be found on the MIT Entrepreneurs Club website: http://web.mit.edu/e-club/hadzima/founders-memo.html.

The final document to create is the Operating Agreement. This document is actually a document used a lot by lawyers in forming and structuring companies, so there are a lot of template documents to help you create your own Operating Agreement. Just search on Google if you want to create your own, although it may be best to involve a lawyer to help you understand things.

]]> Further Reading

Covey, Stephen. The 7 Habits of Highly Effective People. 1989. New York: Free Press.

Fisher, Roger, William Ury, and Bruce Patton. Getting to Yes: Negotiating Agreement without Giving In. 1991. New York: Penguin Books.

Hadzima, Joseph. "Considerations for Founders: Issues in Structuring Relationships Among Members of the Founder Team". 1994-2005. http://web.mit.edu/e-club/hadzima/founders-memo.html. Last visited: 2/11/2006.

Singer, Blair. The ABC's of Building a Business Team that Wins. 2004. New York: Warner Business Books.

Are the Dark Ages Coming?

2006-02-08T21:01:13Z

Have you ever wondered if we were bound for another dark age? I have... pretty much everything moves in cycles, so wouldn't dark and enlightenned ages cycle, too?

Well, unfortunately I've found recently that things like the lack of tolerance of self expression is potentially one of the major indicators of an age that is changing for the worse. The abuse of the Patriot Act and the stacking of the Supreme Court with justices that may overturn Roe v. Wade and other civil liberties is a start for Western religions.

Check out this article: http://news.yahoo.com/s/nm/20060208/ts_nm/religion_cartoons_dc. Riots because of somebody portraying another religion's sacred figures in a less-than-holy light is certainly a disturbing fact. How about the even more disturbing response from Jaques Chirac, president of recently-rent-assunder France: in many more words, "for God's sake, please don't piss them off!"

Just think about it for a while, and also read Steven Levitt's Freakonomics, which might give you some more food for thought. But at the end of this, I just have to ask, Does the reduction in tolerance of other people (in general, not just religious) indicate the beginning of a declining Age?

In the words of Mike Myers, "There are two kinds of people in the world that I hate: people who are intolerant of other people's cultures and the Dutch."

The Basics of Entrepreneurship, Part 1: Overview

2006-02-05T16:39:39Z

For the past two weeks I have immersed myself in the entrepreneurial gatherings and seminars on MIT's campus. In particular, I attended The Nuts and Bolts of Business Plans and Starting and Building Successful Tech Companies. Both are great courses and very educational, comprised of a plethora of guest speakers covering entrepreneurship topics from finance to marketing to team building, and everything in between. What follows is a multi-part series on the basics of entrepreneurship broken down by discipline.

Team

It's a common phrase - almost a cliche - in the venture capital industry that investors "would rather have a great team and a mediocre idea than a mediocre team and a great idea". The team is the basic unit of the startup, and while people may come and go as the company develops, a competent, committed team is critical to the success of the venture. There are a number of elements that contribute to the selection of team members, complementary skill sets, startup experience, industry experience, and common culture being but a few.

Team dynamics are one of the most common reasons startups fail. When the going gets tough, it's critical that the founders rally the team to make it through the crisis. Strife and dissention will occur in time of crisis, but by understanding the culture of the company, not sending mixed messages, and rallying around a common mission, good teams can pull through even the toughest of times. Many managers report spending 90% of their time managing people issues and the rest managing everything else. Even at MIT, known for its abundance of talented individuals, building lasting teams is a difficult endeavour.

Putting together a strong team with industry experience and a common culture is one of the greatest steps towards success that a founding entrepreneur can take. Later in this series, I will dive into team building in greater depth and discuss many of the considerations one must make in selecting a team.

Mission

A successful startup venture has a well-defined mission statement that expresses the goal of the company and the team to the world. This statement provides a rallying cry for the team, the company's champions and customers, and strategic partners. For example, Google's mission statement is "to organize the world's information" and CASHFLOW Technologies', the producer of Rich Dad, Poor Dad, mission statement is to teach people to become financially independent. These mission statements provide important guidance for the decisions of everyone involved in the company.

A mission can change over time, and often does, however the critical element is that everyone in the company, from the janitor to the CEO, knows what the mission of the company is. For example, Bob Jones, in a recent guest lecture at MIT, said that every person in one of his past startup companies had made at least one sale - including the janitor and the receptionist. He used customer interaction as a tool with which to bring everyone in the company closer in line with its mission statement.

Marketing

Marketing is an important part of any company's success. A successful company must be able to generate steady, and hopefully steadily increasing, revenues, which requires developing a base of satisfied, returning customers, as well as continuing to win new customers in order to ensure the growth of the company.

A successful marketing campaign is an integrated blitz using a variety of media targeted at a specific customer to achieve a specific goal. The message in the blitz is continued through ensuing marketing efforts to create a "drip" that reinforces the message and builds an association in customers' minds.

Intimately knowing one's customer and achieving a specific goal are critical components to a successful marketing campaign. An understanding of the customer and his needs comes from meeting and getting to know the customers in order to understand their "pain", or what keeps them awake at night. The specific goal may be something like "our website will be the first place people turn to when they want to know about x" or "we will be the leading provider of office supplies to businesses with between 1 and 10 employees".

By understanding the importance of knowing one's customer and understanding the goal of the marketing campaign, one can construct a solid campaign that achieves its goal and generates returns in spades.

Sales

I have separated sales and marketing because, while related, the act of selling and the act of marketing are two different things. Good marketing supports sales but the sale itself is still another beast. One must intimately understand the customer before selecting the method of sales, such as direct sales, mail order, telephone, internet, or retail. Each method suits a different type of customer, and often one might combine a few methods that work in synergy. For example, many retailers also maintain an internet presence in order to capture sales from customers who prefer to shop from home.

Thomas Watson, founder of IBM, is famed for the phrase, "nothing happens until somebody sells something". The phrase is simple but understanding the axiom is a must for entrepreneurs. In its essence it serves as a reminder that the company serves customers and without the revenue generated from sales to those customers, the company cannot exist.

Cash Flow

Cash flow is the foundation of any business. The flow of cash through a company - from its receipt as revenue to its spending as expense, investment, or dividend to shareholders - is the lifeblood of any company. From day one of the enterprise it is important to keep diligent records of all transactions, collect revenues, pay creditors on time, and file tax returns. Without competent accounting, the foundation of the company will fail and slowly but surely the financial stability of the business will erode.

Examples of companies that suffered from poor accounting include Enron and Worldcom - two of the biggest failures of corporate governance of the last twenty years. These companies constituted a failure in the entire accounting system in place in the U.S., which includes an independent auditor that is supposed to check the company's books to ensure their accuracy. These failures led to the creation of Sarbanes-Oxley, which, while only affecting companies that are public or intend to become public, is a major cost to those companies and a large impediment to their ability to competitively conduct business.

Business Systems

Business systems are the underlying systems that govern the functioning of the company and enable it to efficiently provide the goods and services it is supposed to provide. These systems don't need to be complex - and probably shouldn't be - in order to function, but well thought out processes enable a company to beat its competition without having to cut margins. Systems reduce the time, effort, and resources required to complete a task. For example, Thomas Edison's mass-production approach to research and development enabled him to create the light bulb: by developing an efficient method for testing light bulb filaments, Edison was able to test over one thousand different filaments before finding one that burned long enough to be useful to consumers.

While Edison was not the first one to invent the light bulb, he was the first one to apply a system of research and development to the light bulb to improve it enough to make it ready for the consumer market. In addition, Edison's company developed power systems which enabled him to provide the support structure for his product, something that none of his competitors could offer. The result of Edison's genius is General Electric, one of the largest companies in the world.

Product

The product is, of course, an important part of the company. Without a functional product that fulfills the company's value proposition, there won't be anything to sell. However, that said, perfect is the enemy of good and one must balance the importance of developing a revenue stream with the need to work out the bugs in a product. For example, the Blue Screen of Death used to be a very common occurence on early Microsoft Windows products, but by the release of Windows XP, these screens have become few and far between.

The early versions of Windows still fulfilled the value proposition of improved productivity. However, over time Microsoft was able to improve the functionality of the software to reduce the amount it crashes. In fact, Windows is a great example of the trade-offs between a revenue stream and a perfect product (even now it's not perfect).

Legal

The legal aspects to a company are very important, and are also overlooked. There are two main categories of law that are most important for an entrepreneur to observe in the early stages of a startup: corporate formalities and intellectual property.

Corporate formalities are things like holding and documenting an annual shareholders meeting, signing contracts using your official company title, and filing annual documents with the federal and state governments that enable the entrepreneur to remain protected from the liabilities of the startup company. These liabilities include legislative liabilities, such as prosecution for a broken bone due to a fall down a flight of stairs in the company's offices, and debt liabilities, such as loans and credit card bills. Observing these formalities enables the legal creation of a "corporate veil" that protects the owners and managers from a lot of the risks of running a company.

Intellectual property (IP) drives the competitive advantage of the company. Whether its the secret recipe for the Chef's Specialty, or it's the patent to a new, world-changing device, intellectual property enables its owners and creators to retain an advantage against their competition by encouraging the creation of new technologies and practices. IP is especially important to entrepreneurs because they need the leverage granted by IP in order to compete with large companies that have a lot of money to throw into creating competing products.

Financing

There are startup costs for a new company that must be financed before it can take in any revenue. These costs include things like incorporation fees, stationery, office space, and other costs that you need to set up the business. This financing can come from a number of places, but usually is derived from the founders, perhaps their friends and family, and bank loans. Additional funds must often be raised before the company can take in revenue or make a profit and these needs are usually funded through venture capital or bank loans.

There are a number of ways to finance a company and they can be very complex due to multiple strategies and multiple stages of funding. For example, many tech companies get multiple rounds of venture capital funding based on meeting development milestones. The exchange is that the amount of the company owned by the founders successively diminishes as the funding rounds progress. It is important for an entrepreneur to understand various methods of funding in order to choose which one is right for his company.

]]> Suggested Reading

Kiyosaki, Robert and Lechter, Susan. Rich Dad, Poor Dad. 1998. New York: Warner Books.

Stevens, Mark. Your Marketing Sucks. 2005. New York: Three Rivers Press.

Web 2.0+ Business Concepts

2006-01-30T08:38:39Z

Here is an article I wrote in November, 2005. It discusses a few opportunities that I envision in the future. I have actually written a lot more on the topic, but I'm holding back from posting it all right now because there are opportunities for distribution through other media channels.

Web 2.0

Since 2003, there has been a quiet revival of internet-based services, commonly referred to as Web 2.0. The change in the services from the original, Web 1.0, services of the Dot-Com era is a focus on the long-tail economic model, the use of entirely web-based platforms. There are many advantages to this model because it captures a broad customer base and allows for constant software updates without affecting users. The focus of these platforms is tailoring the service to the customer – even advertising, such as Google’s AdSense, is customized.

Web 2.0 is also used to describe the emergence of new social networking websites, such as Friendster.com and Facebook.com, that allow people to maintain profiles with their contact information and establish a link network with their friends and acquaintances who also have profiles on the site. This model has now been extending to allow users to include pictures and descriptions on their sites.

This paradigm also encapsulates a newfound trust in the user. For example, Wikipedia, an online encyclopedia, receives contributions from any user with the expectation that enough users will view each entry that an informed consensus will emerge. This belief is called the principle of critical mass, which asserts that when a certain, large threshold of users is surpassed that a consensus will emerge on a topic. However, this principle also assumes that the emergent consensus is accurate.

Web 2.0+

While Web 2.0 is a marked improvement on the economic models used in Web 1.0, there are still a number of drawbacks to Web 2.0. There are three immediately visible problems: users are not rewarded for their contribution to knowledge bases, so the most knowledgeable users have no incentive to contribute; there are no checks and balances on emergent consensuses, so a common misconception can spread (the tyranny of the majority) unchecked; data is only skin-deep – there are few data mining techniques employed on the data to improve its usefulness to users.

Long Tail Economic Models

The Long Tail economic model describes the large number of products that appeal to only a few customers each. This model proposes that companies can position themselves to take advantage of the economies of scale provided by the internet in order to reduce the cost of carrying products that are bought by only a few customers. When one integrates across a large number of customers all buying a product that very few people like, it can equal or even exceed the revenues gained from a narrow product line that a lot of people like.

Figure 1: An example graph of the Long Tail model

Venture Capital

On one side of the economic graph is a small base of investors, each with lots of capital to invest; on the other, a large number of users, each with a little capital to invest. The current regulatory structure and investment marketplace restricts investment in early stage start-up companies to only the small base of accredited investors, those with over five million dollars in net worth or over one million dollars in income for at least the next three years, who are believed to be financially solvent enough to handle the high risk of investing in a start-up company.

However, a few companies are beginning to challenge this paradigm. Zopa.com is a website that conducts peer-to-peer banking –an online marketplace for issuing and securing microloans that diversify a user’s risk over a number of loan issuings. This model avoids the securities regulatory structure, which requires many expensive filings with regulatory agencies in order to secure a large number of small investors, because it uses a loan structure that requires the repayment of the microloans rather than exchanging money for equity.

In the future, it is possible that small investors will be able to invest in the start-up market using an online investment marketplace that is the microventurecapital equivalent of Zopa.com. The risk to the investor can be reduced by only allowing small investments – in the thousands of dollars – in individual start-up companies, forcing the investor to diversify his or her portfolio across a number of start-up companies.

The drawbacks to such an approach are dealing with the strict regulatory environment in the U.S. and other Western securities markets. An interesting, but high-risk, alternative to entering this model in a Western market would be to take advantage of the under-regulated securities environment in a country such as China or Russia to debut this economic model, which would hopefully force a change in the regulatory structure of Western nations in order to keep pace.

Consulting

Under this model, users contribute to projects in exchange for a flat fee or revenue-sharing. High-powered, knowledgeable users have an incentive to contribute because they would now have the opportunity to earn compensation for their efforts. A simple example of an application of this model would be the use of advertising revenue to pay Wikipedia users for their contributions. Amazon.com could also pay users for writing product reviews. In such models, there is a concern that users could attempt to abuse the system for their gain. However, basing their pay off of user ratings, comments, or page visits would limit the abuse of this system.

In addition to broad-based consumer sites such as Wikipedia or Amazon.com, another application of this model is outsourcing development to a large user base. For example, many software projects are ripe for a distributed development model. Most software is divided into a large number of small source files, each of which could be written by a different user who is paid individually for their contribution. Such a system could capitalize on users’ specific skills and significantly reduce the development time for projects by spreading the man-hours across thousands of users. In such a model, quality control can be achieved through unit tests developed by the staff of the company outsourcing the development.

Collective Design

Collective Design allows users to post ideas and set them up the same way as in the consulting model. However, instead of receiving pay for their work, users help one another with implementing their ideas for new technologies. To combat the issue of intellectual property ownership, users would sign a contract releasing their work to the owner of the idea. Collective Design depends on the development of an “eBay” style community of users who are interested in contributing to one another’s ideas.

This model is great for entrepreneurship, as long as the website can develop a sufficient number of users to see enough ideas to completion that users continue to return to the site and the site can maintain a profit.

Data Mining Services

Data mining refers to using search algorithms to infer information from a data set or find a certain, hidden piece of data within a large set. Such algorithms are receiving a lot of attention from groups such as the CIA, Department of Homeland Security, and the Defense Department, as well as large corporations with large data sets stored in knowledge management systems. However, web vendors have equally large data sets, but do not employ such mining techniques to allow their customers to infer information based on the information already present in the data set.

Unifying Interface

There is a proliferation of many types of websites, such as social network sites, that in order to keep in touch with everyone, one must become a member of multiple sites. However, there is little evidence of consolidation in this industry. A service that is much needed is a single website that permits people to collect their diverse array of websites into a single interface. This website will access the data from all of the websites the user enters, then present it to the user in a single, simple interface where they can interact with the data without needing to know from which source the data comes.

Other People’s Data

Current Web 2.0 platforms rely on data ownership as their proprietary edge and barrier to entry in the market. However, in order to interact with and attract users, these platforms provide multiple interfaces with which to interact with the data they hold. Most of these sites provide inadequate data mining and search techniques to their users. The data contained in many of these sites is extremely underutilized. Using advanced data mining techniques on data contained on other websites, such as social network sites, a company can gain niche markets such as match-making by providing better solutions than any of the competitors.

This market is a very tenuous hold, but is ripe for leveraged-buyout exit strategies where the companies are merged with the companies on whose data their techniques are used. However, it is unlikely that the data-owners will implement these techniques without pressure from external competition.

Trust but Verify

The principle of critical mass is critically flawed. Since the principle assumes that the emergent consensus is accurate, it is vulnerable to common misconceptions. Many of these misconceptions can be harmful fads, such as the Atkins Diet. With the propagation of information globally, misconceptions are more harmful than ever. Bad data on Wikipedia can affect a multitude of decisions and attitudes. Running data mining algorithms on knowledge databases will highlight inconsistencies between related pages and data sets, which can then be flagged for resolution by site administrators or super users. These data miners act, in effect, as checks and balances on these data sets (think republic versus democracy), which will help prevent inaccuracies and misconceptions from propagating in these data sets.

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O'Reilly, Tim. "What is Web 2.0: Design Patterns and Business Models for the Next Generation of Software". 09/30/2005. http://www.oreillynet.com/lpt/a/6228. Last visited: 12/18/2005.

Wikipedia. "The Long Tail". http://en.wikipedia.org/wiki/The_Long_Tail. Last visited: 1/6/2006.

Wikipedia. "Web 2.0". http://en.wikipedia.org/wiki/Web_2.0. Last visited: 1/6/2006.