How do I value my startup?

Valuing a tech startup is one of those ‘how long is a piece of string’ questions (which is no help at all), but it’s still an important factor in trying to raise money for your early stage venture…

Naturally, both sides will look at valuation in opposite ways.

The plucky founder will want to give away as little of the company as equity for as much cash as possible (the highest valuation), thus retaining more for themselves, their co-founders and any future funding rounds.

Meanwhile, the investors will want some meaningful slice of the company, so if things really do take off and the company is worth something in the future, they will get some kind of nice return on their money. As they may invest in several startups knowing most will fail, for each one they do invest in, they will want to see 10 times return on their money (to cover those that fail to give any return at all.)

Maybe, somewhere in there is a deal. Maybe not. You may have to speak to dozens of people before you raise a cent. It can take months. It might not happen at all.

But if you are venturing out to get some equity funding, my best advice is ‘be realistic‘. That means, don’t go crazy over your valuation, don’t do it slap dash (invest the time to do it properly), prepare yourself and practice.

I am assuming we are talking about a brand new, pre-revenue startup with no trading history. You have an idea, a business plan, maybe a prototype, have set up a company, put in some of your own money, and have something (an app, website, some users) to show for it. But you are otherwise brand spanking new.

Are you really going out with him/her?

Before worrying about valuation, please think carefully about WHO you get on board as an equity stakeholder in your business, and think WHETHER you actually need new shareholders at all.

Investors tend to hang around (as there are only limited opportunities to get them out). It can be very awkward if – later on – you think you’ve made a mistake. Also, some future investors won’t touch you if you have the wrong people on your share register. The same goes for co-founders and sometimes employees too. Be careful what you wish for.

You will be assessed by who you associate with, and having investors in your business is about ‘as associated’ as you are going to get in your life. Like a marriage, it can take a lot of nasty unravelling to undo.

Also, have a real think about how far you can go on your own.  With your own money, or some cash you can cobble together from some kind of early or trial revenues, partnering, R&D tax incentives, rich Uncle Tom Cobley and all.

Do you really need to raise money? Can you not get your customers to fund your business, at least a little bit further… to profitability? In many ways, that’s the best way.

But let’s say you’ve done all that and exhausted all other avenues. Equity fund raising it is. It will just take more money to give this thing the push it needs.

How to value it?

Simply put, the price of an early stage tech company is whatever the founder is willing to sell a piece for, and whatever someone is willing to pay for that piece. This is also not very helpful, but it’s true.

It’s a bit like selling your car, or your house. There is only one unique version, and a limited amount of buyers. But you only need one (or a few) brave buyers, and then the deal could be done.

If you need, say $50K, and are willing to sell 10% of your startup for this investment, and someone is willing to pay you $50K cash that for the stake, then, by definition, your company is valued at $500,000 pre-money.

Pre and Post Money Discussions

The ‘pre-money’ bit means that BEFORE they put the $50K in, your company was worth $500K (as $500K is 10% of $50K).

Note that AFTER they have put it in, it now ALSO has $50K in it, so technically your business is now worth $550,000 (‘post money’). Talking ‘pre-money’ is cleaner and easier to calculate in any valuation discussion. ‘Post money’ gets a bit fiddly.

With your startup now valued at $550K, the new investor does not actually have 10%, they have 9.09%. What was 10% pre-money is now 9.09% post money.

If they wanted 10% post money, then they’d have to put in $55K (which is 11% pre).

If you, as founder, owned 100% of the business beforehand, you now own 90.91% after the transaction. The issue of the new $50K of shares has diluted you a little. But you will have over 90%, which is almost as good as 100%. You have complete control, except you now have an investor, who one day hopes will get more than $50K back for their investment, hopefully half a mill or more. That is the point of investing, after all.

Now, with the $50K in the bank, you can get on with business and ring every last ounce of value out of that fresh investment. The hope is that if used wisely, future valuation will be way more than $500K by that stage. Which is the whole point. You and your investor wins.

Stuck in the Middle with You

Except, the investment is not liquid (they can’t get it out of a bank as cash) and you won’t be able to borrow against it. Effectively, it’s stuck in there until there is some ‘liquidity event’ (someway down the track) like the future sale of the whole company, an IPO or new investors come in allowing some original ones to exit some or all of their shares.

This latter eventuality is a rarity. What new investor wants to see their money used by original investors exiting stage right?

Another way of earning on shares is dividends, but I am assuming you are a long way out from profits.

Valuation Ranges

So, back to valuation. How do you come up with $500K, or $1M or many millions as the fair market valuation for your early stage tech business?

There’s a basic rule of thumb, which seems to be ‘accepted wisdom’ in these parts.

Assuming the business is a truly scaleable tech startup with a clear defensible position, a significant market to go after and with good founders…

1. If it’s just an idea and a slide deck, you can’t value yourself more than A$500K. That is, if you wanted $100K to build a prototype, then you’d have to sell off 20% for that (pre-money). Better to try to cobble together $100K, or whatever you need, or code it yourself, and get to MVP that way? Many startups can get to MVP on less than $20K if they are frugal and clever. Startups usually turn to “family, friends and fools” (the 3Fs) in this round. (Hint: don’t get fools.) If you expect your business to be worth a few million over time, why even start at a valuation so low, give away so much for so little and raise money on an idea? Go further.

2. If you have a MVP/prototype, but are still pre-revenue/launch, or perhaps have a trickle of early sales, then you may be valued in $1M-$2M range. So if you wanted, say $500K for growth/sales and gain market traction, then you’d be selling off 25%+ for that. Or ~10% for $200K, etc. This would be ‘Seed Angel’ round (pre-VC) from high net worth investors most likely. This is perhaps the hardest money to get, as you are still very early, and too small for VCs. Raising $20K is much easier, finding people who can part with a lazy $50K or $100K each takes more effort.

3. If you have launched your product, have paying clients, revenues, growth and traction, you could value yourself more than $2M, and really the sky’s the limit the more of that (and the more time/evidence & unmet potential you have). Once you’ve been around for a while, have good market share, growth… you get more into normal business valuation metrics like annual total and growth of sales, net profit, clients, market share, etc… You’d need to know your ‘Cost of Client Acquisition’ numbers really well, as well as ‘Lifetime Value of Client’ etc.. Investors will be all over this. You may then be in VC and Series A territory, so would looking at investment here of at least $500K, probably $1M or several millions.

If you are a WA-based early stage tech startup and have an idea/deck and perhaps an MVP, and think you’re worth $4M or $5M+ then I would have to say ‘you’re dreaming’.

That’s not to say you won’t be able to raise money at all on that valuation. There’s always someone out there with more money than sense, and might be persuaded by a slick slide deck and some fine words. But even if you did get early stage money at that price, how can you sustain it? How will you be able to build an upside for your investor(s)?

Knowing how risky it is, most investors into early stage ventures are looking for a 10x return over time. If the valuation starts too high, that makes the 10x even less likely and they will shy away. Remember, it’s easy to buy things, but when you buy you are setting the base price from which you want to see a multiple. The buyer can make a profit when they buy, depending on the purchase price.

Finally, it’s more than money

Of course, this all depends what you want to do; how much money you need, what you want to sell it for, and (more importantly) the VALUE the investors bring besides money.

It’s YOUR company remember.

How much do these investors ADD in more ways than money? Can they open doors to your next round? to new clients or partners? Do they have experience commercialising what you are doing? Have they been there and done it before? How have their other investments gone? What are their real motivations for investing? Are they going to be active or passive investors? Involved, but not too much, or just plain annoying?

If you’re not happy, 100% rock solid happy with an investor, don’t take their money. Listen to your gut. It’s usually right. Making the wrong choice is simply not worth it, no matter how much money they throw at you.

~~

Photo by rawpixel.com from Pexels

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Latest Internet Trends: Mary Meeker

Every year since the mid 1990s, Mary Meeker has presented the latest internet trends in the US and globally.

You can view her here delivering the latest trends for 2018 (she speaks for 33 minutes). In typical style, she speed clicks through no less than 294 slides at a rate of 1 every 6 seconds. Don’t blink, as it’s one of the most amazing presentations you see.

So what? Well, not only is the content good, but as I have mentioned before, the ‘Trend is your Friend‘.

If you’re running a tech business, or any business really, you need to know which way the world is going. It’s far easier than swimming against the tide…

  1. Internet growth is slowing – not surprising for something that has over 50% market share globally; there are now 3.6B people connected.
  2. Digital media use still growing – up to 5.9 hours a day.
  3. Devices are better, cheaper and faster – we’re doing more with our devices, with coin exchanges and digital payments exploding.
  4. Voice is lifting off – the tech is now there for voice, with products growing.
  5. Data vs Privacy – companies are using data to provide us with better experiences, but we’re giving them enormous amounts of our data. “While it’s crucial to manage to manage for unintended consequences, it’s irresponsible to stop innovation and progress.”
  6. US tech companies investing heavily in R&D – a ton of money is being invested in tech companies. The top 5 R&D companies are tech companies, and fastest growing: Amazon, Google, Intel, Apple & Microsoft (with Facebook 11th.) Tech companies are now 25% of total market cap.
  7. E-commerce growing strongly – a lot of it is driven by Amazon. Integrated payment and customer support systems are exploding. Shopify even has an online exchange where you can buy and sell online shops, from within its own platform.
  8. Search continues to dominate – people find products via Google, but also Facebook and Instagram. Google is adding a commerce platform, while Amazon is evolving its ad platform.
  9. CTRs and CPMs are rising on platforms – cost is rising more than reach, but both are rising.
  10. Spotify converting most of its users to paid – driven by a great user experience.
  11. Mobile shopping growing fast – especially using video and gaming. Shopping = entertainment.
  12. Alibaba is now the leading retail environment in China – e-commerce sales in China is 20%, #1 in the world.
  13. US Household and student debts rising – while personal savings are low; relative prices are falling, people spending less proportion of their incomes on food and entertainment.
  14. Rise of the gig economy and sharing – leading to rises in flexible gig economy jobs, renting out spare home space on AirBnB.
  15. Transportation spending flat – cars are lasting longer, Uber driving prices down.
  16. More spending on health care – but there are signs that tech can bring prices down: “Let’s hope so.
  17. While some jobs are displaced, others are created – service jobs have replace ag jobs, aircraft jobs have replaced locomotive jobs.
  18. US unemployment is low, consumer confidence high and rising – job openings at 17 year high.
  19. Most desired non monetary benefit is flexibility – tech and freelance work make this possible. 15M ‘on-demand jobs’ in the US, such as Uber, AirBnB and Etsy.
  20. Massive uptake in data makes data cheaper – also drives customer satisfaction and personalisation.
  21. AI emerging – “one of the most important things humanity is working on.”
  22. Cyber Security – a major sector.
  23. US vs China – China had 2 internet leaders 5 years ago (in Top 20); today China has 9. Rest are from US. Facebook and Google (US) dominate with ~2B users each, but Tencent and Alibaba (China) both have ~1B users each. AI growing in China, as are doctoral and first degree holders.
  24. Hunger for education – Coursera and Youtube learning courses/videos rising rapidly; lifelong learning & retraining.
  25. Change. Opportunity. Responsibility – “we’re living in an era of unprecedented change, and along with this come opportunity and responsibility.

~~

About Mary Meeker

Former Wall Street analyst and now VC, Mary worked at Merrill Lynch and Morgan Stanley (where she was lead manager for the Netscape float and later on the Google IPO.) She published her first internet report in 1995. She is partner at Kleiner Perkins Caufield & Byers.

Main Image: screenshot of Mary Meeker presenting at Code 2018 Conference.

Why most new products fail

A better mousetrap does not necessarily sell. In fact, most of the time, it doesn’t.

If you build it, they will come.

Nonsense.

If they come, build it.

That’s pretty much the message I try to ram into new startups, imploring them to use the lean canvas, or some such method, to ‘just get out there’ and be nimble and responsive to customers’ needs, building up their business along the way.

These days, you can get a new startup going on credit card debt, build an MVP (minimum viable product), work with your first paying customers, get revenue coming in as soon as possible, laying the ground work for a possible scale up later on.

That way, you don’t risk piles of cash. Having less money also teaches you to work smart, fast and love your early clients to death. You’ll learn the fine art of on-boarding, and how small tweaks to your landing pages can make massive differences to your conversion rates and first revenues.

The fact is that most products fail.

Studies show that, depending on the category, 40% to 90% of new products don’t last. Every year in the US 30,000 new products are launched, but 70% to 90% of them are no longer sold after 12 months.

It’s also a myth that you have to be first to market. 47% of first movers don’t make it. Sometimes, even better products don’t cut through. Better, as in ones that have distinct advantages over incumbent offerings.

Why?

A classic Harvard Business Review paper (“Eager Sellers and Stony Buyers” by John Gourville) a dozen years ago laid out the reasons, yet we still see people ignoring the advice.

Gourville’s paper is a must read for anyone looking to develop and market a new product.

People are not always rational. I’m not talking about some crazy guy you see on a train or shuffling down the street. I mean all people, as a rule. Irrational.

For example: studies have shown that if you give people a 50% chance of winning $100 and the same risk of losing $100, most people won’t take the bet. In fact, you have to offer most folks a two to three times gain over a possible loss before they are swayed.

In other words, if they have 50% chance of winning $300 and 50% chance of losing $100 then more will go for it than not. But not if the 50:50 chance of winning was $100, or even $200.

The reason, says the theory, is that losses loom larger in our minds that wins. We may know what we have is not all that great, but the costs of switching means we are happier to stay with our current lot, than strike out and go for something potentially better. Unless the odds are stacked more heavily in its favour.

Put it another way, better the devil you know than the devil you don’t.

“Loss aversion”, says the paper, “leads people to value products they already possess more than those they don’t have.”

This bias is called the ‘endowment effect‘. And it is quite strong.

The implication is that if you are trying to get people to change their behaviour (use your bright shiny new object rather than the one they are used to), then your new product better have massive advantages, well communicated and understood, before your potential clients make the switch.

In 2007 and 2008, I was happy with my Blackberry. It had email, allowed me to surf the net (chunkily, but it kinda worked) and the keyboard was on the outside, much like the PC I was used to. It was way better than my old flip top Nokia phone.

Then came the iPhone. No keyboard. I heard rumours the batteries did not last. It took me til 1999 to make the move, but after I’d started using it, I never dreamt of going back to Blackberry. Nine years on, I still use iPhone.

Many millions did likewise. Blackberry subsided and never recovered. Apple went on to become the richest companies on the planet, and is inching its way to a trillion dollar valuation (it will be the first company to do so, if it gets there).

The fully electric car may seem like something fantastic (no more petrol pumps) but if you are not sure there will be charging stations, are you really going to switch to the Nissan Leaf?

The 9x Effect

Company executives tend to over emphasise the benefits of the new product (by a factor of 3) while the consumer tends to over emphasise the benefit of their existing product (also by a factor of 3).

This means that the new product actually needs to be better by a factor of NINE if it is to be viewed as equivalent to the incumbent.

Which is why you hear of innovators talk about the ’10x’ effect, which means their new product may have a chance.

I recently saw a new agtech service that would (at least) save the user 10 times the cost of the product itself. It should stand a chance. If they were going for 2 or 3 times uplift, little chance.

Easy Sells

The best new products are those that require little change for the consumers, while providing massive improvements on the existing product.

Maybe this is why hybrid cars have made a greater impact than fully electric ones. The consumer gets the benefit of better fuel consumption, but still has the knowledge that a petrol tank exists, which is something they’ve been used to all their lives. In time, perhaps the fully electric car will out, but for now, the hybrid serves a purpose.

Another implication is that you need patience. Patience is a virtue, as I tell my children at every occasion, much to their annoyance. Customer acceptance of a new way takes time. Google, Facebook & AirBnB all took several years to take hold.

It also means that you should strive for 10x improvement. Find believers, get them to be evangelical about the new product and spread the word.

But, whatever you do, do not believe that simply because your new mousetrap is better, it will sell. It will most likely fail.

Raising funds? Ask for no and then 3 more

Reverse psychology can be powerful. Be kind when friends stuff up and they’ll be  shamed into doing better next time. Tell a family member “I’m fine!” through gritted teeth when clearing up and they’ll be honour bound to help.

And so it goes with early stage (seed) capital raisings for startups.  The best advice I was given when pitching my fledgling tech business to potential angel investors was “try to get them to say no.”

This works beautifully on so many levels.

Firstly, if they absolutely can’t say no, then they’re probably going to be a yes. If they’re vascillating, telling them a no is fine will let them off the hook.

Counter intuitively, if you tell a potential investor they don’t have to invest, they may be more interested in doing so. (‘I don’t want to miss out..’). It’s a classic closing move. It’s also a bit like putting someone on silence. They have a sudden urge to speak.

But you don’t want someone investing who is not that keen on investing. They will become a millstone around your neck.

What you want to do is to cut off the time wasters as quickly and diplomatically as you can. The “maybes” will suck the lifeblood out of you. They’ll say they need to talk to their partner, or think about it more, or … any number of reasons.

Ring me next week and we’ll chat” is not a “maybe”. It’s someone who is too weak or shy to say ‘no’ to your face and will give you the run around. What’s another week got to do with the price of fish in Denmark? Nothing.

Stop all this upfront. “It’s OK to say ‘no’, really. In fact I am happy with a clear cut no.”

When you get the no, do one more critical thing.

Say something like: “Thanks for your time today listening to my idea. Now you know what we’re doing, can you please give me 2 or 3 other people who you think might be interested in hearing about this opportunity?

You see, a “no” is totally fine. In fact, it eases the tension, and the angel investor will be almost honour bound to help introduce you to more people. It’s their quid pro quo for saying no.

While this no shuts one door, it should lead you to 3 more. The ‘no’ is just a paving stone along the road to funding your business. The more the merrier. It’s fine. 1 pitch becomes 3, 3 becomes 9, 9 becomes 27 and so on…. you’ll find your money along that road.

Back in 1999, I remember showing our idea to one high net worth individual down town. He listened respectfully to our 10-minute pitch. We then closed our laptop, looked at him and he simply said “No, this is not for me, but thank you for showing me your idea.”  I have seen him at various events these past 18 or so years and he is always smiling. He is as respectful, positive and friendly as ever. He passed me on the street the other day, stopped to chat and said how he knew I would do good things in my new role. This was someone who utterly rejected the investment opportunity I showed him and it is totally fine. A relationship (and perhaps mutual respect) was formed.

No’s are not to be taken personally. Encourage them. Use them. Don’t waste time with maybes. Get through the no’s and the yeses will be not far away. Because the yeses are always connected, somehow, to the no’s.

Picture Source: http://silicon-valley.wikia.com/wiki/Optimal_Tip-to-Tip_Efficiency

Get them on the drip

When we were contemplating the best revenue model for aussiehome.com, the online real estate portal we established in 1999, we considered the following main alternatives:

  1. Subscriptions – real estates agents pay regular fees to list their properties
  2. Advertising – advertisers pay for display ads on the website
  3. eCommerce – home seekers can buy/rent directly off the website

Any other revenue model you can think of is just a variation of the 3 above. Note that for each option you have a different paying customer. And knowing who your customer is, and what problem you are solving for them, as I have discussed in these pages, is critically important.

In subscriptions, your client is the real estate agent, and the users of the site (home seekers) get to use it for free. What would agents want in return? Enough enquiries (and as we learned over time, a listing edge) to justify these fees.

Advertising income means your paying customers are your advertisers. In return for the promotional investment on your site they expect to see lots of views of their ads, and click throughs. Likely advertisers would be banks, mortgage brokers, home builders and any other home-related businesses.

The final one is pure ecommerce – taking on the whole industry, competing against real estate agents, and selling/renting properties directly off the site. Back in 1999, barely 3% of all properties in WA were sold privately (ie by the owner, not through an agent).  Fortunately, we discounted this 3rd option. We did not believe the world was ready for home owners to take a punt on a new website, chancing their arm with their largest financial asset (their house). 18 years later, this is still the case. Nearly everyone selling their property in 2017 does so through a licensed real estate agent, and REIWA member. ‘For sale by owner’ sites have floundered.

Selling ads, we thought, would be tough as we’d be up against Yahoo! and others and we’d need huge traffic to pull any decent ad dollars. This would mean raising a King’s ransom in funding, and blowing most of it on our own promotions. This seemed too risky. Another good decision this, as Google and Facebook would come along and scoop up nearly all of the digital ad money in Australia.

So, almost by a process of elimination, we plumped for subscriptions. Subscriptions is no easy solution though. Real estate agents, and most small business owners, resist paying ongoing fees. It adds to their costs, and makes their business riskier. They would be far happier paying for something large in one bulky purchase (as we found out, on such things as banner ads and websites).

Subscriptions is also a long, slow row to hoe. In order to get properties on the site, you need enough agents to be paying to load them up. Only then will visitors have enough content to peruse, find your site useful and return.

This is the major problem with brand new two-sided market places. You have to build supply and demand simultaneously, and this is extremely difficult.

When you’re building a 2-sided marketplace from scratch, how can you get demand when you have little supply, and how can you get supply when you have little demand?

Uber solved this curly one by paying the first drivers to sign up in a city some income, irrespective of whether they had passengers. They realised that the minute the first passengers used the service, there had to be Uber drivers nearby. Uber knew this first experience had to work well, so their early adopters would rave about the service. They grew from there.

We did something similar. We gave away 3-month free trials to our early real estate agents, so they could plop all their listings on the site, for free, in order to get some supply up there. As soon as the first people looked on the site, there had to be hundreds of properties for sale and rent. Once a few agencies were supporting us, it became easier to get others to give us a go. Obviously, this does not produce any income, so we could not do this forever. After our first year, we stopped giving away  free trials.

Slowly, but surely, we started to earn monthly income. As agencies came off their free trials, they started to pay a fee. Not huge bikkies, but something. Once you get customers paying for your service, you are in business. They take it more seriously than a free offer. They update their listings, and then, something wonderful happens – they start to get enquiries. We could see the email enquiries coming directly off the site. (We could not see phone calls of course, but these were happening, so we were told.)

On top of this base of subscriptions income, we added some ecommerce (users could buy Landgate sales evidence online) and advertising (banner ads for agents, and display ads for mortgage brokers and the like). We then moved into web site design for our agencies (building their sites off our system), magazines and in time feed income so that our clients could be on up to a dozen sites through us. But it was the bedrock subs income that built the strong foundation.

As Seth Godin wrote recently, the ‘drip drip drip‘ of subscriptions is the most sustainable business model.

Newspapers have had to learn this. The NY Times put on 800,000 new paying subscribers since Trump was elected. Their shares are soaring, built off a base of 2.2 million subscribers, up more than 60% in the past year. Failing NY Times fake news indeed. Quite the reverse Mr President!

One thing that took me to Business News in 2013 was that their readers had been paying for subscriptions since 2002. By 2017, these subscribers were renewing at record levels, and subscriptions income was the largest single income source. A great local story of a media company taking a brave route, and prevailing.

Netflix entered Australia 2 years ago, and now 1 in 3 Australian households have a subscription. Quickflix, its Aussie competitor, started more than 10 years ago, never passed more than a few hundred thousand subscribers. Although prevailing against all other local competitors, they could not compete with the US-backed giant and shut down within months of Netflix’s entry.

Realestate.com.au’s valuation today is north of A$9 billion. I remember when it was worth $6 million, after the throes of the dotcom crash in Easter 2000. But it built itself up, and the ‘network effect’ of having pretty much every agency on board meant every agency had to be on board, and everyone went there to view properties. A complete 2-sided market of immense power, they could pretty much charge what they like. It now costs more than $1,500 a property to list on the site.

As my cofounder Nick used to say to me, “Charlie, get them on the drip.” How right he was.

Uber disruption

share and share alike

Last week I got the chance to listen to Jerry Hausman, an economics professor from MIT, who spoke on ‘Startups – will their economic models take over?’ – a topic close to my heart.

The 70 year old econometrician started by pouring scorn on Twitter (‘I mean, don’t you have something better to do?’) which I thought was wonderfully ironic, given his audience contained the esteemed business leader and well known Twitter aficionado, Diane Smith-Gander, who was tweeting away live at the time. The point he was making was he was not necessarily a raving fan of these new businesses, despite being an avid user of Uber (‘They are 40% the price of taxis in Boston – in fact you could do away with public transport and give everyone Uber vouchers and it would be far cheaper for government’).

Uber’s valuation of US$62 billion and Airbnb’s of US$30bn defines them as ‘unicorns’ (valued over a billion) and have come from nowhere in less than 10 years. This was simply not possible when Jerry (or most of us) were growing up. ‘Stanford university was a backward country college, not even Ivy League, now people drop everything to get in there.’ Stanford has spawned Yahoo!, Google, Hewlett and Packard, Youtube, LinkedIN, Netflix, Paypal, Cisco and Sun among its alumni and is known as the ‘billionaire factory’.

The poster child of the sharing economy, Uber, has been incredibly disruptive forcing regulatory fights (and invariably, wins) in 68 countries and 450 cities. ‘Uber keeps dropping its prices and driver compensation, yet Uber wants to maximise revenue, so has to drive huge increases in sales.’ argues Hausman, ‘The drivers are earning less and less – in the US they only drive 13 hours week – and they also have to run their own cars paying for maintenance, petrol and depreciation.’ Jerry pondered if the Uber drivers were getting a good deal or not, and thought not.

In the US, cars are only used 4% of the time, and with regulation lagging the fast development of Uber, there is still upside for the company in terms of usage, and savings in costs for users. Imagine if the continued rise of Uber and their ilk meant that cars were used 25% of the time (a 6-fold increase). Many of us may get rid of our second car, or even give up owning a car altogether, as ownership made less and less economic sense. Imagine what would happen when self-driving cars become the norm, that you can hail easily through an app. What would that do to traffic congestion, car accidents, the environment, public funding of new roads, the health system, taxation, the insurance industry, car industry and car park revenues? This would disrupt many sectors, and drive fundamental changes (some for the better, some worse). But it does hinge on the economic model for Uber and their drivers working, and the public’s acceptance of the car sharing economy. Airbnb can do likewise for accommodation. I see many startups trying to be the ‘Uber for the x industry’. It’s the startup ‘model du jour’. We teach our children to be good sharers, might we as adults do likewise?

Jerry is not a fan of regulation, above the minimum, as he sees it crowding out efficiency and entrepreneurship. His favourite phrase was ‘I’m a fan of capitalism between consenting adults.’ Any large industry that has been over regulated over time is ripe for these new models to take hold. ‘How about the real estate industry’?, I asked him, ‘Is anyone, or could anyone uber that?’ Jerry replied, ‘It’s easier to uber your car ride, or your stay in a hotel, as we’ve all given lifts to people in our cars or had people over to stay. But the average person simply does not sell their property very often, so it’s not something they feel comfortable doing on their own. It’s a big ticket item, often their largest financial asset. That’s not to say it can’t happen, ever, but that will be a more difficult one to disrupt.’

I agree, and it’ll probably take some time before the real estate transaction is done directly between buyer and seller, but I also bet some people somewhere are working on this, and over time, even this transaction will be changed irrevocably. My advice to real estate agents, as it is for taxi drivers and hoteliers and anyone in a regulated industry, is to be aware of these creeping changes that can disrupt your entire industry, seemingly from nowhere. Don’t scoff at the technology, have an interested and serious look into it. Stay relevant. Keep your customers close. Don’t assume anything. If you wait until you’re waving placards on the steps of Parliament against some well funded and beautifully designed upstart to get interested in the sharing economy, you’ve already lost.

Bootstrap yes, but don’t skimp on a good lawyer or accountant

Google don't like lawyers

Google “I like lawyers” and the top results are articles such as “Why do people hate lawyers so much?” and “People like lawyers less than you think”.

Even Google can’t find a positive result.

It might be easy to knock them, but finding a good lawyer or accountant is critical to the success of any business. I wonder why they get such a bad rap? Perhaps its the legalese and financialese that some find perplexing, or the $100’s per hour fees charged in 6-minute blocks that wrangle.

While it’s important to conserve cash when starting (and running) a business, as my wise business professor used to say: “Never skimp on a good lawyer or accountant; doing so will be a false economy. Find a good one, and these people will save you tens of thousands of dollars in the end.”

I can certainly attest to that…

When our fledgling online business was still in ‘bare survival mode’ in the early 2000s, I became aware of a relatively new government scheme called the ‘R&D Tax Rebate*’ (or ‘R&D Tax Incentive‘ as it’s now known). I remember asking our existing accountant (twice) whether we qualified, and being told unequivocably that we did not. At the networking function around this time, I got talking to a city accountant who had been at the same uni as me, and he mentioned that we would definitely qualify. I followed up with him, and not only did he manage to get us over $50,000 cash back that year, he backdated the process (as we’d missed out in its first year of operation, the year before) so we duly won two years worth of rebate, over $100,000 in cash. At the time, this was the difference between sink or swim.

We changed our accountant.

[* The scheme allows businesses investing heavily in R&D to convert a portion of their losses into cash back from the ATO. Once profitable, you can use it to minimise tax. I would estimate this scheme returned us half a million dollar benefit over the course of the subsequent 7 years.] 

Also around this time, we were made aware that a rival website was taking data from our site, and displaying it as if it was theirs. I became perplexed as to how this could be legal, but various lawyers I spoke to did not seem to know if we even had a case. Until I met a brilliant IP lawyer, who had used our site before (so he was a fan, which was nice), and seemed confident that we were in the right, and they were in the wrong. The upshot of his work was that other site shut themselves down.  You can read the ensuing media coverage of this case here.

I have used this same IP lawyer ever since.

I can tell you that both the accountant and lawyer mentioned above were extremely reasonable with their charges, and sensitive to the fact that we were but a small startup with limited funds. It felt good to have some experts on your side, and to get good outcomes as a result. I could not have done any of this alone.

So, do not skimp on a good accountant or lawyer. But bootstrap your startup. It sounds paradoxical, but it’s probably the best advice I can give you.

So many flearnings (my startup journey)!

flearning

Last week I did a talk to BloomLab, the university based co-working space for student startup folk here in Perth, WA. My slides are visible above (and also here).

Here is my 10 “flearnings” (learning from failures) – hard won advice from making the wrong decisions (many times), but learning from them.

  1. Startups are easy

Wrong, well actually, right – startups ARE easy, initially; as what you are mostly doing at the outset is “buying things”, and, as a board member once told me, “any fool can go out and buy something”. You raise some money, or maybe invest your own (along with friends, fools and family), and/or max out your credit card(s), and then go on a buying spree … buying programmers, office space, cool marketing campaigns, staff, …. It’s a buzz of excitement, and you’re wearing cool clothes, have ditched the jacket and tie, and are in a startup.

Wrong!

Businesses only survive if they are SELLING things, that is, collecting revenue. And that means someone ELSE is doing the buying, from you. Unless you are creating value by solving a problem for them (your clients), they will not buy from you. If they don’t, you ain’t got a business. Startups are hard. Selling is hard work. Not many startups are cut out for it. But everyone should be sales, including (and especially including) the fancy pancy founders and CEO.

  2. Build it, and they will come

Wrong! Although ultimately the service should sell itself, very few will do this from the get go.

Also, don’t fall into trap that the next release, the latest new functionality, will solve all your problems. ‘Once we add this feature we’ll be home and hosed’. Nope.

Having a great product is very important (as long as it solves a problem that people will pay to remove), but it’s a necessary, not sufficient, factor in your startup succeeding.

3. We’ve got a great product!

A related fallacy to #2 above. The worst sales person falls in love with their  product. The best fall in love with their clients’ problems.

We thought we were building the greatest map-based property web site (even if we were that was irrelevant). We thought we were solving home searching and making it easier. Well, yes we may have been, but they weren’t our clients. They were our users. Our clients were real estate agents, and paying a monthly subscription. We had to solve their problems. What was their problem? NOt selling properties. Properties sell. Buyers seek them out (buyers like to buy, remember? espeically property, especially in Australia.)

‘Getting listings’ is the real estate problem. Good listings. Ones that will sell. Ones that have nice owners. As soon as we realised this, we developed more and more features (including web development and even a magazine) that helped them get listings. ‘List and last’.

Who is paying you? They are your clients. Solve their problems. Full stop.

4. Spend loads of money on ads

If we’d had a bucket load of money for ads, we would have just used it. (There’s that buying itch again!) So what? We might have felt good watching our TV ads, hearing the radio commercials or watching the bus ads zoom by. So may our staff and investors. Would it have brought us revenue? Probably not. So many dotcoms spent huge amounts on advertising (or ‘brand’ as they euphemistically put it), so more people would come to the site, have a ‘meh’ experience, which meant you had to raise more money to get a different set of people to the site. And so on.

Have you ever seen an ad for Google? [Well, OK, I did see this one, and it was great, but it was not a traditional ad in any sense.] Promote the site through making it easy to spread, make it sticky (people stay on), make it elastic (draws people back). This could be about design, in built devices (such as Dropbox offering extra storage if you referred customers), encourage content sharing, etc. Use the free media; journo needs stories. Treat journos & influential bloggers as clients. Take them out for coffee. Don’t just do mass press releases; tailor your media approaches and provide exclusives.

5. Do regular, massive big upgrades

No; keep innovating, but not in a wholus bolus way, as that will ruin things for your users. Changing how the whole site works really annoys your loyal fans. Keep improving things, based on testing and feedback, in an iterative manner. Be fluid, add features, yes, but also think of ways to keeping it simple. UX (user experience) is all important these days. It’s a refined skill, and you will inch (not blast) your way there.

6. There’s either a tech solution or there isn’t

It’s not that cut and dried. The times I was told something was impossible, then the programmers would wander in all sheepishly and show me how they’d solved it (bless their little cotton socks). You get to learn what’s hard and what’s easy. I’ve found a simple truth in all this – it’s never the technology, it’s the people.

7. You’re on your own

Not true! There are multitudes of people out there, probably hammering away at similar type businesses solving similar problems, every day. Network, go to startup events, find people, ask questions, provide value yourself (give and it shall be returned). Years before Spacecubed, Perth Morning Startup, Startup Weekends and the rest, a few internet enterpreneurs still going in the mid 2000s formed ‘eGroup’, as much for the emotional support as anything.

There are now over 30 places and programs you can visit in Perth alone to find alike minded people and support…

Perth-Startup-Network-Sep15

View a full list here

8. SEO is a black art & expensive

I learned much of what I know by trial and error, but the importance of ‘title tags’ and ‘H1’ headings were not lost on me. Get these right and 80% of your search engine optimisation is done. Also, hire someone local who knows that they’re doing. (Direct message me if you want to be introduced to Perth people I have used and recommend.)

The SEO and SEM (search engine marketing) ‘industry’, along with social media and web/app development, is not a regulated so anyone can hang up a shingle and claim they have knowledge. Beware of stupid ‘I can put you on the 1st page of Google’ claims, because no one can guarantee that (well, not before knowing what search phrase is important, and how competitive that is, and how your site is written/updated).

And don’t try to cheat the system. Do not engage in ‘black  hat’ tactics (hiding white text on white backgrounds, keyword stuffing, content automation and the like) to get a higher ranking. Anything that looks like a shortcut is a shortcut, and could get you blacklisted (removed) from search results. It’s hard work, done over time. It’s cumulative. Google is only trying to find the most appropriate site for the search terms entered, so be that site. Have interesting, fresh content. Change it up and keep posting.

9. Social media is all nonsense / waste of time

Really? How do you view the telephone, email or web sites in general?

Social media is just a communications tool. Use some or all of Facebook, Twitter, Instagram … to engage with your audience, build your brand, learn about your market/competitors and all the other things it can do. Use them as part of your overall strategy. You can’t do everything, so decide what makes sense for you and what you can execute on well. And keep doing it, and keep learning.

Allocate time for it, and who is going to do what. Best case is everyone does some of it, and lends a hand to some degree, in the same way everyone probably uses email or the phone to some degree. Don’t allow it to be addictive. Have a plan, train your staff, measure what you do, keep what works and ditch what doesn’t.

In promotional campaigns, mix traditional advertising and social, and watch the impact of your promotions make a larger impact and last longer.

Do not buy links, likes or followers. Build your social media presence organically (the occasional Facebook promoted post, OK), and watch your Klout score to gauge which activities work the best.

10. I will build for a PC 

Think mobile first, because that is now becoming the largest environment online. Build for mobile, and then PC. With a mobile responsive site, you can pretty much have your cake and eat it. 40% of Australian traffic is now on mobile during weekdays, and more than 50% in the evenings and at weekends.

~~

So there you go, 10 flearnings, from 10 failed mistakes I have made (some of many, many more I could bore you with). Despite making loads of these errors, and learning the hard way, we did survive 10+ years, so we did OK…

All the best with your startup!

SLIDES AVAILABLE HERE >> http://www.slideshare.net/CharlieGunningham/so-many-flearnings-my-startup-journey

Farewell iiNet

Michael Malone looks on as iiNet shareholders vote in favour of sale to TPG

Tomorrow TPG take over Perth’s (as yet only) billion dollar tech startup, Australia’s #2 internet service provider iiNet, with financial settlement on the deal.

Founded in his Mum’s Padbury garage in 1993, because newly graduated Michael Malone wanted to continue to use the internet post university, the rise of iiNet is testament to Michael’s audacity, vision and hard work, and in latter years, as an example of a company that truly understood (and lived and breathed) that the customer was always at the centre of things.

In the mid and late 1990s, with government-owned Telstra slow to get into national broadband, a whole host of small ISPs were established in Perth. iiNet was quick to soak them up as it grew to its own IPO and beyond. Michael took the company public in 1997, acquiring Wantree, Networks and Net Trek along the way. In the 2000s, a dozen other acquisitions occurred including Malcolm Turnbull’s own Ozemail, and New Zealand’s iHug.

As iiNet grew so it went head to head with Telstra, and then, in 2005/6 a stutter occurred, which was almost terminal. Due to some accounting problem post a recent takeover, results sent to the market were later revised, causing the stock to be suspended for weeks, and a decimation in share price. This brought in new board members and the sale of iHug.

It proved to be a mere misstep, from which the subsequent acquisitions of Up’n’Away, Westnet, Netspace and Internode pushed it past Optus into 2nd place in the residential broadband market in Australia, with only the now privatised Telstra ahead of it.

In 2008, peering from afar was an unlikely foe – the Hollywood movie industry. In attempt to knock off a small fish on the other side of the world, as some test case for further legal action elsewhere, a class action was brought against iiNet by 34 movie and TV companies including the mights of 20th Century Fox, Warner Bros and Village Roadshow. They claimed iiNet should have done more to prevent illegal downloading of movies by its customers, which iiNet argued was akin to blaming road building companies for every car crash. iiNet famously won the case, and two subsequent appeals. Other ISPs around the world breathed a sigh of relief.

After 20 years in charge in 2013/14, Michael took 6 months off to go mountain climbing and respected former Brit and CFO David Buckingham took over in an interim role. When Michael returned, his heart was not really in it, and he left for good in mid 2014, still a major shareholder and no less passionate, but with other things on his mind. He remarried and moved to New South Wales, buying himself a large mansion in the country. He joined a few startups as a board member.

When low cost provider TPG made an offer to iiNet earlier this year Michael was incensed, claiming the board had lost all growth plans for the company and were folding too easily. In a prescient warning, he said the board and TPG were “appalling silent on the impact this would have on our staff and customers.”

Michael had made ‘serving the customer‘ the be all and end all of the company. Everyone, including him, was remunerated on NPS (net promoter score) – a gauge of how evangelical your customers are with your service. iiNet won award after award for this.

A few months later a rival bid came in from M2 which prompted TPG to up their initial offer. In July Michael bowed to the inevitable and 95% of shareholding went along with the deal. He looked saddened (see picture) but also must have felt pride in the final valuation.

2 weeks ago the deal passed its last administrative hurdle, with the ACCC allowing the merger to go ahead. The following week TPG acted swiftly, removing the CEO David Buckingham, and many management reporting lines were changed. An interim board was put in place, which disbands tomorrow. The swiftness of these moves were a shock to many inside, and outside, the company.

Time will tell if the customer-focus essence of iiNet will remain. Many fear that if their well renowned devotion to customers drops away, so may the client base. 600 staff inhabit 502 Hay Street in Subi – how many will be there by Christmas, or the same time next year?

Whatever happens will not diminish the achievements  of this son of an Irish fence maker, who built up a billion dollar company from scratch, taking customer calls by his bedside at all hours of the night in that Padbury garage back in the early 90s. Over 20 years this brought him many admirers, amazing experiences and enormous wealth. It’s been quite a ride.

Photo : Philip Gostelow

Ecosystem done. What Perth startups need now are success stories

Startup Weekend

Almost exactly three years ago I attended the first Startup Weekend in Perth. 100 plucky individuals bought tickets to attend. 40 or so got up on Friday night to make a 1-minute pitch (if they went one second over, they were stopped in their tracks). From these 40 pitches 15 or so teams formed by 9pm that night, and they were off and running.

By Sunday evening the teams had to pitch their ‘completed’ ideas to some judges. Some had almost complete products out on the web, or in the Google play store. They had branding, cool designs, working products, had engaged in customer validation and had learnt a tremendous amount. Perhaps 6 or more months of learning had been crammed into a frenetic 48 hours. Most would wake up a little bleary Monday morning and return to their day jobs.

I was one of the mentors on that first weekend, and I remember the ‘Breakeven app’ who I worked with ended up in 2nd place. The leader of the team had attended two Startup Weekends in New York previously and thought Perth’s one was better. Better in terms of the quality of the attendees, mentors, judges and ideas.

Wind on three years and there have been 5 startup weekends. There are now 5 tech accelerators in Perth (a year ago, there were none). There have been 3 iterations of Founders Institute. There are half a dozen co working spaces. The Perth morning startup meetup has 1500+ members. I have accumulated a list of 250+ startups that I know of (there are probably way more, and I am finding out about new ones every week).

The ecosystem is full and vibrant. None of this existed 3 or more years ago.

A well known Perth-based VC Matt Macfarlane told me once, “first comes the ecosystem, then the success stories, then the investors.”

We’ve got the ecosystem, now we need some success stories.