Paul Wallbank – Brilliant Communications

Author: Paul Wallbank

The pay day
Last Sunday Mark Fletcher celebrated his 10,000th post at the Australian Newsagency Blog. In seven years of posting that’s an impressive achievement for someone running both a retail store and a software company.

In his landmark post, Mark looked at the major issues he’s covered on his blog over the last few year and one stands out as the biggest – the payoff for newsagency owners when they sell their businesses.

The failure of many newsagents to manage their businesses for day to day profit. Too many newsagents expect their pay day when they sell and do not realise that their pay day is today, tomorrow and next week … and that this determines what they will receive when they sell.

For Australian newsagencies the news is bad; their established industry is struggling in the face of technological change and regulatory changes – both of which are other points Mark raises – but more importantly the buying and selling businesses in all sectors is undergoing a fundamental economic shift.

Lifestyle Businesses

The underlying idea is that these businesses are what Steve Blank calls “lifestyle businesses”; proprietors buy them to provide an income for their families.

For these “lifestyle businesses” to have a resale value another family is has to raise the funds to purchase the enterprise.

Therein lies the problem, most purchases of businesses are financed by bank loans secured against property.

Late baby boomers and Generation Xers – those born between 1955 and 1970 – are the obvious buyers of these businesses and they don’t have access to the same equity as their parents.

The situation is even worse for those generations following whose high education debts mean an even later entry into the property market and even less equity available should they want to buy these businesses.

For sellers, this means is buyers can’t pay the prices retiring business owners need as their nest egg to support them through twenty or thirty years of bowling or travelling in their later years.

This inter generational mismatch isn’t just restricted to Australian newsagents; it’s a problem around the Western world for business owners whose exit strategy involves selling the business as a going concern for a substantial amount.

Cash poor buyers

As we reach the end of the late 20th Century credit boom, the money isn’t there for people to pay the sort of sums required by existing local business owners to retire in comfort. Even if the banks were prepared to lend the sum required, the buyer’s underlying assets can’t secure the loans and, most importantly, the cashflows aren’t there.

In an Australian newsagent context much of the cashflow has changed because of deregulation and new competition but on the bigger scale changing consumption patterns at the end of the 20th Century debt binge coupled with aging populations and restricted credit are changing the economics of family owned, small local businesses.

For the current owners of these small businesses, it means the pay day has to be today as it won’t be there tomorrow.

The danger is how many will follow the example of the large corporations who find themselves in a similar situation and respond by excessively cutting costs or chronically under-investing which is what has crippled big store retailing across the US, Australia and the UK.

Mark’s constantly pointed out that Australian newsagents have to reinvent themselves, as he celebrates seven years of blogging and 10,000th blog post it’s probably worthwhile considering how many, like the rest of us, will be working in our businesses far longer than we originally expected.

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January 10, 2012
The pros and cons of bootstrapping
There are plenty of ways of raising money for a business; venture capital, bank loans, private equity and – by the far the most common – bootstrapping, where a company finances it’s growth through its own cashflow.

An article in Tech Crunch by Ashkan Karbasfrooshan looked at the reasons why bootstrapping doesn’t work, his views are understandable Ashkan given his own business has raised $1.5 million in venture capital (VC) funding over the past four years.

Outside the Silicon Valley bubble, it’s worthwhile considering the real benefits and disadvantages to bootstrapping your business. As with any business tool there’s real pros and cons with all financing methods.

Benefits

There are a number of benefits with bootstrapping, in that it forces the business’ management to focus on the product and customers while giving founders full control of the business.

Total control

A bootstrapping business has total control over its destiny – the business owners answer to no VC, bank or outside imposed board of directors.

Those outside investors may also have different business objectives to the founders. Often a venture capital or private equity investor has a three to five year time frame while a founder may be looking further.

Also a mis-match between the founders’ and investors’ exit strategies will almost certainly be a problem should the opportunity to sell the business arise.

One of the biggest risks for a smaller business is banks can call in loans or ask for additional security – something that crippled many smaller businesses during 2009.

For those who’ve raised equity funding, founders can find their shareholdings diluted or even be fired from the business they created.

Customer focus

The business that is focused on funding itself pays close attention to the needs of its customers. The distraction of raising, and then managing, investors or lenders can distract from building the business.

Validating the business model

A successful business that has grown through funding itself is has, by definition, a valid and profitable business model. This is not necessarily true of VC or debt funded enterprises.

Overcapitalisition

In his Tech Crunch article, Ashkan quotes Marc Andreessen and Jason Calacanis as saying “raise as much money as you can.”

This may well be conventional wisdom in Silicon Valley though the reality is a business can have too much money, as we saw in the original dot com boom with businesses such as Boo.com lavishing money on founders and expensive frills.

A business can be crippled by having too much investment money that distorts the founders’ objectives and allows the company to lose focus on helping customers and getting the product right.

Generally with bootstrapping this isn’t a problem unless the founders have an insanely profitable business, which renders the need for outside investors largely irrelevant.

Disadvantages

For all of bootstrapping’s advantages there are real downsides as well including the risk of being undercapitalised and the difficulty in attracting diverse management.

Undercapitalisation

One of the main reasons for business failures is under capitalisation; simply not enough money to grow the enterprise or to put it on a sustainable footing. This is a constant risk for bootstrapped businesses.

Inability to focus

Many owners or managers of bootstrapped businessese focused on making sales so they can pay the rent and make payroll; this distracts management from executing the longer term aims of the business.

Expertise

In taking an equity partner – either in private equity, venture capital or angel investor – the founders get the benefit of the investors’ expertise.

A good investor who has similar objectives to the founders can add real value and complement the original team’s strengths and weaknesses.

No one size fits all businesses

Overall there’s no black and white to bootstrapping versus borrowing money or finding an equity partner; all of them have their risks and benefits.

As entrepreneur Steve Blank points out, there are six types of startup and only two of them; the scalable and buyable (born to flip) are suited to the Silicon Valley venture capital model.

The real risk in business is assuming one way or another is the only way to fund an enterprise, for many it’s a combination of some or all of the methods to raise funds.

It’s quite possible to see a business first bootstrap to get established, then get a bank loan to finance growth, followed by a VC or seed investment that finally sells out to a private equity fund.

For many business owners though, funding the business out of cashflow is the most sustainable way to grow and profit. If you’re happy with what you’re doing, there’s no reason to be hassling for equity or begging at the bank.

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January 9, 2012
The irrelevant operating system
Last decade, people queued around the block to buy the latest version of Windows, today no-one cares. What next for a market that has become commoditised?

When you visit a website your browser reports, among other things, what type of system you’re using. Net Applications – a US based web monitoring company who analyse online browsing statistics – keep a regularly updated list of what people are using when surfing the net.

On their latest statistics, Windows XP finally fell below 50% in September 2011, just on ten years after it was released. Windows 7 is taking over from XP while Apple steadily gain market share.

These statistics show how the operating system has become irrelevant, only really dedicated geeks really care anymore about their version of Windows or whether a computer is running an Apple Mac or Microsoft product.

As most computer users are drifting to cloud computing services and consumers are increasingly using their PCs to access online games and social media sites, it doesn’t really matter anymore what systems are used as long as they work.

For many in the computer industry, this is a problem as they desperately want to sell a product in a market that has become commoditised. It’s another example of the PC industry’s broken business model.

It’s not just the computer industry with this problem, the 3D TV hype of 2010 was a desperate attempt to sell new television sets in a market that had stalled; recession hit consumers had no desire to replace their perfectly good TVs that were less than a decade old, just like Windows XP users.

This year’s Consumer Electronics Show that launches in Las Vegas this week will see similar desperation as the various PC and mobile phone manufacturers trying to generate excitement about their new products.

For the journalists and PR folk at the CES the problem is customers largely don’t care anymore. As the failure of 3D TV illustrates, consumers aren’t buying the hype.

Just as with operating systems, most customers want something that works, if you’re going to get them to replace older proven technology you’ll have to show where the new product adds value.

The era of products flying off the shelves because they are new and shiny is over – just ask Microsoft about it’s operating systems.

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January 8, 2012
The business of baffling choices
In his Daring Fireball blog, John Gruber’s takes to task the view that Apple suffers through not having a wide product range.

John makes the valid point that Samsung seems to stealing market share from HTC rather than Apple but the whole theory of offering too many choices strikes to the heart of two industry’s business models.

Those two industries are the mobile telco business and the Windows personal computer sector.

In the PC world, the wide range of models has been both an advantage and a weakness; it’s allowed Dell and others to create custom machines to meet customer needs but also leaves consumers – both corporate and home buyers – confused and suspicious they many have been taken advantage of.

All too often customer were being had; frequently buyers found they’d bought an underpowered system stuffed with software that either was irrelevant to their needs or an upgrade was necessary to get the features they hoped for.

The entire PC industry was guilty of this and Microsoft were the most obvious – the confusing range of operating systems and associated software like the dozen version of Microsoft Office was deliberately designed to confuse customers and increase revenue.

For the PC industry, the “baffle the customer” model reached its zenith, or nadir, with Windows Vista where Microsoft deliberately put out an underspecced ‘Home’ edition designed to push sales up the value chain.

Compounding the problem, most of the manufacturers followed Microsoft’s lead and put out horribly underpowered systems in the hope that customers would upgrade with more memory, better graphics card and bigger, faster hard drives.

Most customers didn’t upgrade and as a result the Vista operating system – which was horrible anyway – enhanced its well deserved reputation for poor performance.

In the telco sector, consumer confusion lies at the heart of their profitable business model; a bewildering range of phones and plans often leaves the customer spending too much, either through an overpriced plan or paying punative charges for ‘excess’ use.

Having a hundred different types of Android phone adds to the confusion and, by restricting updates, they can cajole customers into ‘upgrading’ to a new phone and another restrictive plan every year or so. This is why you get phone calls from your mobile phone company offering a new handset deal 18 months into a two year plan.

Apple’s model has been different; in their computer range there has never been a wide choice, just a few configurations that meet certain price points. The same model has used for their phones and iPads.

For Apple, this means a predictable business model and a loyal customer base. They don’t have to compete on price and they don’t have to fight resellers and telcos who want to ‘own’ the customer. It’s one of the reasons mobile phone companies desperately want an alternative to the iPhone.

Companies using the baffling choices business model – Microsoft, HP, Dell and your local mobile telco – may well continue to do okay, but that business model is coming under challenge as new entrants are finding new niches.

For all of us as consumers all we can do is make the choices that are simple are reject complexity. Warren Buffett has always maintained he doesn’t invest in businesses he doesn’t understand, perhaps we should have the same philosophy with the purchases we make.

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January 7, 2012
Booking a disruption
Last night, US based booking service Eventbrite launched their Australian service, which promises to disrupt some cozy local incumbents.

The Australian ticket booking industry – like most of the nation’s business sectors – is dominated by two large players; Ticketmaster and Ticketek, with the latter dominating most ticket sales for big events.

Like most Australian duopolies, both Ticketmaster and Ticketek have a comfortable existence. With almost every ticket for major sporting, entertainment and cultural fixtures sold through their services, they’ve been allowed to neglect investing in new platforms while reaping monopoly profits from both attendees and organisers.

The development of online ticketing platforms like Eventbrite and Australian equivalents like Sticky Tickets are part of the disruption coming to this sector.

All of a sudden, event organisers don’t have to rely upon the grace and favours of major incumbents and ticket buyers aren’t getting slugged with outrageous “administrative fees” by the agencies.

The ticketing sector is one of these areas where decades of business practices have allowed middle men to develop, now a whole breed of new intermediaries are using technology to challenge the incumbents.

Integrating other technologies like reporting services, mailing lists and social media platforms along with hardware like iPad, iPhone and Android based management platforms for those on the door makes these services even more compelling to event organisers.

Right now the big incumbents probably aren’t taking these services too seriously as their cashflows, and management bonuses, seem safe and unassailable. Like all challenged industries, it might take them some time to figure out there is a real threat to their positions.

It will be interesting when a big events organiser or sports venue decides to move across to one of the newer ticketing companies, then we’ll see how the big incumbents deal with the threat to their businesses.

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January 6, 2012