Tag: business

Startup economics

The failure of Everpix is a good lesson for any business founder.

Business advisor Ivan Plenty’s in-depth study of the viability of failed photo sharing startup Everpix with some useful lessons for business owners in any industry.

Everpix shut down last November having run out of money despite getting favourable reviews from the tech press and in an unusual move, the founders put the company’s financials up on GitHub.

As Plenty points out in his analysis of Everpix’s finances, the company was unlikely to ever break even and it’s a lesson to every business owner on the importance of keeping an eye on cashflow and understanding where the venture’s break eve points are.

One of the key take-aways from Plenty’s analysis was that the base costs of the business were too high and even in the best circumstances it was unlikely that venture would have succeeded.

A good business plan would have helped the founders understand this problem and it illustrates why rigorously developed cashflow forecast is a great tool for a manager or proprietor.

The Silicon Valley investment model

The ultimate objectives of a company’s management are always important when considering the success or failure of a business; what objective is the business working towards?

In Everpix’s case, it may well have been the Silicon Valley Greater Fool model was a likely end, with good software and a growing customer base the company could have been attractive to a buyer.

Were that the objective of Everpix’s founders, the company was under-capitalised as management couldn’t afford either the burn out or the PR and marketing team essential for raising the venture’s profile with key investors.

Under-capitalisation is one of the greatest problems for any new business and its clear that Everpix didn’t have the equity to scale the way it needed.

Capital on its own though isn’t a panacea, from Ivan Plenty’s analysis the indications are that Everpix’s fate would have been the same, but more drawn out.

Everpix’s failure and the numbers behind it are a good lesson for anybody thinking about starting a business — numbers matter and businesses live and die by them.

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The Roadrunner Effect

Your business can keep running even when it’s gone over the edge of a cliff.

Fans of the roadrunner cartoon will remember how in almost every episode one of the characters, usually the coyote, would run over a cliff.

A few seconds after running off the cliff they’d keep going and then, just as they realise their mistake, they’d plummet into the deep canyon.

It’s similar for businesses – you can be a long way over the cliff’s edge before you realise you’re about to take a big fall.

Yesterday’s post about Sensis and the squandering of ten billion dollars is a good example of the Roadrunner Effect in business.

Sensis annual revenue and profit 1999-2013
Sensis annual revenue and profit 1999-2013 (millions of dollars)

While it was obvious from the early 2000s onwards that the Yellow Pages model of expensive small business advertising listing was doomed, Sensis boss Bruce Akhurst did an admirable job of keeping revenue flowing.

Even more impressive is that the division managed to book close to a 50% gross profit most years during that period even when the revenues started to decline.

A large part of Sensis’ success was in screwing more money out of its client base with enhanced ads, new categories and a better digital offering that tied into Google’s Adwords program.

Unfortunately for Akhurst and his management team, economic gravity eventually claims even the luckiest or best run enterprise and Sensis was no different as small business started realising Yellow Pages advertising had become largely ineffective.

In many respects Sensis is a good example of a once profitable business that fails in the face of technological change – the new technologies help it become more profitable at first, but eventually a changed marketplace kill the business.

The question for those enterprises and industries is how long can the owners, managers and employees keep running before they realise the ground has dropped out from beneath them?

It could even be entire countries that suffer from the Roadrunner Effect, it certainly appears that the game was up for the European PIIGS long before it became obvious to the governments and citizens. This may prove true for Australia as well.

Either way, it’s worthwhile for business owners and managers to consider whether there’s a cliff face ahead even when revenues are accelerating.

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Defaulting to transparency

Messaging startup Buffer seeks to be open in every aspect of business, will this help the startup grow?

Social media scheduling startup Buffer takes transparency seriously, will it help the business?

Many fine words have been written about openness, sharing and collaboration in recent years but few organisations really practice what’s been preached. An exception to this is social media service Buffer that takes openness to extreme levels.

Buffer keeps few secrets with the company sharing its monthly operating figures, internal emails and even its formula for calculating salaries.

The company’s CEO Joel Gascoigne believes this helps build trust in his startup, saying in his blog:

There are many reasons we default to transparency at Buffer, and perhaps the most important is that I genuinely believe it is the most effective way to build trust. This means trust amongst our team but also trust from users, customers, potential future customers and the wider public who encounter us in any way.

Building trust is one of the most important tasks of any business owner or manager; whether it’s with customers, staff, suppliers or investors and startups have a bigger task than most. So Joel is onto something with this approach although one wonders how long the philosophy will last as the company grows.

One thing that stands out in Buffer’s figures is how little Joel and his staff earn; while $158,000 is a good wage it isn’t the massive income that those who glamourize startups pretend founders earn.

Joel’s experiment with Buffer is an interesting experiment and it will be fascinating to see how long the company continues the philosophy of extreme transparency and how many others follow the example.

While it might not be necessary to be as open as Joel Gascoigne and Buffer, the idea of defaulting to transparency is one that many organisations – particularly governments – would benefit from adopting.

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Demand Media’s closed window of opportunity

Demand media’s downfall offers some hopeful lessons for those who want to see better quality content on the web.

A few years ago content farm Demand Media was being hailed in some quarters as the future of the media industry.

Today its stock is languishing, revenues are falling and any thought that the cheap, low quality writing that Demand Media delivered will be the future of media is laughable.

Variety magazine recently published a feature describing the of the fall of Demand Media  with a focus on how Google’s changes to its search engine algorithm undermined the content farm’s busines model. Variety’s story is an interesting case study on not relying on another company for your business plan and extends the hope that low quality writing is not the future of online media.

Dodgy business

Demand media evolved from the eHow and eNom businesses, both of which relied on dubious – if not downright dishonest – online practices.

eNom was particularly irritating, basically just registering domain names around popular search terms that led to   pages full of advertising that delivered nothing of value to someone searching the web for information on a topic.

It was very profitable for a while though, as Variety reports;

Early on, Demand used eNom’s 1 million generic domain names (such as “3dblurayplayers.com”) to serve up relevant ads to people searching for specific topics. These “domain parking” pages were immensely profitable, generating north of $100,000 per day, according to a former Demand exec who requested anonymity. “That’s $35 million-$40 million per year without doing any work,” the exec said.

The eHow business wasn’t any better, relying on low quality, cheap articles that only worked because they were stuffed full of the keywords that Google would base their search results on.

On January 26 2011 Demand Media went public and the criticism of both the newly listed company and Google became intense.

This story from Business Insider – which ha featured some gushing and dreadful analysis of Demand Media previously – illustrated the problem the company had of being overwhelming dependent on Google, although the writer believed Google were making too much money from content farms to really act against them.

Google’s problem with the content farms was real, the quality of search results was falling and users were finding their pages were full of low value rubbish rather than authoritative sources which opened the search giant’s core business  to disruption from Microsoft’s Bing and other search engines. Something had to be done.

Jason Calacanis, whose Mahalo was a competitor to Demand Media, flagged the risks to content farms in a presentation early in February 2011, “the one rule of working with Google is don’t make them look stupid. If you make ‘The Google’ look stupid, they’ll f- you up.” He said. “eHow makes Google look stupid.”

Eventually Google decided they were sick of looking stupid and changed their algorithms and the rules for getting a page one search result suddenly changed.

Demand Media’s business was doomed from the moment Google made that change, as Variety reports;

By April 2011, third-party measurement services were reporting that the Google changes had reduced traffic to Demand sites by as much as 40%. Demand issued a statement that the reports “significantly overstated the negative impact” of the change, but the stock took a dive — plummeting 38% over two weeks — from which it has not recovered.

As Demand Media was affected, so too was the entire Search Engine Optimisation (SEO) industry where thousands of consultants found their strategies of placing low quality pages and link rich website comments now damaged their clients’ businesses.

For web surfers, Google’s change was good news as suddenly search results were relevant again.

Demand Media was, in essence, a transition business that prospered during a brief windows of opportunity that quickly closed along with the company’s prospects.

That window of opportunity was also dependent on someone else’s business strategy, which is always a dangerous position to be in.

Demand Media’s lesson is that while there are opportunities to be had in markets that are being disrupted by new technologies, there’s no guarantees those opportunities will last. What works in SEO, digital media or social marketing today may not work tomorrow.

It’s also a hopeful lesson that websites regurgitating low quality content is only a transition phase in the development of online media and that providing good, original writing and video is the best long term strategy for survival on the net.

Should that lesson be true, then it’s good news for both writers and readers.

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Finding the mythical pot of gold at the end of the crowdfunding rainbow

Raising capital through crowdfunding sites like Kickstarter is only the beginning for most businesses.

Raising capital is tough, while the Silicon Valley legend of a smart group of geeks finding wealth through fairy godfathers – aka VCs – throwing money at them may be true for a small number of outliers it isn’t the reality for most businesses.

For most businesses, even if they are lucky to find a VC or angel investor, raising that money is usually the start of the next phase of building a venture which can be even tougher.

With the recent rise of crowdfunding sites like Kickstarter, Indiegogo and Pozible which are a lot easier to raise capital through than finding VC or angel investors, there’s been a lot more commentary on how these services are a pot of gold for artists and entrepreneurs.

Mark Pesce discussed some the challenges of Kickstarter campaigns in an interview on the Decoding the New Economy YouTube channel about funding Moore’s Cloud.

Backing Mark’s views is a post on Fast Company’s design blog discussing what happens after  a successful campaign.

In Life after Kickstarter, Jon Fawcett describes what happened after raising over $200,000 for his project Une Bobine.

Having more than met his targets, Fawcett found raising the money was only the start of the business challenges with logistics, taxes and fulfilment being hurdles his team had to overcome.

Fawcett actually had an advantage in had tied manufacturers up before launching the funding campaign; for those who haven’t, the process would be even more fraught.

As the Fast Company story concludes, the successful fund raising was only a small, albeit critical, part of getting the products to market.

Fawcett’s story is a reminder that a product’s journey doesn’t end with funding. While Kickstarter has democratized and decentralized the process of raising capital, concerns of manufacturing, shipping, and storage still retain the unglamorous grit of the real world. There’s no flashy website for setting up your supply chain. Perhaps that’s the next part of this grand process prime for disruption.

While raising capital is tough, it’s only part of the story of a successful business. Jon Fawcett story is a reminder of that.

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Does small business really want high speed broadband?

Is big business getting all the benefits of high speed broadband?

One of the mantras of the digital economy is new technologies, such as the web and cloud computing, level the playing field for small businesses competing against large corporations. Could it be that belief is wrong?

The Australian Centre for Broadband Innovation last week released its Broadband Impacts report where it examined how high speed internet is changing communities. The results weren’t good for small businesses.

One of the key metrics the ACBI used was business use of websites, it’s shocking enough that only 70% of Australian corporations have an online presence but less than half of small businesses being on the web is disgraceful.

Australian-business-internet-use

An interesting quirk in the above table indicates that there’s quite a few microbusiness using online sales services and one wonders if the question being asked by the Australian Bureau of Statistics is too limiting in its definition of websites.

The ABS defines businesses with a web presence as those with a website, home page or other web presence but excludes those listed solely as part of an online listing. A web presence was reported by 45% of Australian businesses as at 30 June 2012.

With this definition excluding social media and listing services, it probably does understate the number of Microbusinesses that have an online presence but not a website as defined by the ABS.

The relevance of broadband

In the context of broadband it’s worth noting that websites and online commerce don’t need high speed internet connections, so it’s hard to conclude that giving these businesses faster access is going to make a difference to the way they work.

Where high speed broadband and ubiquitous internet really make a difference is in business operations. As workers become more mobile and the internet of things rolls out, having access to reliable connections is going to become critical to most organisations. Again though, small business tracks poorly on this measure.business-reporting-new-operations-by-size

legend-to-australian-business-barchart

Overall the use of cloud services – which is what the bulk of these “new operational processes” will be – is pretty poor across the board although one suspects in the larger organisations various groups have changed their business practiced around services like Dropbox and Documents To Go without senior management being aware of it.

What’s particularly disappointing about this statistic is small businesses are the group most suited to using cloud services and those not adopting these technologies are missing a competitive advantage.

So who needs broadband internet?

These results beg the question – does small business really need high speed broadband access? If they aren’t doing things that could be done on a dial up modem, like registering domains or setting up websites, it’s hard justifying the investment of connecting SMBs to fibre networks.

While there’s no doubt high speed internet is essential to the economic future of communities and nations, we have to keep in mind that not all groups will take advantage of the new technologies. Some will be left behind and in Australia’s case, it may well be small business.

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Shops of doom

Some locations are the kiss of death of businesses.

“Location, location, location” is the mantra for real estate investors and property speculators, that rule is just as true for those setting up a shop or cafe.

When you pay attention to the retail strips or malls in your suburbs you’ll notice how some locations are doomed to fail.

The featured picture in this post is what should be a good location in the centre of a dining strip in an affluent Sydney suburb. Just fifty metres either side of the premises are successful and long running cafes.

However this spot has had five different business fail in the last three years and in the past decade hasn’t had a single stable tenant.

The question is what causes this? Is it because the landlord’s are greedy?

In some cases it is, the featured premises had a stable tenant in a very nice and well priced fish restaurant for many years. When the landlord jacked up the rent, the seafood cafe moved out and the place has struggled ever since.

Something many people have mentioned to me over the years is how difficult they find it to negotiate on price with landlords over commercial space with the owners very reluctant to budge on rents.

Often, the letting agents are prepared to throw in sweeteners like fitout costs, rental holidays or paying utilities but it’s very rare that the headline rent will be negotiated down.

Part of this could be due to the properties being valued as a multiple of their monthly rents; so if the leasing rate falls, so too does the property value which is bad news for the landlord and their bank.

When landlords get too greedy properties lie vacant for a long time. A good example is nearby to the featured property.

closed-bike-shop-in-bad-retail-location

The bike shop that occupied this unit for about 12 months moved out over two years ago and before that it had been vacant for a long time. Despite being on a busy commuter strip in an affluent suburb, it’s a lousy location with poor visibility, truly awful parking and lousy amenities.

In a genuine free market the rent should fall until a business that can operate in such a low turnover location can afford it, that no entrepreneur can make the numbers work indicates the asking price is too high.

Although even the cheapest rents won’t help a truly blighted location which is why it might be a good idea to ask around the local shops and residents to see how a location has performed before signing that lease.

It would be a shame to doom your business because of a lousy choice of location.

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