Category: business advice

What do startup founders really earn?

A global survey of salaries drawn by startup founders illustrates some truths about being a business enterpreneur

One of the myths of the current cult of the entrepreneur is that everyone will be a winner as their startup gets bought out by Google for a billion dollars. The reality is life for a startup founder is a grind.

Startup Compass looked at 11,000 startups across the world to discover what founders really earn and the results show the reality of life when you’re starting up a business is that the wages are pretty poor.

In San Francisco, London and New York, the wages are piddling compared to the cost of living in those cities.

Low pay and business success

This is good news for investors though, as there’s a clear correlation between the success of a startup business and the salaries its key staff members draw – successful businesses are built on the back of founders ploughing everything into the venture.

It’s also high risk as a failed business can leave the founder with nothing to show for several years of hard work, something that’s overlooked by the ‘liberate yourself from your cubicle’ gurus advocating everyone starts up their own venture.

Australia’s high cost economy

Notable in the stats is the high rates demanded by Australian founders, more than 25% higher than their Silicon Valley counterparts and a gob-smacking 60% more than London or Canadian equivalents.

Australia’s high cost of doing business was emphasised last year where a comparison by Staff.com found Sydney was the second to Zurich as a place to base a tech startup. Worryingly, that survey didn’t consider owners’ drawings.

Part of Australia’s high wage requirements are no doubt due to the country’s lousy tax treatment of options and share plans but a bigger problem is property ownership – an Australian who hasn’t bought a home by 35 is destined to be one of the nation’s underclass.

So an Aussie entrepreneur has to earn enough to qualify for or service a mortgage, it also discourages Australians from starting even moderate risk ventures.

The consequence of the need to draw a high salary is that the proportion of investor funds that goes into founders’ wages is almost three times higher in Australia than it is in Silicon Valley. That’s a big disincentive for foreign investors to put money into Aussie startups.

If you wanted an example of how uncompetitive the Australian economy has become, this is a good start.

Regardless of where a startup is based though, the message remains that the road to a billion dollar buyout from Google or Facebook is not paved with gold.

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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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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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Commoditising cafe Wi-Fi

Over the past decade the idea of offering Wi-Fi internet connections to customers has become standard in the hospitality industry, today it’s pretty well a commodity.

Over the past decade the idea of offering Wi-Fi internet connections to customers has become standard in the hospitality industry, today it’s pretty well a commodity.

Not so long ago it was difficult to find a cafe that offered Wi-Fi and many of those that did either charged for it or were part of a provider’s networks that you had to be a member of.

Today, Wi-Fi has become pretty standard in cafes and places like airport terminals although interestingly the hotel industry has been slow to adopt it.

In the hotel industry a perverse rule of thumb seems to apply that the more expensive the property is, the pricier internet access will be as backpackers hostels invariable have free Wi-Fi while six star hotels charge anything up toe $30 a day for a connection.

While the hotel industry still has to be dragged into the 21st Century on this front, cafes seem to have reached a point where having Wi-Fi is no longer a commercial advantage but not having free internet is now a distinct disadvantage.

This was the point made by Nicholas Carr in his 2003 essay IT Doesn’t Matter where he suggested that computers, and other ‘infrastructural technologies’, don’t offer a competitive advantage once they are widely adopted.

For a brief period, as they are being built into the infrastructure of commerce, these “infrastructural technologies,” as I call them, open opportunities for forward-looking companies to gain strong competitive advantages. But as their availability increases and their cost decreases – as they become ubiquitous – they become commodity inputs. From a strategic standpoint, they become invisible; they no longer matter.

Carr’s proposition also implies that businesses who don’t adopt these technologies once they’ve become widespread risk being irrelevant and marginalised.

For cafes, this means that customers will be ignoring them unless they do offer Wi-Fi and it will be another cost of doing business for the proprietors of coffee shops.

Which begs the question of how do cafes differentiate themselves.

Perhaps the answer lies in the dog bowl shown in the photo, making a venue pet, or child, friendly may be one way to attract customers.

One thing’s for sure, just having good coffee and tea might not be enough to cut it in the future.

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Potentially unwanted applications – what are we are installing on our smartphones?

Do we really understand what we are installing on our smartphones? Sophos Labs thinks potentially unwanted applications or PUAs are a growing problem.

One of the notable things about the technology industries is there are always new terms and concepts to discover.

During a visit to Sophos’ Oxford headquarters last month, the phrase ‘Potentially Unwanted Applications’ – or PUAs – raised its head.

PUAs come from the problem application developers have in making money out of apps or websites. The culture of free or cheap is so ingrained online that it’s extremely hard to make a living out of writing software.

As result, developers and their employers are engaging in some cunning tricks to get customers to download their apps and then to monetize them, particularly in the Android world which lacks the tight control Apple exercises over the iOS App Store.

“What’s interesting about Android,” says Sophos Labs’ Vice President President Simon Reed, “is it’s attracting aggressive commercialisation.”

The fascinating thing Reed finds about this ‘aggressive commercialisation’ is where the distinction lies between malware and monetisation and when does an app or developer cross that line.

Reed’s colleagues Vanja Svajcer & Sean McDonald explore where that line lies in a paper titled Classifying PUAs in the Mobile Environment which they submitted to the Virus Bulletin Conference last October.

In that paper Svajcer and McDonald discuss how these applications have developed, the motivations behind them and the challenge for anti virus companies like Sophos and Kaspersky in categorising and dealing with them.

The authors also flag that while the bulk of the revenue generated by these apps comes from advertising, there are serious privacy risks for users as developers try to monetize the data many of these packages scrape from the phones they’re installed on.

Svajcer and McDonald do note though that potentially unwanted applications aren’t really anything new, we could well classify many of the drive by downloads that plagued Windows 98 users at the beginning of the century as being PUAs.

What we do need to keep in mind though that what is driving the development of PUAs is users’ reluctance to pay for apps and that it’s going to take a big change in customer attitudes for this problem to go away.

For businesses, this is something managers are going to have to consider as they move their line of business applications onto mobile devices, as Marc Benioff proposed at the recent Dreamforce conference.

Sophos’ Simon Reed believes potentially unwanted apps won’t be such a problem in the workplace however. “Consumers may have a different tolerance towards PUAs than commercial organisations,” he says.

The prevalence of PUAs on mobile devices does underscore though just how careful organisations have to be with who and what can access their data. It’s another challenge for CIOs.

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Building great work

Mediocrity is something we have to avoid if we want to do great things.

“You have to understand Paul that we are building a structure designed to last twenty-five years,” sneered the consulting engineer as we sat in a site meeting on a high rise construction site just inside the City of London.

I sighed deeply and let the matter of cladding fire protection water tanks slide and pondered nearby St Paul’s Cathedral, wondering what Christoper Wren would have thought about the mediocre architecture being thrown up around his masterpiece.

The consulting engineer was a suitable person to build mediocre buildings, he and his firm were only on the project by virtue of the property developer being from the same masonic temple and the calibre of their shoddy and visionless work reflected their suitability for the project.

Apart from the pedestrian architecture and engineering, the lack of foresight extended through poor design right through to not allowing enough for future expansion of the building’s communications – by the early 1990s it had already become apparent modern office towers were going to need plenty of space for network cables and the lack of which probably contributed to the structure being totally refurbished in the mid 2000s.

That day was the beginning of the end of my engineering career as I found I didn’t much care for being patronized by mediocrities all too often encountered in the building industry in the mid 1990s.

At the time most of the architecture in London was pedestrian and bland late Twentieth Century mirror glass. The real tragedy being that modern construction techniques give architects and builders possibilities that Wren couldn’t have dreamed of.

Thankfully London snapped out of that era of mediocrity and today building like The Gherkin, The Shard and London City Hall show what’s possible with imagination and modern building techniques, although things can go wrong.

Mediocrities patronizing those who don’t share their narrow, bland look on life will always be with us, thankfully we don’t have to accept them in our lives.

If we want to build great things that push the boundaries or change the world, then those grey mediocrities have no role in our lives.

Where that consulting engineer and his masonic friends are today, I have no idea but it’s not likely they built any of the iconic buildings that now dot London’s skyline.

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