Startable – Healy Jones’ & Prasad Thammineni’s Blog

Startups vs Bubbles

I just saw a cool Tweet by Ariel Diaz, a Boston-area startup executive.

The link leads to a post entitled “The End of the College Textbook as We Know It?” There is a pretty eye-catching chart that implies there is a bubble in the textbook market:

If a chart like that doesn’t make you want to start a company you aren’t an entrepreneur!

Someone should chart various assets/commodities/services/etc against the CPI. Anywhere there is a chart where inflation of the item is outpacing the CPI by 2x or more is potentially fertile grounds for innovation. I’d like to dub this the:

Inflation Innovation Ratio

Startups can create value by “disrupting” a market – providing a better service/good through the power of technology. If a startup can offer a superior service at a lower price, then both the end consumer and the startup can capture some of the “rent*” extracted by the current players in the industry. Growing a business by shrinking a market.

One caveat I would add is that there are industries where inflation is happening for reasons that a startup may not be able to attack – such as government regulation. I’d hope that other reasons, such as problems in the distribution chain, could be overcome by the power of the internet to disrupt.

*despite having studied way too much economics the term for the lost consumer utility in a monopolistic market escapes me…

I like this post by Max Levchin entitled “On ambition.” He discusses the tradeoff between thinking big with your web startup or accepting a smaller exit and return. He is for “going big.”

I guess my thoughts go a little against his position – I believe it is OK to accept a quick, smaller exit if you’ve more modestly financed your company.

I hear his arguments – they are really well articulated. However, I think it can be honorable to sell your startup for a good but not enormous price to a larger company if that company will legitimately help you achiever your vision.

Starting a company – and especially starting a technology company – is about more than making money. I believe that every founder has visions of their target customers massively adopting their technology and using it to change how they do their business or live their lives. Nobody creates a new technology and says, “Wow, I hope barely anyone uses this!” If being part of a big company can help you get there then I don’t think getting acquired when you are small is bad.

I understand the investors may be more money focused. And founders should be thinking about that too, since many of them have the opportunity to make good money doing something less risky (i.e. just having a regular job at a good company for a salary.) And Max correctly points out that a small exit for a correctly capitalized company can really generate a lot of money founder. So that’s not all bad!

My gut is that this burst of angel financing will result in a crop of startup executives who 1) start something cool, 2) sell the company to a larger company, making a little $, 3) work at the acquiror* for a while and learn a lot about scaling a business and running a clean operation and 4) will then go off and found another set of companies, some of which will be very, very “big” ideas that need big venture capital financing.

*I like to spell it this way. But I also think pumpkin should be spelled punpkin, so…

Ash Maurya has a great post on how to document your business model – and it sure beats a business plan! This is a handy framework for anyone thinking about internet startups. These types of frameworks are much more time effective for internet entrepreneurs vs. the traditional business plan.

Note that the “Unfair Advantage” is on the Market side of his framework, not the Product side.

Last night’s Web Innovator’s meeting was great, maybe the best one so far this year. I really enjoyed the “self funded success stories” talk. Three successful startup founders who bootstrapped their businesses spoke about the trial s, tribulations and lessons-learned of self funding. It was really inspiring to see local companies that were doing well without the need for any outside funding!

Laura Fitton of OneForty moderated the panel, which had:

• Steve Conine, Co-Founder of CSN Stores
• David Hauser, Co-Founder of Grasshopper
• Todd Garland, Founder of BuySellAds

Bootstrapped Startups Lessons

Some of the key takeaways on how to bootstrap your startup, as I understood them from these founders:

1. Even if you were not trained as a developer it is very helpful to be able to take part in your products development. Bootstrapping is a lot easier if you don’t have to pay anyone to develop your service/site/product.
2. Start pushing right away for a product that you can sell ASAP. When you have funding you have the luxury of taking time to get to market; when you are self funded you need to get selling fast.
3. Be sales and support in the early days. If you do not have lots of capital in the bank you need to be very careful that your service is resonating with customers. The only way to do this on a budget is to do it yourself. Listen carefully to your customers and change your product as fast as you can to meet their needs.
4. You don’t need a 50 page business plan. Two of the three founders used a spreadsheet to define their company’s early stage goals and track their progress; one had a two page business plan and a spreadsheet. You don’t have time to do a beautiful 50 page bplan – just figure out what you think your metrics and costs will be and start executing (and monitoring your progress against your plans.)

Along the lines of my recent series on what makes a good platform (part one, part two) Shaival Shah has a post on how Hunch uses its API to drive growth.

Wow. This chart from Quantcast is really powerful:

Android gaining share. Source:Quantcast

And Android’s share is clearly coming from the iPhone:

source:quantcast

I wonder how much of this is because consumers are not happy with AT&T? Or is it people who, for whatever reason, didn’t love Apple’s products? Or is it because some Android phones are cheaper? Finally, how many of these Android users are first time smartphone users (like RazrDude) vs. people who switch from the iPhone?

AT&T recently announced new pricing plans for smart phones that limit monthly bandwidth usage, in theory to reduce the strain on their mobile networks caused by Apple’s products. The reaction in the mobile development community has been to become pretty depressed, as everyone now believes that new apps will have to be more efficient in how they use their subscribers’ data plans.

But what if this could actually be good for mobile app startups’ ability to monetize their apps?

Let me explain!

A large number of smaller ecommerce companies make money from 1) selling products and 2) marking up the shipping of their products. In fact, when I was a VC, I saw a surprisingly high percentage of actual cash flow coming from shipping at a large number of the online retailers I evaluated. In some cases, over half the margin was coming from shipping. This is because, as a bulk shipper, the retailer got a substantial discount off of standard shipping rates. The retailer charged the consumer something similar to what the consumer would expect from walking into a UPS store and captured the difference.

If mobile apps could bundle a certain amount of bandwidth with the purchase/subscription to their app then they might be able to capture a similar margin from marking up bandwidth. In other words, if AT&T is willing to act like UPS and sell bandwidth to the mobile startups in bulk, these startups could then mark up the bandwidth and sell it to consumers bundled along with their app.

If the pricing of data plans really starts to bug consumers, AND if AT&T is willing and able to provide bulk bandwidth purchases to startups – including the ability to meter/assign bandwidth to an individual consumer at the moment they are using a particular mobile app – then this could be a way for data-hungry applications to monetize. While a consumer may never be willing to pay for, say online content/video, they may be very willing to pay for the data plan needed to actually consume the content. This could be an entirely new way for startups to actually sell something to consumers who typically expect everything to be free.

What do you think? Am I crazy? Is there anyway AT&T would ever do this sort of a thing? I’d think that the billing would have to be done by the startup or Apple, which is something that AT&T may not like. I also think there is a bit of technical work that would need to be done since the ability to  meter additional purchased bandwidth would have to created.

Mark MacLeod just put up a good piece on metrics SaaS companies should track.

One of the co-founders of my company recently posted his thoughts after attending the Startup Lessons Learned conference, from the perspective of a startup product manager. It’s worth a read!

I have just re-read for the third time Steve Blank’s awesome post on business plans vs. business models. I have been thinking about something writing along a similar idea for quite a while, but obviously don’t have the same level of experience as Steve Blank! However, since I’m currently living this I feel like I can justifiably write about it.

My startup, OfficeDrop, doesn’t have the traditional 30 to 60 page word processor written business plan. We’ve written a lot down, but haven’t created a traditional 60 page business plan to supposedly guide our growth. And the writing we do do is usually done in a slide deck.

Steve writes about capturing a business model on slides. We’ve sure got a lot of slides! They are a good way to put our thoughts together and communicate them with each other and our investors.

I think the most important document in our startup is our financial model, which is build in a spreadsheet. It “memorializes” our assumptions and contains our results from operations. (I say memorializes in quotes because our assumptions change pretty quickly.) I call it our “business model.”

I prefer spreadsheets for business models, probably because of my financial background. I like the ability to put the important assumptions into a “living” sheet, so that when an assumption is changed the entire output changes and then compare actuals to our key assumptions. You don’t quite get that flow in a PowerPoint presentation or a Word doc.

We need to know how much experimenting we can do with our current pot of cash. We also need to carefully monitor the cash we gain from our revenues. As the marketing guy, I also need to understand the cost of acquiring a customer and how much they are worth – (stuff like churn rate and average monthly revenue per customer really matters to me.) A spreadsheet allows me to automatically update at the end of each month and compare against the assumptions. Oh yeah, and understanding the initial cash flows of our startup is pretty important. Spreadsheets do that, not Word docs or PPT.

Spreadsheets do have problems capturing some of the pivots a startup has to do. For example, we have just release a free desktop scanning software download that helps get paper scanned directly into Google Docs from most standard scanners. This is a pretty big departure with our current model of providing subscription scanning services and online document management. But it is a test that plays off our all of the technology we developed and all our experience in cost effectively scanning small batches of paper documents.

What is the problem with a spreadsheet as the basis for a business model during a pivot? Well, I think we understand the costs of launching our desktop software, which are captured in the spreadsheet. But the upside is a lot more complicated. The issue I find when introducing a potentially major change in a business model captured in a spreadsheet is that it takes a freaking long time to create a legitimate Excel model vs. a legitimate potential strategy captured in a PowerPoint slide. But as we test our assumptions and generate data, I’ll be sure to fill out our spreadsheet and see where the chips are falling.

On a side note:

I do think business plans have a purpose and could be useful for a traditional set of startups. If I was launching a restaurant or a law firm, I’d probably write a business plan. Obviously I like to write, and putting things down in a structured business plan could be helpful when business innovation is less important than finding a way to make an existing business concept work. The nice thing about a lot of the business plan templates floating around is that they are a bit like Mad Libs for starting a business. But I’d still build a financial model spreadsheet!