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Tuesday, April 29, 2008

Working for a Starup - One more take

In a previous post I talked about the opportunity costs of quitting what you are doing now and joining startup. If you evaluated the total costs and the possible scenarios and decided that joining the startup gave you the highest expected value over other options including staying in your current job, then consider this.

Would you consider then a new scenario? Here, instead of quitting your current job and joining the startup, you invest an amount equivalent to the total opportunity cost and you continue in your current job. With opportunity costs, it is not an accounting cost and you won't see that as a line item, but now I ask you to take a loan out for that amount and invest that on the startup. This cannot be worse than the one you chose and could be better sine you keep your current job and cash flow.

Pushing this further, if you look at this as an investment decision, what other investment options are available and how does this one compare against the rest? Does the startup still provide the maximum expected value?


Why or why not?

Do you see inconsistency in this argument?

Why are they selling?

Are you considering buying a franchise or a local business from a previous owner? Are you trying to break from your daily routine job to start a new career as a franchise owner? First consider this:

  1. If this is a profitable business, why are they selling?
  2. What do they know that you don't about the growth trajectory and risks?
  3. Why do you think it is going to be different in your case and you will turn the business around and make profit?

Featured: The Business Catapult


Newest member in Boulder Net, The Business Catapult.

The Business Catapult is dedicated to improving the early stage investment marketplace by bringing standards and efficiencies to what has historically been a time-consuming and expensive process. We are not an investment group; rather, we provide the tools and infrastructure that allow entrepreneurs and investors to find each other.

The Business Catapult will soon release an online service for connecting entrepreneurs and investors. This service is in final testing, and is available to a limited number of test program participants. When testing is complete, near the end of the first quarter of 2008, we'll release this service.

In the meantime, if you are interested in participating in our test program, or in being one of our initial users, you are invited to log on and try out the application process. If you are interested in participating in our test program, please also drop us a note using this form.

Monday, April 28, 2008

What Angels look for in Startups

In a previous post I talked about what VCs look for in a startup. Factors like clear understanding of competition and business skills are considered more important than the specific idea that is being funded. Business Week talks about Angel investors and their methods. Angels have become more organized than ever and use the same decision criteria as VCs:

  1. What is the market opportunity, barriers to entry, and business model?
  2. What's the company's competitive edge?
  3. Is there an exit strategy?
  4. What is the entrepreneur's background?
"The biggest fallacy
is that 98% of people think if they have a wonderful technology the
business will take care of itself," says Holdren. "But the character of
the entrepreneur is more important than the technology."

Sunday, April 27, 2008

Boulder Salary Data from SimplyHired.com

The salary data are from SimplyHired.com

Web Developer: 88K
The average salary for web developer jobs in Boulder, CO is $88,000. Average web developer salaries can vary greatly due to company, location, industry, experience and benefits.

Average salary: 49 K
The average salary for jobs in Boulder, CO is $49,000. Average salaries can vary greatly due to company, location, industry, experience and benefits.

Does a President Control the Oil Price? A reply to BCBR

In Boulder County Business Report blog, David Clucas says

So who do we "thank" for the higher oil prices that ultimately fueled the green movement into fifth gear? I think we should thank Bush.

The president got us into a nasty Middle East war in the heart of world's source for oil. That's spooked the region, but fueled investors who ultimately control the price of the commodity. The President also is politically friendly to the oil industry, helping comfort those investors. As real estate and the financial investments collapse, more investors have flocked toward oil as a "safe" investment, driving the price further up.
It is editorializing, bordering on ad hominem attack, to attribute the results of market forces to one president. David further disagrees with increased demand from China and India and goes on to predict $65 oil per barrel when a Democrat takes over as the president.

If you do not think the current oil shock is due to increased demand from India and China, Krugman (in his NYTimes blog) points us to look for the inventory buildup. He asks where is the inventory due to a speculative run? Any significant drop in oil prices like the one David predicts will increase the demand considerably, driving the prices higher again.

What is the other reason contributing to higher prices in US? The weak dollar. That can be attributed to both lax monetary policy and a bad fiscal policy (tax credit and war spending). The increase in interest rate due to the above leads to weakening dollar which makes the oil imports more expensive. But a weak dollar also helps increase net exports.

I do not think any one President can do so much damage or so much of improvement like $119 to $65 oil. For his claim to be true, not only should all the hoarded supplies be released but also the dollar has to strengthen considerably from its current levels. The latter would increase our imports and hence shrink the national income.

The market forces are driving the oil prices. Higher oil prices are here to stay.

David does have a point on linking Oil prices and Green movement. Professor Mankiw calls this the Pigouvian tax. I will discuss this in another article.

Other article of interest: McCain's Gas Tax Vacation
Economist Nordhaus explains the effect of Oil shocks on the economy, in his paper, "Who's afraid of the Big Bad Oil Shock?"

Boulder County Business Report Website Hacked?

I get the RSS feed from the BCBR and display it on the right sidebar.
I found a series of entries titled "hacker indonesia rulez". Once I reedited the Google Gadget it came out alright. A Google search for "hacker indonesia rulez" gives the BCBR site as the first two results. I wonder if they already know about this.

This makes it a strong case for organizations and small business to pick a more secure web hosting service.
I captured a screen shot of the Google search result.

Saturday, April 26, 2008

Looking for an Idea or a Partner for your Startup?

Nicole Glaros who blogs her ideas at NearlyNicole has an idea and is ready to join forces with a developer willing to start a venture. Nicole is very practical in recognizing that there is nothing sacred about ideas and readily shares her ideas with others. Compare this to most people who wants you to sign an NDA for even a coffee chat.

Nicole's idea is to create a hosted solution for shared file storage with security, synchronization, collaboration and Tagging.

Friday, April 25, 2008

Problem with Changing the ways of people


A Boulder based startup PublicEarth is in stealth mode and claims in its website,

"we are changing the way people create and use information about the world around them, using the internet and location-aware devices"
Granted they cannot say much now about what they are doing. I mean no disrspect to the good folks at PublicEarth. But the problem with changing the ways of people is, it is a long and hard process and since there are no barriers to entry for developing solutions like these, many people believe they can change the ways of people as well. What is my change cost? How will this product offset this cost?

Shouldn't there be a product that improves the value we generate by creating and using information rather than change the way we create and use information?

Slice of Pie


In a previous post I talked about value addition. So how to find what value you add?

On the left is the size of the pie without you.
On the right is the size of the pie with you.
The difference is your value addition.

But the question is how much of this do you get to keep? Is that small slice that is missing is all you get or is it the remaining piece?

Steve Wozniak on his Entrepreneurial Journey

Steve Wozniak spoke at UC Berkeley this Tuesday. Here is a link to the video recording (Real Media). There are two quotes that sound idealistic but are rooted in reality,

  1. " it seems wrong to charge $6 for something that costs 6 cents. Shouldn't you tell your customers that it cost you only 6 cents". Yes Woz is correct. If you are simply acting as a middleman between a 6 cent supplier and a $6 buyer, you are not adding any value and your customers will soon figure this out. You credibility takes a hit. It is different however when you indeed add value by creating something better from the 6 cent components.
  2. " not every startup can become Google or Apple, but you have to keep trying"

Thursday, April 24, 2008

Why join a startup

I wrote two articles, one on what you need to know about the startup before you join and the other on how the discipline of business thinking matters more than the idea. Here is a simpler advice that I received in a conversation with Professor Rashi Glazer of UC Berkeley, on taking any job i general:

First ask yourself, do I want to want to work for the company that wants me? Why do they want me? What value can I add to the company? If you cannot figure out your value added, ask them how you can add value. If there is no value added, why take that job?
The other thing to keep in mind is, you don't work for the company, you work for your boss. How do you think you will make her/him look when they hire you? If you cannot make your boss look good, what is the point?
The other advice I received is from Lynn Upshaw, another marketing processor at Haas School and a Brand Consultant.
There are things you need to care about joining a startup for your first job or when switching careers. In a small shop you do get to do a variety of things. But you have to ask who is around me who has been down this path and can teach me. If you have no one to learn from within the organization and you are learning from outside as you execute, you are not learning much. For all the bad rap on large organizations, they have lots of people who have been this path a few times. If you reach out to the right people you can learn a lot faster.

Wednesday, April 23, 2008

Wal-Mart REIT - Addressing the State tax issue


Boulder representative Claire Levy, a Democrat, wants to stop Wal-Mart and other companies from deducting real-estate expenses they're paying to themselves. The Wall Street Journal explained how this works:

The arrangement takes advantage of a tax loophole that the federal government plugged decades ago, but which many states have been slower to catch. Here's how it works: One Wal-Mart subsidiary pays the rent to a real-estate investment trust, or REIT, which is entitled to a tax break if it pays its profits out in dividends. The REIT is 99%-owned by another Wal-Mart subsidiary, which receives the REIT's dividends tax-free. And Wal-Mart gets to deduct the rent from state taxes as a business expense, even though the money has stayed within the company.

All legalities aside, I see the root of the problem in the difference in the costing for GAAP accounting and tax purposes and costing for economic decision making. One key economic cost component, Opportunity Cost, does not figure in the GAAP and Tax accounting. Looking at Wal-Mart's plan to pay rent to itself and claim state tax deduction, this seems acceptable from an economic perspective.

It does not matter whether they own the property or not, they have to account for the opportunity cost of investing the capital in the real estate and using that property for its retail purposes vs. other opportunities for the capital or for the property like renting it out to others.

An alternative to the current tax bill by Rep. Levy is to consider a "Carbon Tax". Instead of levying state tax on the corporation's income, the state should tax the former's operations that impact the land and environment. This is equivalent to state recouping the Opportunity cost of the land and the environment being used by a store as opposed to the next best alternative.

What do you think?

Monday, April 21, 2008

Doc, Can you save our business plan?

I wrote this post on startups and business plans in my school's blog :


Glazer: I just told you what the problem is. Your market description and competitor section do not agree. Any market that is growing at the rate you describe is going to have competitors. Saying there is none convinces the VCs that either you did not do your work or that the market isn't really there. If you think it is indeed a new product with no competitors think about the substitutes. No one is going to believe you when you say there are no competitors. When there are no competitors there are no customers too.

Friday, April 18, 2008

Recession fears

From The New York Times:

In the suburbs of Denver, Max Garcia was netting as much as $2,000 a month last year as a self-employed computer repairman, he said. As recently as November, he was still receiving three and four calls for help a week. But since early February, calls have dropped to one a week or fewer, he said.

“Everybody’s getting tighter,” he said — himself included. With his income cut in half, Mr. Garcia, a single father, no longer takes his two young daughters out for fast food, he said. For clothing, he now goes to secondhand stores instead of the mall. For amusement, he visits the park instead of the museum.

“We spend more time at home,” Mr. Garcia said. “We don’t drive anywhere we don’t have to.”

Thursday, April 17, 2008

Investing in the thinking process not the ideas

In the last post I asked whether VCs invest in startups based on the pedigree of the founders. That is not the right question. Definitely pedigree reads like a pejorative term. Professor Rashi Glazer of UC Berkeley says,

VCs do not invest in the current idea you have, they know the statistic that 80% of the funded startups ended up doing something different than what they were funded for. They invest in the business process and thought process the founders demonstrated and they know that the right thinking process will allow the founders to adapt when the situation changes.

In a way it is people the VCs invest in, because the thinking process cannot be separated from the people but it is not tied to just one set of people. Your past victory gives you the benefit of doubt.

Wednesday, April 16, 2008

Startup Strategy

In the Web2.0 world there are many ideas that are slight variations of the same. This variety creates excessive fragmentation of the very small lead users and the large middle is in no hurry to take sides, they wait around for consolidation and a clear leader with critical mass to emerge.

So what creates the next YouTube? Is that strategy? Network effect? First mover advantage?

Do startups need a strategy?
Or more specifically do they need one to be successful?

In the Web2.0, Social networking, free business model wave, can a startup succeed without a strategy?

Strategy is creating value by unique positioning.

If you take the list of startups that apply to Techstars or participate in Startup Weekend, they all perform similar activities in almost identical ways implying that their positioning is very similar with no discernible unique value. So a winner, if any, among these is determined by the pedigree of the founders and by the operational efficiency of their current startup.

Is this the right approach to select a startup to fund?

Sunday, April 13, 2008

Boulder Net In the Long Tail

(Click on image for bigger picture)
Since the LinkedIn group Boulder Net required a web page I created one using Squidoo. Squidoo was started by Seth Godin, a well known author on viral marketing (and a Stanford GSB MBA). Anyone can create a Squidoo web page on a topic like, Boulder Net, or cooking, hiking etc. It is exactly one page and Squidoo calls this page as Lens.

Lens/Page creation is extremely easy and it allows me to add content through RSS feeds. There are probably 400K or so lenses on Squidoo. When I first created the Boulder Net lens on March 31st, it was ranked at 47K. Today is is about 22K. There are two other links (I added both) coming from outside to this lens, and I visit this lens once a day to add some RSS feed. The visitor statistics show utmost 1 visit/day over the past two weeks. Yet the lens rose in rank. This means there are at least 25K pages that do not even get 1 visit per day, get edited or have external links. For the others that are lower than 47K it is probably much worse.


Talk about the long tail. The tail for lenses seem to start at close to 100-500 with a length of 399500. The Tail to Head ratio is about 790 to 3995!
Boulder Net is proud to be in the tail.

Saturday, April 12, 2008

Digital Signage Network in Boulder



PhotoVu a Boulder, CO Digital frame maker rolled out a Ad network in Boulder, CO. The WiFi enabled Digital frames can display JPG but otherwise limited in their features. The displays, now seen at Wahoo Fish Taco, lets the retail owner display Ads about its own business and other local businesses.


"... we’ve decided to formally enter this market by opening a new Digital Signage division and rolling out our first network in downtown Boulder, CO. This will allow us an unprecedented local test-bed in a tightly confined geography to further refine our technology and service offerings before rolling out into other major metros later this year"

The cost to the retail owners is zero and PhotoVu's equipment costs will continue to drop with expansion of the feature set of these digital frames. The operation can scale really well to any number of displays and networks.

There is also immense possibility to build a Google AdSense like auction framework for the Ad displays. Consider the case where the local and non-local businesses know exactly the type of people who will be watching it at different times of the day at different locations. With this profile they now can fine tune the product being advertised, the Ad format, length etc. For example, for a Wahoo near a University, the Ads could all be for Gen Y products and delivered in format the always on and mobile kids understand and act. With this level of targeting, advertisers would vie with each other to get their products in front of their potential customers. This competition can easily be turned into a profitable bidding structure that is not much different from AdSense.

While the possibilities are amazing and endless, there is nothing technically complex or unique about this. The barriers to entry come from the size of the firm offering such a bidding network and its pedigree. This has to be done one local business at a time or by signing up large franchises like McDonalds to have this display in all their stores. The former leads to fragmentation and slow uptake and the latter requires a big brand name behind such an Ad network.

It should not be a surprise to anyone if Google entered this arena and quickly captured the entire market.

Friday, April 11, 2008

Race and Case Competition: Daniels College of Business

Once again a few of my classmates (not the same bunch as the Leeds case) to Denver participate in the Race and Case competition conducted by University of Denver, Daniels College of Business. So you race down the ski slopes of Vail and solve a case at the same time (well not quite). Here is a link to a post on their experience in Denver, participating in the competition:

The case question centered around whether a union-oriented pension fund should divest a holding in its portfolio that was exhibiting objectionable labor practices.
...
and the company’s management team – to reap long-term benefits. We took a creative and relatively unique stand, which helped us get selected as one of four teams out of 12 to participate in the final round of the case competition. After the second round, we ended up taking 3rd place, behind Brigham Young and Vanderbilt.

On the Leeds School of Business Case Competition

A few of my classmates participated in the the Leeds/Net Impact Case Competition at the University of Colorado, Boulder – focused on a leading internet infrastructure firm moving into green business. Here is a link to their experience in Boulder:

Did we win? Well, let’s just say that none of the three Haas teams that qualified for the top 20 semifinalists advanced to the final round. Haas was recently ranked #1 and #2 in CSR, so my guess is that our ideas were just too advanced for the judges to understand.

Patent Protection

You have a great idea for a product, you believe this will have a big return when developed into a commercial product. The problem is this is a neat but simple idea that anyone else can copy and reproduce. If they have better resources, supply chain management and sales force, they can sell faster and cheaper.

Do you think patenting would protect you?

In its fiscal year 2007, the USPTO received more than 467,000 patent applications and ended the year with a backlog of 760,000 applications. In an effort to catch up, the office hired more than 2,400 new patent examiners in the past two years. [EETimes]

The US patent office just ran a competition for MBA students from top business schools to solve the problem of patent pendency.
Patent pendency is the amount of time it takes from the time a patent application is filed until the USPTO makes a final decision as to whether to grant the patent. The backlog is how many patents are currently waiting to be examined. Currently, the backlog stands at more than 760,000 patent applications, and the average pendency is approximately 32 months. Patent offices around the world are experiencing similar or greater backlogs and wait times, due to the rapid growth of innovation and increasing complexity of technology, among other issues.
Do you think your product has a lifecycle of 20 years? 32 months?


Even if you get the patent approved, would you have the resources to go after every violator?
Irrespective of who develops and sells, does the product have a total net present value (across all manufacturers and markets) that exceeds the litigation costs and the opportunity costs?
In other words, would the damages awarded cover the litigation fee and lost revenue? Would the violators have resources to pay you?

If you have the next best drug for the incurable diseases it helps. But if you have an idea that has a short shelf life and minimal net present value, is patenting the right decision?


Would you spend your scarce resources on patenting or on developing and marketing your product?

Thursday, April 10, 2008

Thinking of joining a startup?

So you are thinking of joining a startup. May be you are fresh from school or have great experience working in a big enterprise and want to take a larger role in a startup. Here are a few questions you want to find answers for, from the founders and/or by yourself. As I wrote last time, entrepreneurs by definition have unbridled optimism and may tend to assign a lower probability to certain risks. It is up to you to build a better model.

These may seem like a lot of questions to answer for a job, but think of yourself as a VC, except you are investing with your time (part of it compensated) and opportunity cost.

Market:

  1. Which market is the company's product and services addressing?
  2. At what stage is the market in? Is it growing? mature?
  3. Are these the only players developing such products?
  4. How big is the market? What percentage does the company say they can capture? Is that realistic? What are the probabilities of different scenarios?
  5. How is the company's market share growing since inception?
  6. Who are the competitors? What is their market share? How is their market share been growing?

Products:
  1. What is the product/service? Can YOU explain than in plain English?
  2. Is the company's products ahead of its time? Is there a network effect?
  3. What is unique about the product/service? If they can do it why not many other people can do the same?
  4. How is the company differentiating their product/service from the competition's? How do the product/services compare to competitor offerings?

Customers:
  1. Who are the customers?
  2. What segments is the company addressing? Is the segment growing? If the startup is offering products for a shrinking segment, you can make a prediction about their growth limit.
  3. How do these segments make purchasing decisions? What drives their decisions? features? quality? price?
  4. Is there a customer? Can you find out from them what they think about the products? Startups usually have early adapters, can you find out from your network?
Business Model:

  1. How is the company making or plan to make money?
  2. Do you think this is sustainable and scalable?
Marketing and Sales:
  1. What is marketing and brand strategy?
  2. Who is selling the product? What are their qualifications?

Finance:
  1. How is it currently funded?
  2. How will it be funded in the future? What are the sources and what is the probability of getting funding from these?
  3. What is its current cost structure? i.e what are the expenses? Is that sustainable?
  4. Is the company leveraged heavily?
  5. Can they generate capital to make big investments?
  6. Are they cash flow positive? Is more cash coming in than that goes out?

After all this is your career decision. When no other information about a privately held startup is available, you have to do the legwork.

Tuesday, April 1, 2008

It is different in my case ... Self Bias

Before you make the big decision to quit your job to start your own venture or to move to a different city to start fresh, be aware of the highly biased opinion we have about our abilities. The very trait that defines an entrepreneur, unbridled optimism, works against them preventing them from interpreting the data in an unbiased manner.
Wharton professor Gavin Cassar says,
"It's been shown in many studies that people are overly optimistic. Individuals form an inside view forecast by focusing on the specifics of the case, the details of the plan that exists and obstacles to its completion, and by constructing scenarios of future progress."

Even when the entrepreneurs use metrics and accounting systems to budget and forecast, their self bias make them overestimate the opportunities and diminish the risks. As Cassar says, "it is important to recognize that financial projections of success are merely projections based on beliefs, which are sometimes based on overconfident or optimistic assumptions".

The other aspect that leads one to quit the current job and enter self-employment is due to incorrect estimation of costs, more specifically ignoring the opportunity cost of doing so. Focused on the earning possibilities and the project cost of making those earnings, individuals ignore the income they were leaving behind and whether the new income compares well against what they were letting go. The opportunity cost is not just your pay check, it includes the health insurance,4 01K matching, holidays and vacation pay and other fringe benefits.

The question is, when the startup bug bites you would you recognize the need to do the costing and earnings estimates right?

Featured Startup: LogRhythm

InformationWeek features Boulder's LogRhythm in its April issue. Founded in 2003 by Chris Petersen and Andy Grolnik, LogRhythm delivers software for interpreting your raw data.

By automating the collection, organization, analysis and archival of all log data, LogRhythm enables enterprises to easily comply with log data retention regulations while simultaneously gaining valuable, timely and actionable insights into security, availability, performance and audit issues within their infrastructure.

The field of of analysis is crowded and there are many open source options. The challenges are in developing the market and educating the customers that they need such a tool. Customers need to see the direct relation to revenue from a log analysis tool. "We show them other ways they can use the product, and the ROI goes up," Petersen says in his InformationWeek interview. The bigger problem is making sure the right type of events are logged so they can be analyzed for decision making.

There is a big opportunity to offer log analysis in Software as a Service (SaaS) model. End users will have less resistance to use the analysis tools on a per use basis instead of investing in one. There is no need for ROI calculations and depreciating the software cost over years and worrying about installations and upgrades. If the platform and APIs can be standardized, individual developers can add value added components that end users can 'rent' on a per use or per month basis. I do not yet know of a log analysis tool offered in SaaS model.