Recently, I met a young lad trying his luck in start-up business. At first, his idea intrigued me because I couldn’t understand it. So I decided to catch up with him at a later date. What I concluded, even after the follow-up, was that he is months away from finalising his idea, let alone getting invested, which is what he wants. I couldn’t quite tell him that he is nowhere near where he thinks he is.
After a little while, I started to see some of my early years in him. Quite a random idea, but was convinced that he has found the unique idea that addresses one of the biggest challenges, perhaps in his immediate surrounding. So, I decided to correspond with him and give him some advice on some of the key questions he has been stuck on. It made me realise something. Although I try to achieve high efficiency in my work, once in a while, I need to introduce inefficiency. I sometimes need to waste time, even though I am overwhelmed with work.
It’s important for me to waste time once in a while because of 2 reasons. 1) I never know what’s around the corner and hence I don’t know if it is actually a waste of time and 2) even if it is a total waste of time, it confirms my believes and suspicions. So, what this lad did for me was, unexpectedly reminded me of my young days and the actual necessity to spend some time on your idea. Follow it through, seek advice, realign the business plan, seek stimulation and don’t be afraid to make mistakes.
Even though I am not convinced of this lad’s business, I am optimistic about this lad achieving his goals because he is acting like a sponge, ready to make mistakes and learn, some of it from me. So, I recommend to everyone that once in a while, you need to waste time, on purpose. Treat it as a genuine opportunity, with respect, and perhaps it won’t feel like a waste of time.
I couldn’t resist writing this short note today as I watched the BBC news coverage on the list of possible outcomes if the highly educated bankers can not figure out how they got to this mess, what the exact current status is and what they are going to do about it. I personally think that events like this is going to make the start-up community thrive. This is why.
The intention was good, but...
Supply & Demand
We, helped by the exaggerated media coverage and focus on a few nodes on the timeline are led to believe that the reason for the difficulties we are facing are due to one single problem. A good example of this is that, in Japan, the Credit Crunch in 2007/8 is referred to as “Lehman Shock”, as if Lehman Brothers single-handedly brought down the global economy. By the time these large problem manifest themselves in such a visible and catastrophic way, there are more long term and fundamental reasons. As with any business, it is always, I mean always, a question of Supply and Demand. Bankers provided reckless products because there was a demand. No matter how much I detest manufactured low quality pop music, as long as there is a demand, people (including talented people) will continue manufacturing this. We see this phenomena in the start-up industry too. Accelerators continue to churn out “entrepreneurs”, because there is a demand for more entrepreneurs.
Rising Private Equity Amount
The signs are there aplenty to suggest that consumers are genuinely demanding innovation, unique and actually intelligent products. At least, I believe (hope) so. I will admit that not all entrepreneurs will go on to produce things that actually contributes to the progress of humanity but in a way, we need those too. The more competitive their operating environment is, the better their product becomes. Let’s not forget, also, that when the financial markets are in a turmoil, investors tend to pull back and keep their money close to them. That part is not particularly encouraging to start-ups requiring investment. If your profession is Investing, however, it becomes harder to find a good investment ideas. The good news is, they would eventually have to invest, mainly because that is their job.As pointed out by Pitchbook.com Quarterly Report, there was a phenomenal growth in Private Equity deals this year in US. In fact, since 2008, there has been an increase in invested amount every year and this year (Q1 & Q2), we have seen more amount invested in IT Private Equity deals than all of last year.
The Timing
I think that timing is perfect to be thinking about starting something up. It is not to say that it is easier, but demand for good products is higher and many investors are keen to be part of it. This is why, we at NeuralM are very optimistic about this industry and are very excited to hear about more crazy ideas.
Although no two businesses are alike, the stories of those that are successful and those that aren’t, start to form a common theme. As a part of this series “The Risks of a Start-up”, I want to discuss the issue of unrealistic overhead.
There is no right and wrong, but still some get it very wrong
Ambition, not recknlessness
So, at which point does an ambitious growth plan become a reckless plan? I once knew a start-up that declared itself a bootstrapped company while it kept pouring tens of thousands of dollars each quarter for about 2 years. They have stretched the term “bootstrapping” to the extreme. The only thing that was bootstrapped about that company was their revenue. The CEO was a firm believer that in order to make it big, you have to think big, including the spending.
Start small
Start small because you can always scale up. It is always difficult to scale down the spending and this is even more so for a start-up because you have less to fall back on. I always recommend that start-ups write a business plan as early as possible because it helps them think through the small details of the business. No business plan is complete without cash flow projections. The aforementioned start-up simply committed to substantial fixed cost even before knowing, even vaguely, how much this company was going to make.
The numbers
Even if you are a rock star hacker, numbers have to make sense. Overheads should be a function of revenue. If your current monthly revenue is $1,500, your spending needs to be below that (while you are bootstrapping). Sounds condescending? When you win an award or get very positive feedback from your group of friends, apparently, it is very easy to be convinced that it is ok to hire the best developer and buy the the best equipment based on the assumption that revenue will pick-up substantially, followed by the inevitable investment. If you ever want a reality check, by all means talk to your mentors but please take a long hard look at the numbers. Never give up the dream but in order to keep it alive, don’t put yourself in a situation where you don’t really understand why your overhead is substantially larger than your revenue.
Before becoming a start-up consultant, I used to work in the energy industry. To be more specific, I helped large companies with over $100 million energy (or fuel) budget manage their price risks. One of my favourite customers were airlines. Not only because I wanted to become a commercial pilot after graduation but also because they operate in a truly cutting edge field, a fiercely competitive market and with high stakes.
The gorgeous B787
The level playing field
I don’t think there are many industries operating in the similar conditions as the airline industry. The planes, seats, fuel, meals, airports, crew (certification), booking systems etc are all standardised. Even if they want to push the boundaries, it is one of the most strictly regulated industry preventing you from operating the airline in non-standard ways. Thanks to all these rules and standardisation, it is a very safe mode of transport, providing the abilities to millions every year to expand their horizons, conduct businesses and meet friends and families. Unless you live on a remote island, most of us usually have an abundance of airlines, routes and combinations of them, when taking a trip abroad.
The Packaging
What is the decision making process when purchasing a ticket on a highly competitive route? The airline, departure time, cost, duration, connection and even the lounge are some of the details that we go through when deciding who to fly with. So, what does the “best product” mean in the airline industry? It is probably the combination of all of these things. Most of us do not care what aircraft you will fly, how many flight hours the pilots have, the cruising altitude, the fuel supplier etc and the industry has learned this point long time ago. The typical customer does not care about these things. Rather, the industry concentrate on the packaging. The things that doesn’t cost a lot of money yet they seem to have a huge impact on the profitability.
Value Proposition
The lesson I take from the Airline Industry is the ability to create value proposition from a seemingly impossible situation. In the aviation industry, through packaging, a few airlines have successfully differentiated themselves from the rest, even if the entire trip experience is technically the same. Through innovation, you can package a dull experience, like a 12hr flight in the economy class, seem sexy. Imagine a situation where British Airways and Virgin Atlantic offered the same price for the same long haul route. An easy choice isn’t it? So, go on and give the customers what they want, not what you want to give them.
I was in a very strange setting (an enjoyable one nevertheless) recently during a holiday in France, with my family and friends. One afternoon, we took a break from the countryside, the fantastic food and wine and decided to checkout the local fishing pond.
I’ve been to 3 fishing ponds in my life before this one, with varied success each time. What I saw and the comments made by my friend, who has been to many fishing ponds, was a reminder how simple things like fishing can be very contrasting from one country to another, with almost the same result.
Let's go fishin'!
The best fisherman
We were based next to a family with 4 kids. They all had their own rods, chairs and a few other essential gears. After a few minutes, it was obvious that they do this often and each time one of the kids catch a fish, the father barks commands at the kid, telling him what to do. This made me smile and reminded me that I was on a peaceful vacation. What was really fascinating, however, was that as far as I could tell, the father caught no fish while I was there and the mom kept on catching these magnificent trout one after the other. I was surprised because of her style of fishing. To me, she seemed like a super-mom. She was looking after the children while sipping wine, making baguette sandwiches and eating them, talking to her neighbor family (not us). Once in a while, she would shoot a glance at her float and her children’s and see if all the floats are still floating. If one of them is missing, she would shout the kid’s name or if it was hers, puts down her glass of wine, calmly walk over to the rod, and picks up her rod calmly. She would simply reel the fish in, remove the hook, re-bait and shoots again. It was almost like part of a shopping trip.
Not very stylish
I was watching the others fish too. One thing that distinctly lacked from the scene was the stereotypical fishers’ style. I don’t remember seeing anyone there with one of those fishing vests, rod rests or other fancy gear. A chair and table perhaps. Like the family next to us, they weren’t particularly paying too much attention to the fishing. They were there with their food and drink, cigarettes and friends and were generally there to enjoy the weather, friends and their wine. Once in a while, one of them will catch a fish and calmly put their wine glass down and reel it in.
Getting the job done
In my view, one of the typical characteristics of a French person is, their nature of getting the job done whatever the circumstances and style. So, watching these very relaxed anglers, I thought to myself, let’s just get it done. Yes, I understand that there is an art-form in the “how” part of any process but I, like the French casual anglers, tend to think that the end result is probably more important than the process. So, if you are stuck for ideas how to sell your ideas and the products, I don’t think the customers (the fish) particularly care about things like who you are, where you are and your experience level, so long as the bait is right, the proposal is communicated well to them and you stand out from the crowd.
Web marketing
When you are marketing in a very competitive space and you don’t want to leave the success to luck, let’s think about the package. Is the bait right for the fish and the setting (Marketing and USP)? Are you sure you have hooked the bait correctly, not showing too much of the hook nor letting the fish take the bait without getting caught in the hook (Monetisation and Retention)? Have you chosen the right space and targeted the appropriate fish matching your muscle power (Business Development)? One thing I re-learned also, was that, even with the perfect equipment and set-up, you will always need patience.
This is an area I often discuss with start-ups because the digitalness of the start-ups is frequently misunderstood or even completely missed.
“We believe that our passion will bring success eventually”
“We don’t think that we want to dilute our company too much”
“We are not in it for the money only”
“This product is my baby”
These are the statements I hear often amongst the start-ups. I have no disagreements with these statements specifically, but I want to talk about misalignment of interest and expectation amongst start-ups and the inability to make purely logical decisions on what is supposed to be a logical process.
Is your business in "1" or "0"?
Digitalness
In the world of financial derivatives, there is an instrument called Digital Option (aka Binary Option). It is called that because the payoff characteristics is either “on” or “off”, 1 or 0, it pays or it doesn’t. Options are also instruments whose payment is triggered by an event, such as price of oil reaching a certain level, default on loan payment or any other trigger that can be quantified. So, when I talk about the Digitalness of the start-ups, it is about the necessity of certain “events” that need to take place for the business to become “1”, from “0”.
The Events
So, what are these events that can act as this trigger? Examples of these include;
Funding
Advices and Mentors
Various Expertise
Collaboration
Critical Mass
Economic Climate
Media Coverage
Idea/Inspiration
Team formation
Each of these events (and many others) can make or break a start-up and indeed make “1” from “0”. Many entrepreneurs I talk to have a good idea how and when they are going to make their business to a state of “1”. They seem to be well informed of how others did it and try to follow the proven methods. Regrettably, far too often, I come across a situation where the entrepreneur just does not understand that they may not be in the position to choose which event is their “event”. For example, a founder of a Web 2.0 company I once knew had a fantastic product with fantastic team behind him. He also had a very good idea how he thought he would get funded. Because he waited for the ideal investor to come by for too long, the prime time for the angel investment came and went and he is now forced to revert to bootstrapping, which is extremely difficult once the business has been geared up for VC investment. You would be very lucky to be able to choose the “event” for you. They often choose you.
The business decision
In my view, however wonderful your product is, unless you become “1”, it is no more than an academic exercise. If you once made a conscious decision that you are going to brave this tough world, putting your idea and product out to the world in return for financial reward, it is a business decision. This may not be the case if you are only after recognition and awards, but most entrepreneurs would not say no to financial rewards, which means that almost all entrepreneurs are in it as a business challenge. So, the decision is, do I need to exploit this “event” to turn my business into “1”, then there really should be no reason not to act on that event. Even if it is likely that without an investment from a certain type of VC, the growth of the business will follow a slower path or into a slightly different direction, these outcomes are both “1”. Not getting invested and waiting for the ideal event to occur is an extended period of “0”. The question is, can you afford it?
For the first blog of this series (The Risks of a Start-up), I wrote about “the idea“. Now let’s assume that the idea is perfect and you are ready to flesh everything out or even launch the service/product. In most cases, even the most experienced entrepreneur will have some apprehension at this stage. At various stages of a star-up, you seek opinion and feedback from clients, investors and family & friends. Although these are usually very valuable form of input, let’s consider the traps many entrepreneurs fall into.
did someone say, "bigger wheel pls"?
The Positives
In some ways, this can be the most valuable variety of feedback, but it also depends what is “positive” for you. Positive comments do wonderful things to entrepreneurs. Let’s consider a comment such as “the UI is brilliant”. My advice is not to take this as an encouragement to tweak your UI, aiming for more glory. Let’s take it at a face value and use such comments in your “buzz” page for marketing purposes.
The Negatives
Always read the negatives very carefully, because these are the people you must win over. It is true that there will always be nay sayers and you can not win them all. If these unconvinced patrons left you a message, then this is a golden nugget. In a way, it is your tip-sheet for the next upgrade. What I would like to advise is that, do not listen to every little comment. The point about feedbacks is not to understand the personal preferences of each customer you come across, but a representing comment of your target audience. So, analyse the feedbacks and work out what the common theme is. That is the area you would work on. Chances are, if you totally eliminate the “sore point” the clients are pointing to, the new version is likely to be a dramatically different product. I have seen many products becoming quite boring and “average” as a result of over-compensating for the negative feedbacks.
When are you most likely to be over-compensating?
You are looking for more clues from feedbacks than your own creative team
You are pivoting every a few weeks
You are constantly seeking approval of a single person
Your product is becoming undistinguishable from your competitors
So, it is one thing to admit that your assumptions were incorrect and the service/product needs to be tweaked. It is quite another to take each feedback at their full face value and try to satisfy each client. When someone says, “I think your product needs a bigger wheel”, he/she is not saying “go and get the biggest wheel”, unless you are claiming the title of the “biggest wheel”. Instead, the client might be saying, unknowingly, that you need a smaller body to match the existing wheel size.
My father had a business in Japan. It was a trading company specialising in textiles and water technology. As a foreigner in Japan, he had to go the extra mile to achieve probably the most important milestone; trust. In this new series of blogs, I will cover the subtleties that make Japan what it is.
"Shin-yo" (trust)
Trust
I think, simply put, this word has a whole different meaning in Japanese businesses, compared to US and Europe (the “west”). New or old, east or west, businesses rely on trust, especially amongst small companies. Let’s talk about the practicalities of this trust. In the West, trust tend to have a smaller role to play and many transactions take place and contracts executed without any trust at all. Online skill matching sites such as guru.com or freelancer.com are extreme examples of this. While I am sure the majority of participants on these sites are trustworthy characters, the site removes the necessity to have a contractor/contractee trust by enforcing a payment system that ensures no funds are released if the work quality is unsatisfactory. Admittedly, almost all work listed there are rather mundane and does nor require much experience or qualification. It truly demonstrates the supply and demand of the particular skills required. This kind of site simply does not exist in Japan. For better or for worse, even the simplest of contract requires both parties to assume some trust.
Invoice culture
In Japan, much of the B2C transactions still involves invoices. Many of the products, even for the initial transactions, are shipped with an invoice, which you would pay later at your bank, post office or the convenience stores. This creates a lot of inefficiencies but this system works well in the Japanese society. Unlike the above mentioned sites (Guru and Freelancer), this invoice based culture was not created as a result of supply and demand of the products or the services, but the requirement of trust… business owners trusting their patrons.
No PIN required
When you travel to Japan, you will see some posters warning you to look after your credit card. While Japan remains a cash culture, credit card has been around as long as it has been in most developed nations. What is astonishing, however, is that many of the outlets accepting credit cards do not require PIN or even a signature. Although I can theorise why this is the case, I believe that trust plays a big role. The infrastructure and the technical innovation is in abundance even considering the localisation issue (everything in Japan has to be in Japanese). The business owners are either very trusting people or are forced to that position.
Is it really trust or more like convenience?
By now, you might be thinking, wow Japan sounds like a really trusting nation. Running a business there can’t be that difficult. Or not. The point is, this seemingly trusting nature has its downside, which is that if you chose to practice caution (which can be part of a standard procedure in the West), that can be seen as distrust. For example, many negotiations have fallen appart between the west and Japan when the western counterpart insisted on what they might consider a standard contract to be drawn before either party commit to a transaction. In my mind, and I am sure most of you would agree, that running a business purely on trust is simply reckless, whether you have people depending on you or not. So, if insisting on contracts to be drawn can be seen as distrust, is it really trust they are after, or is it convenience? In almost all cases, dealing with Japanese businesses leave you with above average satisfaction level. There are, however, occasions when things go wrong. Some might ague that this is the precise reason why contracts exist, to deal with unexpected turn of events or disagreements at a late stage in the deal. Even now, the preferred way for Japanese businesses is to deal with such difficult situation on a “best effort basis”.
Shin-yo
If you are considering Japan as your business location, I can reassure you that you would not have much problem with quality of work, delivery time and general satisfaction level of the whole experience, if you are able to accept that “shin-yo” is often seen as the most important part of the transaction.
For more on this topic, watch this space or contact me.
It has been a little while since my last blog, simply because I have been busy setting up another business. At the moment, I am very much interested the process of start-ups with respect to the idea, the technology, the passion, the human drama, the financial rewards and the consumers’ perception of these processes. There is much to be covered, analysed and debated so I would like to start with the very beginning, the Idea.
where do ideas come from?
The Inception
I saw the film, quite a complicated plot, and although I was a fan of this exploratory concept, I hope that we would never come to such an apocalyptical scenario. What I think the film highlighted very vividly is the importance of the origin of an idea. I tend to believe that the fate of all ideas are already decided at the point of inception. This notion assumes that if the idea that seems good enough, planning and strategy follows to materialise this idea and execution takes place subsequently. Although there are no perfect ideas, if the flaws of the ideas are managed and the goodness of the idea is properly exploited, a “good” idea would succeed in one shape or form. That is why it is a crime to waste a good idea. What is equally shameful, is the amount of misguided businesses in the world pouring tremendous resources into “bad” ideas. One could argue that bad ideas are required for the good ones to flourish. I argue that the difference between the good idea and the bad idea is decided at the inception and therefore a bad idea does not turn into a good idea, or vice versa.
The “good” idea vs “bad” idea
Like me, if your mind is constantly churning out ideas, how would you differentiate the good ones from the bad ones? Without being too philosophical, I will try to explain what happens in my case. Simply put, a good idea has more potentially positive output than negative, evaluated with the given parameters at the time of inception. Equally, a good idea should answer more questions than creating them. In my point, the distinction between the good idea and the bad idea is easily made if the initial thought process can be as subjective and logical as possible. This is why most of the bad ideas are conceived in a rush, possibly with a lot of irrational thinking. I know this mostly because I have conceived and spent much time on far too many bad ideas.
Post-inception
So what must follow the inception of a good idea to prove that it is a good idea and profit form this idea? First of all, write it down. If you don’t have a pen and paper, try recording it. Sleep on it, and then read/listen to the idea in the morning. In my case, over 80% of the ideas are scrapped at this stage. Not all of the 80% of the ideas are bad ideas but just not good enough. Some of them are cringe worthy. If your idea survives this important stage, then move on to expanding stage, where you would draw, contemplate or otherwise visualise how this idea will become a reality, or the final product, step-by-step. If your idea survives this second phase, share it or pitch it to someone. The aim of this process is not to validate that the idea is good, but to ensure that it solves a real problem with actionable and deliverable solution.
Risk Management
The safest way to avoid bad ideas is not to come up with any and borrow, or steal others’ ideas that are proven to be good ideas. As with anything else, lowest risk means lowest return. In the tech/software start-up industry, this approach is in abundance. As soon as a new innovator, such as Groupon starts to hit the headlines, “localised” versions start to mushroom up in every corner of the world. The high risk start-ups are often involved in ideas that are not readily validated. There are, however, professionals such as myself and my partner involved in validating these ideas. As an early stage investor, to invest into an untested technology can be very risky and measures are taken to minimise this risk, such as analysing the founders’ track record, and early market traction. Although these steps provide good indicators of a good idea, they are not fool proof. A seasoned entrepreneur is as likely to come up with a bad idea, as an inexperienced one. Market traction at a very early stage can be misleading too, simply because the early adopters of a very new idea are often small groups of risk takers themselves. How do you manage the risk of becoming involved with a bad idea? As with everything else in life, the only proven way is not to cut corners. Seek professional opinion to validate the product, the technology behind it and make sure the team executing the idea are competent enough to convert the good idea into an exceptional idea. All of this process is not new. This is Risk Management.
Shingo Potier de la Morandière 