Category: Business

Why to Start a Startup in a Recession

Water Fountain in Vienna This is one of those must-read essays for entrepreneurs. Paul Graham recently wrote a piece called “Why to Start a Startup in a Bad Economy” that I found pretty damn inspiring. His opening lines:

The economic situation is apparently so grim that some experts fear we may be in for a stretch as bad as the mid seventies.

When Microsoft and Apple were founded.

If you’re feeling any doubt about these economic times, that opening ought to shine a ray of hope on you. A lot of companies have started in tough economic times.

His entry has sparked a lot of discussion too:

  • From Don Dodge: great talent is more available, raising money is still possible (though a bit harder), and supplies are cheap.
  • From Fabrice Grinda: there will be fewer competitors right now, decrease your burn rate, and be patient.
  • From Robert Scoble: have a business model that helps customers save money, diversify your customer base, look for new distribution channels, etc.

All are good ideas and worth considering.

I’ve also got more tips on how your small business can save money during a recession. It’s totally possible, it just requires more operational & financial discipline. And take heart – you could be the next Microsoft (MSFT) or Apple (AAPL)!

How Small Businesses Can Save Money in a Recession

Newstand Speaking of saving & making money in a recession, entrepreneurs can do it too. It requires some financial discipline, but it’s certainly possible. Countless businesses and smart entrepreneurs have done it. You can too.

Here’s how:

  1. Buy Cheap

    Prices fall in recessions. That means it’s a great time to go shopping for cheap supplies, raw materials, and services. Outsourcing sites like Elance and oDesk can help you find lots of affordable contractors. A year ago, I saw software developers on Elance going for $40/hr. Now, the cheapest ones are $12/hr. The downside is that quality can vary significantly. So caveat emptor.

  2. Renegotiate Your Vendor Contracts

    This is a good time to renegotiate all of your vendor contracts for lower prices. Chances are, many of them will be willing and able to lower their prices to keep you as a customer. Try to lock in these prices with long-term contracts too (assuming you’ve got enough in the bank), so you can benefit from these lowered prices when the economy improves.

  3. Hire the Best

    It’s layoff season. That means there will be a lot of good talent on the streets. Look for them and woo them. Do everything you can to keep those smart individuals around, so that they’ll continue being there after the recession. It’s a great time to find great talent.

  4. Learn Financial Discipline

    Tough times call for strict discipline. This is what separates the script kiddies from true programmers, the boys from the men, the girls from the women. Learn how to bootstrap, trim the fat, and make smart choices. Ask yourself how each decision will benefit your business. Don’t just focus on the short-term either, tempting as that will be. The financial discipline you’ll learn now will benefit you when the economy rebounds.

  5. Impatient for Profits, Patient for Growth

    Though this is very counter-intuitive to many Web 2.0 companies, the book The Innovator’s Solution advises entrepreneurs to be impatient for profits and patient for growth. This, in my humble opinion, is great advice. If you don’t have a real business model, you don’t have a real business. At best, you have an “Acquire Me!” business, which is a horrible model, especially in a recession.

  6. Negotiate Your Credit Card Rates

    This tip works for both personal and business credit cards. Lots of credit card companies will give you a lower interest rate if you just ask. So ask! Every little bit of savings can help.

  7. Look Into Recession-Proof Businesses

    Some industries aren’t as affected by recessions as others, such as health care, funeral parlor, debt collection, and repair services. Repair services are good because people want to maintain what they have instead of buying something new. If your existing business can be extended into any of these areas, give it some consideration.

  8. Be Creative

    Be creative about your marketing, your products, and your services. Think outside the box for new customer solutions. As you increase your financial discpline, you should also increase your creative solutions. Perhaps it’s engaging in a catchy PR campaign or creating a viral marketing piece. Or a streamlined development process or distribution channel.

  9. Treat Your Customers Very Well

    If you aren’t getting any new customers, treat your existing customers really well. (Honestly, you should be doing this already.) Any practices you start here could be the start of new customer service practices later. Customer loyalty will come in very handy at a time like this.

  10. Prioritize, Prioritize, Prioritize

    Finally, be strict about your true priorities. What is absolutely critical to you? Every decision you make has trade-offs. If you really want those product features or direct mailers, think long and hard about the trade-offs you’ll be making – more design & development time in creating the feature or more design & supply cost in creating the direct mailers. Make a strict priority list and stick to it.

Another benefit of a recession is seeing weaker competitors drop out of the race. Businesses who don’t learn financial discipline won’t survive. So if you have a spend-happy competitor who’s been creeping into your market, don’t worry – they’ll soon be gone.

Do you have any other money-saving tips for entrepreneurs?

iPhone’s Stanza Validates E-books and the Kindle

I love it when I hear news like this. Andy Greenberg and James Erik Abels over at Forbes just reported that the “IPhone Steals Lead Over Kindle“.

They’re talking about the Stanza iPhone app. It’s been available free on Apple’s (AAPL) iPhone App Store since July 2008 and has been downloaded more than 395,000 times at an average installation rate of 5,000 copies a day, according its developer, Lexcycle.

So how is it beating out Amazon’s (AMZN) Kindle?

By comparison, Citigroup estimates Amazon will sell around 380,000 Kindles in 2008… In other words, Apple may have inadvertently sold more e-readers than any other company in the nascent digital book market.

That’s fine though. I’m still exceited. To me, this is yet another data point on the validation of the e-book market.

I know, it’s a stretch to claim that Stanza has validated e-books to the mass market. But it does show to me that there is a growing early adopter audience who’s learning a new behavior – reading books on electronic devices. As this audience grows, they’ll provide a good reference base for the early majority.

Validating a New Market

Every time a disruptive technology enters the market, people either:

  1. Learn how to use it because it solves a problem satisfactorily and is worth the learning curve
  2. Or ignore it because it doesn’t solve squat and/or the barrier for adoption is just too high

In many cases, one company inadvertently helps another by teaching the market the benefits of its solution, thus paving the way for stronger competitors. Take VisiCalc, Lotus 1-2-3, and Microsoft (MSFT) Excel, for instance. Before there was any spreadsheet software, there were pencils and paper. Not all finance professionals saw the need for doing their work on a computer.

But then they saw VisiCalc in action and were hooked. VisiCalc, in effect, had validated the spreadsheet software market.

Soon thereafter, Lotus 1-2-3 stepped in and one-upped VisiCalc. It had more desirable features, such as automatic graph creation and macros. Then Microsoft Excel entered the market and changed everything. Some argue that Excel wasn’t a better product, but Microsoft was a stronger company. Using the distribution power of its operating system, it swallowed up the spreadsheet market.

Being a Strong Competitor

Just because you validate a market doesn’t mean you’re doomed to failure. It’s a case of the first-mover advantage. In some markets, strong companies can validate the market and own it through exploiting a network effect (where the value of your offering increases exponentially with the size of your customer base). Amazon and eBay (EBAY) are popular examples of this.

What’s more important is being a strong competitor. In the spreadsheet software market, Microsoft was that strong competitor. They were able to exploit a second-mover advantage:

A second-mover firm… does not face the marketing task of having to educate the public about the new project because the first mover has already done so. As a result, the second-mover can use its resources to focus on making a superior product or out-marketing the first mover.

In Stanza’s case, I doubt they’re doing any marketing to educate the market. This hasn’t stopped them from creeping onto Amazon’s turf, however. Although they only offer public domain books right now, they’ve been working on some deals with major publishers. I smell a battle.

This is where being a strong competitor will win out. Amazon has the muscle of vast resources, brand name, and most importantly, publisher partnerships.

Is There an E-book Market?

Which brings me back to why I’m so excited about this news. I believe Amazon’s got the right approach, though there’s been some debate about whether or not this market exists. Do readers really want e-books? Or are they already satisfied with regular books?

In my opinion, yes, there is a market. Yes, some do want e-books (I sure do!). And Stanza helps to validate that. While I know it’s not representative of the mass market, its quick adoption shows that it’s not e-books themselves that are holding consumers back, it’s the lack of easy-to-use e-book devices.

Fortunately, I believe Amazon has the strength to pull this off. I have high hopes for them in creating a usable and enjoyable (and hopefully, delightful) e-book reader. They just have to keep on listening to their customers and improving their device. They’ve got the Amazon Store in place, e-books in the inventory, and some early adopters already using it. Now it’s a matter of putting out a cheaper and better device.

If You’re Not Failing Regularly, You’re Not Trying Hard Enough

I love great quotes. I’ve been reading the fantastic & inspiring book, Founders at Work by Jessica Livingston.

The book is basically a collection of interviews. In it, Livingston speaks with the founders or founding members of companies like Flickr, del.icio.us, PayPal, Hotmail, Blogger, Bloglines, Craigslist, Firefox, Six Apart, 37Signals, Hot Or Not, TiVo, WebTV, Adobe, Apple, Lotus, Groove Networks, Fog Creek Software, Lycos, Yahoo, and more. Quite a list, huh? Yea, I know.

I’m currently reading the interview with Stephen Kaufer of TripAdvisor. One line Kaufer said really struck me:

If we’re not failing at something on a regular basis, we’re just not trying hard enough.

He’s not saying you should be coming up with failures all the time. He’s saying you shouldn’t be afraid of failure. Let go of the fear. Be bold and try something crazy.

On the Web, you’ll soon know if a crazy idea is good or bad. It’s relatively easy to quickly deploy a new feature, get feedback, then pull it if it sucks. But if you hold back the idea because you’re afraid of, I don’t know, whatever, then you may have just held back a revolutionary idea.

Fortunately, companies like Blogger, del.icio.us, and Flickr didn’t do that. If they did, think of what they would have missed. What we would have missed.

Relying Solely on AdWords as a Business Model

How would you like to make $115,000 a month? I sure would. That’s how much Sourcetool.com was making off of Google AdSense ads.

And that, apparently, caught the eye – and ire – of Google (GOOG).

Joe Nocera of the NY Times wrote about Sourcetool.com’s dilemma last Friday in his article, “Stuck in Google’s Doghouse“. In short, Sourcetool.com was making $653,000/month in revenue by spending $500,000/month on Google AdWords. That means bidding on sponsored search keywords for about $0.05 – $0.06 a pop to bring traffic to their site, then getting around $0.10 each time someone clicked on an ad. Though Sourcetool.com is adamant that what they’re doing isn’t ad arbitrage, their business model essentially is.

Then Google made some changes to their AdWords algorithm, resulting in an increase of Sourcetool.com’s minimum bid requirements to $1, and in some cases: $5 or $10. The reason given was that Sourcetool.com’s landing pages were not high-enough in quality – they weren’t sufficiently “googly”, in Google-speak. Even after numerous phone calls, rebuttals, and changes to their landing pages, the minimum bid requirement remained. Google’s stance is that their algorithm has spoken. Sourcetool.com’s stance is that something unfair is going on, since Google has made exceptions to others before, including to one of Sourcetool.com’s competitors.

Whatever the case, this basically killed Sourcetool.com’s business model.

One Customer Source, One Revenue Source

Let’s put aside our feelings of ad arbitrage and Google’s practices for a moment here. There are already lots of opinions in the blogosphere, from debating whether or not Google is a monopoly to potential dishonesty within Google’s algorithm to Google doing what’s best for their customers.

Let’s instead talk about Sourcetool.com. Here’s a business that had figured out a way to generate nearly $1.4M a year with a single web property. Not bad!

However, 100% of that revenue was dependent on one source – Google. (Or, more specifically, Google AdWords to bring in traffic, Google AdSense to monetize that traffic.) There’s a strong inherent risk in that. They are at the mercy of one source, and should that source change its policies, go under, or simply turn its back on them, then they’re screwed. And that’s exactly what happened. They got screwed.

To be fair, there are lots of small businesses that rely on one source for their customers and revenue, be it a single product or service, or a single online marketplace like Amazon (AMZN) or Ebay (EBAY).

You know the cliche “don’t put all your eggs in one basket?” When that basket breaks, you’ve lost all your eggs. That’s what will happen if you have only one customer or revenue source. When it breaks, you’ve lost all your customers and all your revenue.

Product Diversification

Although it’s not as relevant to Sourcetool.com, I’m going to touch on product diversification first. In today’s economy, product-line diversification is essential for business stability – just as portfolio diversity is essential for investment stability. Even large corporations realize this. The Walt Disney Company (DIS) is famous for diversifying from cartoons to movies to amusement parks. Apple (AAPL) went from personal computers to mp3 players to mobile phones. And Starbucks (SBUX) sells everything from espressos to board games to CDs.

Which, of course, begs the question – can there be too much diversification? Yes, if it goes beyond your core competencies and brand. But that’s another discussion.

Channel Diversification

Now let’s touch on marketplace or channel diversification. You can look at Google as a kind of distribution channel for Sourcetool.com – it was the primary way for them to acquire customers. No Google, no customers. That’s a pretty simple and scary formula.

The reality of the situation is that Google directs the majority of web traffic nowadays, so most any web-related business needs to work with Google to some extent. But fortunately, there are alternatives.

According to the article, Sourcetool.com was only using Google AdWords to generate traffic. I’m sure that wasn’t the only method, but for the sake of this discussion, let’s assume it was. Here are some other methods:

Using the direct URL method means massively branding your URL so your customers know it and can type it into a web browser manually. It’s probably the most costly method, but lots of start-ups with strong brand recognition do this – such as Flickr.com, YouTube.com, and PayPal.com. Same goes for large corporations like Pepsi.com, BankOfAmerica.com, and NYTimes.com. (Sure makes having a .com domain name pretty important, huh?)

It’s certainly not easy to diversify your online channels, but relying on one 100% can be disastrous. Say you relied on Google for 80% of your traffic, Yahoo for 15% and MSN for 5%. You’d still have 20% of your traffic if your relationship with Google changed. That’s better than 0%, right?

And as a bonus, for ecommerce retailers out there, Amazon and Ebay aren’t your only channels. The list above also applies to you, as well as these online shopping comparison engines & marketplaces:

Revenue Diversification

Now let’s touch upon revenue diversification. Sourcetool.com’s only source of revenue is Google AdSense. Though their current problem is more about customer acquisition via a single channel, it wouldn’t hurt to diversify their revenue streams too, especially if Google were to kick them out of AdSense.

Fortunately for business owners, AdSense isn’t the only ad network in town. There are dozens of others, though none seem to do content matching as well as AdSense right now. Since I’ve listed a bunch of them in my entry about blogging for cash, I won’t repeat them here.

There are also affiliate programs, which work like sales commissions. If you help a retailer sell an item, they’ll pay you a percentage of the sale. Some savvy affiliate marketers are able to make six-figure checks doing this. You’ll also find a number of affiliate programs on my list.

Along with the ads model are sponsorships. Sourcetool.com could try to get sponsorships from various retailers to earn extra income. That would change the nature of their directory though, as they tout themselves as a free directory right now.

There’s also the subscription model, though I’m not sure what kind of premium content Sourcetool.com could offer.

In Conclusion

Relying on a single source of customers or income from a single product or service is an inherently dangerous business model. If that source goes away, so does your business. To solve that, you need to diversify.

If you’re relying solely on Google AdWords for traffic, consider diversifying. Try Yahoo. Try MSN. Try social media marketing. Diversify your customer acquisition methods.

Same goes for your revenue sources. If Google AdSense is your only income generator, consider diversifying. Try another ad network. Try an affiliate program. Try subscription models. Diversify your revenue sources.

Good luck! And remember – diversify diversify diversify!

How to Name a Business

Naming a business can be as hard as naming a baby. Well, maybe not AS hard. But it’s still pretty damn hard.

I’ve been reading Seth Godin’s Small is the New Big and came across his collection of riffs on business naming. Fortunately, he blogged about these as well, from as far back as 2003. (Hey, did he just grab blog posts to make his book??)

Here’s what Godin recommends:

  1. A name that is too descriptive could be too limiting. The less it has to do with your industry, the better. International Postal Consultants is too limiting. Starbucks, Nike, & Apple are good.
  2. Use real English words. Axelon & Altus are bad. Jet Blue, Ambient & Amazon are good.
  3. Make sure it’s easy to spell and pronounce. Prius is a bad name because it can be tricky for some people to spell and pronounce.
  4. Don’t obsess over getting a short name just so you can have a short domain name.
  5. Add a descriptive tagline. Like “Lemonpie, the easy way to learn scuba”.
  6. A name should be unique enough to appear in a web search without a lot of competitors and flexible enough to gain a secondary meaning if you wish to expand your brand.
  7. If you’re creating a whole new product or service, give it a whole new name, not an incremental one. Sneakers is better than athletic shoe.
  8. If you have lots of products and services, come up with a clear naming hierarchy, so customers can understand your offerings. Honda, Honda Civic, and Honda Accord are good. Apple, Apple iPod, and Apple Powerbook are bad, because the “i” prefix isn’t consistent or defensible.
  9. Names with generic words like Central, Land, or World are meaningless. They add no value and are difficult to defend.

Godin’s blog posts:

CrunchBase API for Competitive Intelligence

Who doesn’t love free stuff? I sure do. And when they can be used to make your business offerings even better, I call that Awesome with a capital A.

I was just reading Dharmesh Shah’s Embarassingly Gushing Praise for TechCrunch And The New CrunchBase API on OnStartups.com and it got me thinking.

What Shah is so excited about is CrunchBase’s new & free API. CrunchBase is a “free directory of technology companies, people, and investors that anyone can edit”, much like a wiki. It’s not technically a wiki yet (I believe that’s in the plans though), but pulls in a ton of data (from sources like LinkedIn and Google Maps) in addition to offering manual input from editors and the community. In short, it’s a fairly robust database of business information for the high-tech & internet industries.

To put it another way, it’s a valuable resource for competitive intelligence. Which means if one of these online competitive analysis services were to jump on the API and start including this data, they’d have quite an attractive offering. Or aat the very least, they’ll make things easier for business researchers.

Plus, CrunchBase’s API is free. So why the hell not?

Wish List for the Amazon Kindle

Guess what’s been on my mind? Yup, the Amazon Kindle. How’d you guess?

While it’s enlightening to praise and debate, I know it has quite a few improvements to make before it rocks the market. Sure, it has more promise than it’s competitors, but if it doesn’t maintain its lead, than I’ll be a sad panda.

Here’s my wish list of what Amazon needs to do to improve the Kindle for v2 and beyond:

  • Improve it’s ergonomics (hardware) and usability (software). This is probably its most well-known criticism. Hopefully they’ll follow the principles of KISS.

  • Continue getting more content. That means getting more publishers to release their books in e-book format. Probably not an easy task, but if anyone has the clout to do it, it’s Amazon.

  • Allow more formats to be readable. They don’t necessarily have to be writable for now, just readable. Like PDF, PPT, and XLS file formats. (To their credit, they already support TXT, HTML, and DOC.)

  • Allow readers a way to somehow “transfer” their existing books into the Kindle. I’m not sure how this could be done, as it leaves many openings for abuse. But I’d love to digitize my current library into the Kindle without having to buy all of those books again. Ugh.

  • Add a touch screen interface. Touch screen UIs are nice and generally easy-to-use (if done right). They could add significantly to the usability of the Kindle—again, if done right.

  • Offer a color screen. At least, as an option for some people. I’m sure this is on their internal wish list already.

  • Offer a backlit screen. This could also be an option, as some people may feel its current state is better on the eyes.

  • Offer multiple versions. They could differ in size, storage space, and maybe even color and outer material (imagine a leather-bound Kindle! Hmm!). If/when the Kindle catches on with younger consumers, the market for personalization accessories could be sizable too.

  • Strengthen its body. Books have to survive quite a rough rumble and tumble. It would be cool if the Kindle could survive that kind of physical stress too. Perhaps this could merely be another version.

Go go Kindle go!