Tag Archives: entrepreneurship

Validating Assumptions

In 2010 I was asked to give a quick presentation to MEGA program participants,.  MEGA could be described was an early accelerator program in Australia. The title of my quick speech was “Is your idea commercially viable?”. But the thrust of the speech was really on understanding the difference between facts, assumptions, hypothesis and weasel words – and the importance of validating any assumptions on your journey.

I remembered this yesterday when in a Churchill Club meeting, Community Indicators Victoriawas mentioned – an organisation I knew nothing about. It appears they have masses of free datasets and visualisation tools on different aspects of wellbeing amongst communities in Victoria. A fantastic tool for understanding where pain or pleasure can be felt the most amongst our communities. Eg Which communities have the shortest and longest average distances to Public transport stops.

Then there is the Australian National Data Service which is making all of Australia’s Research data discoverable and accessible. Its an absolute treasure trove that is available under the open access and licensing framework of creative commons.

And finally there is the Australian Bureau of Statistics, the mother load of census and economic data, provided under free and commercial models.

Validating Assumptions has never been easier :)

Can you have a partnership of entrepreneurs?

A group of Scandinavian entrepreneurs caught my eye this year, so when I was in London the other week, I decided to look them up.  They had a local office above a shop in the fashionable shopping district around the Bond Street tube station and were a fascinating group, who seem to have built a working partnership model for entrepreneurial endeavours.

The mechanics were described to me as:

  1. Its all in, you don’t have activities on the side. Which means the partners are aligned on putting energy into the best projects.
  2. For each year you work, you accrue around 2,080 partnership points (52 weeks x 40 hours). So if you take 6 months off, you only accrue 1,040 points that year.
  3. Distributions of profits are based on the percentage of the total partnership points you have accrued.
  4. Every time there is a distribution to the partners, your partnership points are reduced by the same ratio ( e.g. 50% of NTA distributed, means a 50% reduction in your partnership points).
  5. Once you leave, your partnership points stop increasing (i.e. you have a smaller ratio) and get reduced with each distribution. When your points drop below a set amount, you are automatically bought out for a pre agreed amount (because you can’t get to zero when you are getting reduced by fractions).

The group then Continue reading Can you have a partnership of entrepreneurs?

revenue model innovation for service firms

I have been buying and selling services for around 20 years, and during most of that period, have only ever seen two pricing models. Fixed rate or Hourly rate. Each with a couple of tweaks that are normally of benefit to the supplier, not the purchaser.

Fixed Price – is normally used when the service is routine and of low risk. The supplier doesn’t have to waste time estimating and can make more profit by being efficient. The customer doesn’t wear any risk, but may pay more than they have to. Its great for selling haircuts or simple website builds.

Fixed Price with Variations – is normally used for large scale services where things appear routine but some decisions aren’t made until after the project has started and results can be viewed. Its a great way of getting things started for the supplier, and the customer has a reasonable idea of what his costs will be. The supplier is also incentivised to be efficient. Its great for building projects such as house renovations and for complex IT solutions where external parties, i.e. users, will have an unknown impact on the system.

Fixed Price as an Estimate – is normally used for large scale services where things appear routine but there is almost certainly devil in the detail. It gives everyone a confidence around the costs and the worst case scenario – eg it will be this price plus or minus 15%. Customers are happy, Suppliers are happy as risks have been mitigated. However whether its the best deal on the table is another matter.

Hourly Rate – is normally used when the supplier has no insight into how long a job will take, therefore the customer where all the risk. This solution works well for the customer when there is a small service job, eg repairing a fridge, but not so well when you are conducting legal proceedings against another party and the hours could be vast.

Hourly Rate with pre-sold blocks – IT companies seem to love preselling blocks, as it brings in revenue today. Unfortunately though, I have never met a customer that didn’t hate it. Especially when some of those blocks of time expire unused.

Hourly Rate with a minimum commitment – I have noticed a trend of some suppliers working through likely long term engagements and offering customers a discount on the minimum hours they commit to per month, and further discounts on extra hours. When the numbers are estimated right, this seems to be a the best longer term hourly rate solution as everybody gets a win.

But the key to selecting the right revenue model is understanding your costs, risks and most of all, understanding what the customer wants. Looking at your revenue model from the customers point of view is key, and any customer worth having will always offer you a response more than just “cheap hours” if you ask them.

For instance most customers would love to pay “yeild pricing” if given the chance. ie you take a percentage of the upside or a success fee. It means that you both parties are aligned to getting the best outcome. Its rare though, despite the fact that business cases normally show incredible returns for only a small outlay. You see it on occasion amongst consumer law firms that offer a “no win / no fee” option. I also noticed that Domenic Carosa effectively favours it with his “you have a great business, lets do a JV to bring you onto the internet” style of deal.

Why am I talking about this ? Because at the small business end of town, nobody else seems to be talking about revenue models. We are all “revenue model takers” not innovators and we need to get smarter to compete on a world stage. The business Olympics are going on and nobody seems to have noticed.

The reality of online retail in Australia

Not good enough!

I read today that Myer intends to do away with shipping and handling costs for its online store, to stop the leak to internet shopping.   Apparently “Commonwealth Bank estimates that Australian consumers spent $9.5 billion online last year, with $4.2 billion going to overseas online retailers and the remaining $5.3 billion paid to domestic retailers.”

MyerCompeting on price isn’t going to work,  as the competition is always going to roll you.  Here’s a real example.

This week I had my quarterly breakfast meeting with Scott Kilmartin of haul.  haul is a highly successful  multi channel retailer that upcycles advertising billboards into laptop bags, ipad cases and promotional products for companies from their materials.   Scott and I get together regularly to dissect each others business and offer impartial advice.  I value Scott’s insight into retail trends  as he is a keen watcher of players in the market, a keen reader of analysis of retail trends and has bags of experience (excuse the pun).

Scott conducted a couple of experiments this week that have got him worried.  He purchased two items off eBay that were direct shipped out of  China.  The first was a black sweater, XXL size, and in his words  “well made, no loose threads or rough sewing/joins. It could be from Country Road”.  The total cost AUD$9.90 including shipping – But retailing in Australia for around $89.95.  The second item was a fake leather iPad case, for AUD$10.45 – Retailing in Australia for around $49.95.  Both were delivered in 10 days in an Australia Post eParcel box.   Note Scott’s rate to send an empty eParcel box from Carlton to Fitzroy is a whopping $7.65 at the 1,000-5000 pieces a year contract rate.

So can Myer & big retail compete on:
Price? Not a chance.
Quality? Nope, goods are coming from the same factories.
Delivery Speed? Perhaps if they lift their game.  7 days deliver from local stocks is slow when you can get something from China in 10 days.
Risk of Fraud? Absolutely.  The is much lower risk  buying from an Australian retailer – so a fear campaign could work well.
Impact of Fraud? Nope.   Almost everyone I know is happy to trial an order or two and write off the $10 if it doesn’t work.
Range?
Nope.  Australian retailers can’t afford to stock all shapes and sizes  – as most men in their 40s find out when they go to buy jeans.

The conundrum retailers face is old though, just not in retail.  On a number of occasions, businesses I have worked for have had an agency for wholesaling electrical products that we practically built the market for.  And when our sales were strong enough, the manufacturer decided to directly step into the market and we just couldn’t compete.  This always happens.

The solution though is not to compete on price, but to endlessly innovate and provide superior customer service.

Cutting costs and competing on price only is a death spiral.  Always has been, always will be.

Don’t grade students

Can business schools stop giving people marks from A-F or 0-100 please. Just give them pass or fail, so they are prepared for real life.

One of the things I completely abhor, is business students fresh out of school with grandiose plans but poor execution combined with a loser attitude. The mindset seems to be that “it doesn’t matter if I have a big night and consequently turn in shit work the next day, as I will do some better work downstream”.

Unfortunately real life doesn’t work like that.

  • You do shit work – the client fires you. Pass / Fail.
  • If clients fire you because of your work – I will fire you. Pass/Fail
  • You get caught slightly over the limit – you lose your licence. Pass / Fail

There is no grading in real life!

Failure is important. You have got to own it, learn from it and move on. But you should never simply accept it. Franz Madlener built Villa & Hut with the personal ethos “Never, Never, Never give up”.

When I trained to be an Army Officer, you were trained to never give up and allow yourself to fail, until you had explored every opportunity for success or even partial success. And it doesn’t matter how outrageous or how difficult, stressful or personally uncomfortable it is for you. Because everyone depends on each other, when you fail, you bring others down like dominoes.

A couple of years ago I shifted offices. The delivery truck was supposed to arrive at midday, arrived at 8pm, and demanded cash payment before he unloaded rather than the agreed cheque. I had to scrounge up money from more than one personal bank account (because of daily withdrawal limits), then unload the truck and create a couple of usable workspaces so that staff could start working the next day. I finished at 1 am. This isn’t a story of me acting heroically, its a story of not accepting failure, exploring options and preventing the removalists failure from affecting my staff.

Why am I ranting? Because this week I had someone fail on me, plus they didn’t advise me of the failure until I inquired. They accepted the failure and said “it would never happen again”. But what I wanted was them to have the mindset of not accepting failure. Especially as I could think up at least three options that they could have taken, to mitigate their failure.

Real Life doesn’t give you a B-, it fails you and it doesn’t care.

the money plan

I had breakfast the other morning with Scott Kilmartin of Haul. I like talking to Scott about the retail market because he has both heaps of experience, and quality insight. Scott felt that the small independent retailer was absolutely on the wane at the moment and on June 30th a lot of accountants would be advising their clients to shut up shop. This isn’t because unique offerings aren’t palatable to a jaded market place, its because most small independent retailers haven’t moved with the times and willingly embraced social, technological and commercial landscape changes. For instance, any shop that thinks that just having a Facebook page is a social media strategy is almost certain to die.

Anyway this got us sidetracked onto accounts, finance meetings and what Accountants were useful for.   Scott, as the proprietor of a retail business, is fairly typical in what he does. He doesn’t look at his accounts that often if he has money in the bank, he meets his Accountant once a year to discuss tax returns and the idea of having a finance meeting by himself just seems a bit silly.

So I tried to give Scott some practical advice.

  1. If your accounts aren’t useful for decision making, change them so they are. The list of accounts on your Balance Sheet and Profit & Loss is called the “Chart of Accounts” and you can change them to whatever you want for your own reports. Eg I like to split out landline , mobile and internet phone calls, rather than have and expense called telephone.
  2. Try meeting with your Accountant 4 times a year and ask him to offer proactive advice, not just reactive advice on your tax. You may be surprised what he come up with, and if he comes up with nothing, fire him and get a new one.
  3. Have regular finance meetings. If you have staff, get a senior staff member at the table. You may also like to have an advisor, bookkeeper or your accountant there.

I like finance meetings in small businesses, they really highlight what’s going on in the business and the places you need to focus to become more profitable. Some of the topics you can cover are:

  • Building a budget – so you don’t end up spending more money than you earn. Especially tricky are the costs that only crystallise once or twice year, but are being generated silently all the time, such as leave loadings or car servicing. Depreciation is a good example of this.
  • Comparison your actuals to your budget and determine an action plan to address the variances.
  • Build some simple financial policies such as “what should your working capital be?” My position is that for most small businesses – 3 months expenses is a nice starting point for discussions. Another policy could be “how much profit should you distribute and how much should you reinvest?” of “If you have excess cash at bank, how should you invest it?”.
  • And finally, a personal favourite, work through a couple of expense line items each meeting, to determine whether they are still valid. You would be surprised how often expenses either get reduced or vanish when you put them under the microscope.

So if you don’t intend to put some finance meeting in the diary for this financial year, I reckon it may be worthwhile asking yourself “do I intend to be around next financial year”.

managing money

Localisation

Twenty one years ago, when I left Perth, I planned to return in two years because that was where my home was. Despite not being born there, I had become an adult in Perth and it was where all my “forever friends” are. You know, the ones you don’t have to speak to for years, but you know you are still mates.

It’s been about five years since I was last back there, so I really enjoyed the 5 days or so I have just had. One day working and four days playing. But the thing that surprised me this visit, was that it was the first time I looked at Perth with alien eyes. Sure I could still mostly get around without turning the Satnav on, but everything just looked and felt strange.

The sunlight was much harsher, despite being the middle of winter. There was sand everywhere not soil and outside the major cities and towns, buildings were one story high. And after enjoying a fair amount of alcohol with old friends, I realised their values and aspirations were subtly different. It took me a while to remember that Perth is the the most isolated western city in the world, and this is reflected in every day attitudes. Even shopping for groceries, there is fierce brand loyalty to W.A. sourced produce. At it’s core there seems to be a belief that W.A. made a mistake in agreeing to become part of Australia at the start of the last century.

So why am I rambling on about my trip?  Well it reminded me of one of the major take aways from a Churchill Club event a couple of years ago. I had Simon Baker – ex Realestate.co.au , Syd Low – ex Freeonline and Silvio Salom – ex Adacel, talking about “Going Global on a Shoestring”. They all agreed that the best design for a foreign office was to have an Australian financial controller sent over to maintain financial control, but you must recruit a local CEO.   A local CEO has local values and understands how to alter your value proposition and best engage with local customers.

The thing I realised whilst drinking red with old friends, is that this is also an important lesson for eastern states companies looking to expand to Perth. The changes in values are subtle, but critical if you want to launch a successful operation. It’s too easy to be branded an eastern states company and never gain traction.

What type of entrepreneur are you anyway?

I spoke at the Startup Weekend last Friday night on building valuable networks, but got asked by three people before the event – “who is the target audience of the Churchill Club?”.   The simple answer is entrepreneurs, but the real answer is unsurprisingly, a little bit more complex, so I normally talk about the spectrum of entrepreneurship first.

I see basically 5 classes of entrepreneur, regardless of whether they are social entrepreneurs or commercially focussed.

The PlanAspirational Entrepreneurs

Aspirational entrepreneurs are normally students or people in the early stages of their career. They like to attend events with inspirational speakers, can quote from entrepreneurship books written by Steve Blank , Rob Ryan and Michael Gerber and are forever refining their business plans and asking for opinions. They are searching for a full proof plan, and resist launching their business until they accept that failure and evolution is inevitable and to be embraced not avoided.

Hobbyist Entrepreneurs

Hobbyist entrepreneurs are normally academics, software engineers or marketers that have built a small business on the side. They generally label themselves an entrepreneur rather than their day job. Their businesses rarely grow though until they fully commit themselves and depend on its income to feed themselves.

Entrepreneurs

Entrepreneurs are generally ex employees who have taken an opportunity that their employer didn’t want to run with. They come in all shapes and sizes but there are two things they have in common over someone who is just a small business owner. One is they identify themselves as an entrepreneur, the other is that they are growth focussed.

Serial Entrepreneur

The serial Entrepreneur an entrepreneur that starts, builds and sells a series of businesses. They are seen as just fascinating projects, rather than their life’s work. They are passionate about what they are doing, but at the same time emotionally detached i.e. they would sell any business tomorrow if the right conditions were there.

Dealmaker

The Dealmaker is a special class of entrepreneur that is actually more likely to come from the ranks of large corporates than from a traditional entrepreneurs background. Their skill set involves buying and selling businesses and securing finance. They are interested in undervalued assets, emerging opportunities or unrecognised synergies. They make their income from single digit profit percentages off very large transactions, not operating the businesses.

So who is Churchill Club’s target audience? Well I see the Entrepreneur class being split into two. Those running job businesses and those running asset businesses. With an asset business you can take three months off and still have a business, plus you can sell all or part of it. If you don’t have an asset business, you just have a job business, regardless of how many employees there are. The Churchill Club’s target audience are the entrepreneurs with job businesses that want to convert them into an asset business. A worthy objective :)

Revenue Model Innovation

Over a decade ago, I made the acquaintance of CIO of a major Bank, and asked him to become involved in my small IT services business which was growing like a rocket; 0-$2M revenue in year one. He declined, and said that “he didn’t find our business model scalable”. After the rejection I thought “how ridiculous, look at our growth!”

But since that moment, I have been thinking on and off about business models, trying to discern patterns and to have a conceptual framework to work within so that I could design better business models. I feel this is one of the core competencies of the entrepreneur.

Eventually, one of my understandings was that sitting between your product with all its features & benefits and your customer, was your revenue model. And according to Alexander Osterwalder and Yves Pigneur there are only 7 types of revenue models:

Asset Sales – Transferring ownership, normally as a one off transaction. Like a chocolate bar or car.

Usage Fee – The more a service is used, the more a customer pays. Like a hotel room or courier.

Subscription Fee – An access fee to a service. Like a telephone network.

Leasing – Granting the exclusive right to use a product. Like renting a trailer.

Licensing – Permission to use intellectual property in exchange for a fee. Like producing Disneymerchandise.

Brokerage – Charging a fee to be an intermediary. Like credit cards and stock brokers.

Advertising – Charging a fee for advertising a product or service. Like Television or event sponsorships.

The insight I had was that despite the industry, service or product, a good revenue model has two attributes that are common.

1. It creates an Annuity Stream

A system were you have to put energy into every sale you make is not much fun and its difficult to generate substantial returns. Engineering firms are forever chasing their next project. A much better solution is to sell once and then see the money rolling in month after month, known as an annuity stream. As your revenue grows, so does your profit margin as your direct costs decrease. By selling this way, you can also forecast the future and have increased confidence when decision making.

2. It maximises the price you can achieve

The two simplest questions to ask a business about pricing is “are you really covering all your costs?” and “Are you leaving money on the table?”. Its too easy for a new business not to factor in deferred costs such as maintenance or employee leave into its pricing, and finds out at the end of its first year, that it wasn’t actually profitable. Its also too easy to find out your customers would have paid much, much more for your service when you thought giving it a margin of 100% was being greedy. Pricing is always an incredibly complex issue, however all models generally fall into one of two camps. Its based on static variables such as list prices and quantity discounts, or its the cleverer  dynamic, based on market conditions such as you see with auctions and yield pricing. If you think of the dollars as a continuum, with cost to supply on one end, value to the customer on the other – your goal is to get your price as close as you can to the customers value without it being a barrier to sale, so you maximise your return. This requires experimentation and insight into your costs and his values.

So the trick here is to get creative with your existing revenue model and make it work harder for you, creating annuity streams and maximising price, without alienating your customer base. This is part of creating a Revenue Model that is scalable. How you do this, I’m not certain of just yet, which is why I am running a Churchill Club event on it. When I find out, I will be able to create the scalable model the CIO indicated I should have before he joined me, but then ironically, I probably wouldn’t have needed him.

Outsourcing Offshore

Finding worthy topics to discuss was the highest priority when I started the Churchill Club 5 years ago, so I sought advice from a number of quite senior people on what they thought were issues that mattered to the technology start-up community. And like most advice in the world, it turned out to be horribly wrong. Eventually, I just started putting on events to discuss topics that I felt I would be prepared to pay to go to. Turns out, unsurprisingly, that I’m a good bellwether for events that matter to people growing new businesses.

So having decided to outsource some of the technology support parts of the Churchill Club business and not knowing how, I decided to have an event looking at outsourcing tasks offshore to get fast, quality service at the $10 an hour mark. The event focussed on using virtual assistants, sourced through products like oDesk and eLance. And as per the Churchill Club model, I got 3 experienced people on the subject to share their learnings – So here is what they came up with on selecting staff.

  • Start with simple, non-critical tasks until you get good at writing briefs and selecting people.
  • When you post your job you will get lots of responses and many won’t have even read the details of the job.  Therefore add something like, “write Banana in the first line of your response”.  If they don’t, ignore them.
  • Maybe split your tasks into two pieces and select 3 people to do say, the first 10% then select one to complete.  At this price it doesn’t matter there is doubling up.  Lots of mini tests when selecting, avoids heartache downstream.
  • Remember you can post a job but only invite one person to do the work if you want to test them further and still take advantage of the off-shoring website’s features such as payment escrow’s.
  • Avoid anyone who provides a generic response.
  • Always use people with a high rating.  But remember that people are comfortable adding positive feedback and are reluctant to add negative feedback so pay attention to the number of jobs that do not have feedback recorded against them.
  • Get sample work from all of your short list.
  • The supplier’s portfolio may look wonderful, however if it’s a large company, be wary – you may get the junior assigned to your project.
  • Consider outsourcing a portfolio of work to a consultant who then manages the outsourcing for you.
  • Consider outsourcing work to company, rather than an individual if you want something like cutting edge SEO knowledge.

The three speakers passing on their hard won lessons were Pete Williams, Alex Levashov and Linh Hoang , all of whom had thousands of hours experience with outsourcing work to individuals and teams al over the world. Turns out, unsurprisingly, that this question about outsourcing effectively was on a lot of other people minds as well, so I’m glad I asked the question.