Startup Business Models (for thought)

In really thinking through a start-up, and I have had this conversation about a dozen times in the past year, you have to make a specific choice as to what your business model will be.

Sounds simple… Well, if you have read through some of my other blog posts about start-ups, there is a bit of a gotcha that a lot of entrepreneurs run into. That gotcha, that wall, is common knowledge. Sometimes common knowledge is not that common. Because Zuckerberg did it with Facebook or Gates did it with Microsoft or your buddy down the street did it, doesn’t mean you can do it, at least the same way. What worked for one person, may not work for another. Get this in your head before making a business model decision!

Just when it seems like you know something, because you read something, does not mean you really understand the economics of why something is working or not working.

Ok, so you are thinking of starting a website… Actually almost 1 in 10 people (especially young people) have the ultimate or their idea of a website that they would create and a start-up business. I was walking through the mall the other day, stopped and chatted with a guy selling phones in one of those kiosks and he and I got to the point where he was telling he, his buddies are going to be creating a website startup. Ah-ha.

Let’s start by looking at these models based on risk vs. reward. Well, let’s start by identifying the business models (The ones I know of):

1. Advertising – You make money by visitors clicking on links.
No explanation needed. Google, Yahoo, lots out there, few successful.

2. Product/Service Sales – You sell products and deliver physically or virtually.
No explanation needed. Amazon, Best Buy, Target, Wal-Mart, abc distributing.

2. Membership – You make money (every month) by people joining your site.
You know, pay for monthly services to use,view your site.

3. Commission Exchange – You make money whenever a person trades, sells, works, with another person. Ebay, LogoTournament, lots of others.

4. Sponsorship – Basically a twist on advertising, but more than advertising, you get paid no matter what the traffic, so non-click based advertising.

5. Virtual Business To Business Services – You sell backend services to other business. Good examples are Constant Contact, iContact, hosting, chat, etc…

6. Lead Generation
You collect the leads and sell them to a third party. In fact, you control the information flow somehow and set the information price… Good examples are World Avenue, Autobytel, etc.

Risk vs. Reward

I am sure there are about 10 other business models out there (that are real clever), but this list is pretty much the ones that make sense on the web. And when it comes to risk and reward you have to weigh the chances of your success versus the reward. Remember, not everybody is going to make a billion dollars on their first venture. I say be happy with a million. In fact be happy with quarter of a million… I say just be happy with success, meaning staying in business.

So, as you set out to create your new web business, even a new business model, you have to weigh your chances of survival. How to you weigh your chances of survival:

1. Your Track Record
If this is your first time, then reduce the risk by succeeding in ways others are not…

2. Your Capitalization
Often website developing is not about revenue, but about staying in business. Having the resources to do it, is critical. By resources this is man-power really in the end. Everything else, including hosting is dirt cheap now.

3. Your Talents
If you are not a programming, your chances of making a successful run at a web business model that is not retail are remote…unless you are fully capitalized. Being a programmer you have an advantage, saving thousands on programming.

4. Your Ability To Schmooz
Getting others to work for nothing is a talent. Getting partnerships in place to make it happen is a talent. Having an ability to convince others to give you money is a raw talent. A god given sales talent, but quite dangerous as well… I will give some reasons why this is a negative as well in another post.

5. Your Tenaciousness
This may be a moot point if you don’t have any of the other things above. Since if you are broke, not a programmer, not a great networker/presenter and haven’t done this before, your tenaciousness may seem more like agressiveness. So back-off and make a small success first before lighting the world on fire.

The Personal Analysis

So, you need to look in the mirror and take your idea and go through an analysis. Typically new, unique ideas start with the entrepreneur saying I am going to create this really cool site, like for instance a good example would be a local news blog site… And I am going to make money by advertising sales… Well, good luck. In fact I tell entrepreneurs, the quickest way to fail is relying solely on advertising sales. I believe that you will have to generate a million visitors a month to make something like $50,000 a year on the click through dollars… Remember most click-throughs are paying GOOGLE the money, not you. You get a percentage of clicks, and you are not in control of the ad networks, Commision Junction, Google, Yahoo, AOL and others have a heavy hand in control already. So get it out of your head that the ad model is your model! Ad models on the other hand like Facebook and others are high reward if you make it big. Chances of that happening are like 10 million to 1…

So, then you say, well my local blog can be a membership… Sounds good, and in fact if you can find a way to get people to pay, you are going to be in the money. Not a lot of members per month paying to make a million dollar a year site in revenue. I think if you had 10,000 members paying $9 a month you are a million revenue site. So this is more of what you need to be thinking about. I give you a 1 in a 1000 chance of surviving with a membership model… If you do, you will profit nicely.

There there is the back-end model. If you get it rolling, you will get hopefully month or period payments, so it is a very similar model to membership. I will give you a 1 in 25 chance of survival in this model, because it is business to business and businesses need help online!

The exchange commission model is really dependent on your technical know-how and luck. Choose the right model and you could hit it big like eBay. My odds of success are 1 in 100,000. So not so good, but who knows, it is a big payoff model like advertising, so you are either out of business or a billionaire.

Finally retail online model is a medium reward and lower risk. You can make it well enough if you have the talent. If you don’t and are new you still have a chance, but it is risky as well. Knowing your product is everything and if you do know a product well, you may be in luck. I think the prospects of becoming a billionaire are low, but my odds are about 1 in 10 will make some money.

Lead Generation if you pursue this money is about a 1 in 30 chance in my mind of making it. It is possibly a good pay off as well. Every store, sales rep in the world needs leads, so this is a great place to start as well.

Hopefully you get my point in this blog post about web business models and risk and reward.

New Rules For Start-ups For Regular People

For many years I have always met with entrepreneurs to go through their plans for their tech start-up. Not that I am any bit an expert. With mostly 18 years of corporate experience, this really puts me in the corporate camp. Then there are the failed start-ups and the eventually the successful ones. This means that I have learned something over the years, which I am converting to rules. Whether I follow these rules is another story. Since we all learn the hard way over and over… So below are my “Rules For Start-ups For Regular People”. This is really a list of rules for those of you working full time who want to be in a start-up. Not that this is for the corporate workers, but it is the first step for you, if you are working full time and want to begin the path towards owning your own business.

This is not a comprehensive list, nor will you have to get your pen out. These are just the rules that I have noticed.

Now, first off, I am not the start-up guy from the ground up historically, meaning, I have worked in the corporate environment, worked the day and night job, sold off a start-up and/or some software over the years, gotten an MBA as well, and still go back to start-ups for more pain (or gain). This is a work in progress, so I am going to add to this blog entry as I see fit. It is just an opinion, and I probably will borrow a few points (especially from Guy Kawasaki), so sorry about some of the plagiarism.

Rule 1
Less Can Be More, And More Can Be Less

One of my old MBA professors used to have a quiz about entrepreneurs. It was a multiple choice question. Is the Entrepreneur’s motivation best described by 1. Wanting To Be Rich, 2. Independent of Others 3. Brilliant And Be Recognized or 4. Lazy. Now take a moment to think about this question, because I have yet to have a person answer this correctly, especially if they have not been in the trenches of a start-up. This first off, is a subjective question, and I got it wrong. My old MBA professor surprised us by saying lazy. Why lazy? Because the first thing an Entrepreneur needs in his arsenal to be successful, is the desire to get others to do the things that he can’t, leveraging the world of skills around them, so they can lay back and think at a higher level or go golfing. Every Entrepreneur dreams of the day they will be on their boat or taking time off, because the trenches may be fun in the beginning, but eventually it wears away at you, especially if you don’t have the freedoms of 9-5 guys. Hence, why I spent many years in corporate America. Quite frankly its easier.

The whole concept of doing more with less is what you have to get used to as an Entrepreneur, as you have to figure out a maze of choices and decisions.

Rule 2
Value Your Time

A few years ago, I was considering start-ups as I drove to work in New Jersey. It never happened there. Why? Because back then I did not value my time. And in New Jersey, there is little time for a start-up if you want to survive financially. You need to put a price on your time, where ever you use it. You don’t need to think about it all the time, but you have to have a price per hour. Whether it is $25, $50, $100, or $500 an hour, it is worth something. So, when you take a full-time job with a 60 mile commute each way, you have to add up the hours. If it takes 3 hours to commute each day, and you are worth $150 an hour (consulting), you have just blown $450 every day of time you could be using for a start-up, walking the dog, playing with your kids, etc. Take that money back and give yourself a chance by taking a job with less pay that is closer to home. Also, I know a certain entrepreneur that goes to work 20 hours a day on his new venture, bulldozing his way towards success. Trust me, this technique may sound smart, but smart is sitting back and making sure you are putting your time towards the tasks that are at your value level, and moving all the tasks smartly to others…

Rule 3
Separate From Your Emotional Brain

This one took me a long time to communicate, but a long time to have the guts to discuss this with people. It is bottom line thinking. I am not traditionally a bottom line guy, but you have to get to it quickly in your start-up, otherwise you will find yourself on the wrong path. You have to separate your emotional involvement with the product or service. This is not easy to do. Entrepreneurs are passionate, but that does not mean the business model will work. I have seen about 50% of start-ups fail simply because they have not thought out the business model, which could mean they are in love with their idea. You know what it is like when you are in love, you just can’t get it out of your mind. The idea bugs you night and day. But trust me, a little voice of reason should be applied. Now I have failed, trust me miserably, in getting others to separate from their emotional brain and look at things objectively. For instance, you go into a business because you think, without any serious research or confirmation by others, that the business will make money. Or you go into a business helping people, and somehow you will make money. For some reason I have seen this repeating pattern over the years and could not steer these people clear of this pitfall. I will give you a clue. If you are creating a non-profit related business, it is unlikely you will find a profitable model, and therefor your chances of financial success are diminished. Financial success is still the most important end result. Trust me on that.

Rule 4
Find Ideas In Everyday Things

You think a great idea has to be sophisticated. Not really. The only time I needed to find a sophisticated concept, is when I wanted to win a business plan contest, but that was not about reality… You just need to look around and find something that solves a problem. It could be a simple product or a simple service. I am a web developer, so the web is big time for me. Online you have no limits, complete unlimited freedom to solve some small problem with a small idea and put it into action. And most of these successful start-ups solved the most mundane thing, not the most complicated. Like for instance I remember a start-up Yoga accessories website, I wondered if they were onto something, and they were. And I also visited a guy in south florida who was running an iPod accessories business out of his garage in the early days of the iPod around 2000, and he has been successful ever since. I believe his company is called ExtremeMac. Just look around and find the simple things to solve, not reinvent the world or have it so complicated the customers can’t understand what you do.

Rule 5
Discover Hidden Trends, Not Ones On The Front Page

I am always looking for a trend, and when I see a new one, that has not been discovered yet (by the masses of asses), I know that is something important. For instance, recently I have seen a possible new trend of online services that serve us in a way we have not yet been served before, way beyond personalization. I call it Super-Customization. It is the concept of applying a concierge service to anything online and going way beyond the competitors to serve a niche of customers who want to either pay more or experience things at a higher level. Now what is the problem with trends on the front page of the New York Times… The problem is that this is typically when the trend is oversold. I have seen it happen with a dozen trends from creating a search engine, Websites in a box, Online Dating Sites, Speed Dating, Ebay mania, Social Networking Sites, personalization, RSS, iPhone development and others. If you are jumping on the train speeding by with a trend already in motion, you probably will end up on the tracks with the train speeding by crushing you to death. You need to find a niche, you believe will survive or prosper and keep your head down and not get caught up in the lack of reality train.

Rule 6
Use Technology Effectively

A lot of people jump into an online venture and find out after spending a lot of time, money and energy that they are not using technology the way it should be used. The opportunities to use the internet for video phone (Skype), for project management, for sophisticated email services and a host of other technologies are what will make or break your business these days. Effective use of Search Engine Optimization and having a website that gets found is a good example. This is a bit tricky, because if you are a novice, it is possible that you will flounder here. Find a local expert who can give you assistance in this area.

Rule 7
Family And Friends Does Not Mean Family And Friends

I picked this one up recently from Jack Karabees. Basically don’t expect your family and friends to be your investors. When they say family and friends they are not talking literally. These family and friends should be more of acquaintances, or you will find yourself in hot water with your mother, brother, friend.

Rule 8
More Education Is Always More Important

On Yahoo business a few years ago a woman wrote an article about why you don’t need an MBA. On the most part, she was right. I have one and it is no panacea for the business world, especially when starting up a business. But I found her article completely misguided. You don’t need an MBA, but trust me on this, every start-up person would love to have one. More education is always more important. I wish I had a PHD. The more info in your brain, the more you have to draw from in starting a business. Now there is a down side, in that the typically over educated person may apply things to business that are not practical. This comes from their institutional experience, not from the degree. You can always use more education and do not toss this aside lightly. More education is always better. Don’t toss it aside unless you are in the middle of a start-up. Got time off between start-ups. Go back and get a degree… Even after finishing my MBA, I went on to get a certificate from the CED, the Center for Entrepreneurial Development about tech start-ups. It was worth it!

Rule 9
Learn Timeless Things, Not Trendy Stuff

This is a bit of a non-sequiter, but this is important to understand as you grow as an entrepreneur. There are certain things in life that are useful over and over again, and then there are things that are gone in a blink of eye. As we learn things, try to find the things that are consistently the same over time or over time periods. For instance, Excel has been the same for 20 years for me, as has Linux. If I had learned Lotus and early Windows versions only, or just DOS, I would have lost my knowledge. Learning a P&L, Cashflow and Balance Sheet is timeless… Learn the things that you can use again and again and discard things that are just for the moment… Sometimes we have to learn technology that is fleeting, but find the consistent stuff and you will succeed more often.

Rule 10
Know When To Get Out

I would have never believed the story of the Genie and 3 Wishes would be a general truth, like a Twilight Zone Episode, where the guy wishes for something and gets what they deserve in the end. And once again this is something I have seen and will continue to see over and over. You just have to go through this one time in your life to learn this lesson, hopefully. I have seen it a dozen times over the years. A person builds up a modest business and has an opportunity to exit, relatively early, but does not take it, because they believe they can and will do better. It is a gamble like everything in life. A good example is of a this, is a small ISP I was writing business plans for in 1999. The owner came to me and told me a man showed up with an open offer to buy the company. An open offer means that they wanted you to put a price on a contract and sign it… Crazy now that I think about it. But things were crazy in 1999 with the Internet. This was a million dollar a year revenue business, an ISP, and the owner felt it was too early to exit. I wish I knew then what I know now. The trust about life, is things will and do change, like, the economy, our health, 911, wars, volcanoes, meteors, presidents, who knows. Life just throws a curve ball at us when we least expect it. So, when we got a chance to sell my first start-up in 2004 for a little less, we took the money and were happy for it. Every time I hear an entrepreneur tell me that they are going to hold out, I cringe. If you are successful enough to get an offer, 90% of the time, the first offer is the best…