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Learning from an Early Flop
The BagPack, sold at HandsFreeGroceries.com, has been on sale for just about a year this month. It’s time to take stock, figuratively speaking, but also literally. I just withdrew BagPack inventory from Amazon’s distribution center. It’s not that I want to stop selling it, it’s just that I need to avoid Amazon’s long-term inventory charge. I’m getting charged because my inventory isn’t moving. So here at the one-year mark is the story of the BagPack and my analysis of it, seen through my increasingly seasoned lens.
The BagPack started as a serious endeavor. It’s a useful product with a potentially big impact. Ask yourself, how much carbon dioxide would we stop producing if we could carry our food from store to kitchen without a car, up stairs, with both hands free? It’s also a fun product. You’ve never carried 50 lbs of food with so little effort, enjoying the sunshine, holding an umbrella, talking on your phone. It’s really very good. As a matter of fact, I use mine every time I shop.
Enough of the sales pitch. From May through August 2013 it took about a quarter of my time, or 200 hours. I got it “patent pending”, with inventor Oliver Chadwick listed rightly as the primary inventor, built a website on SquareSpace, manufactured some inventory, learned how to ship from Amazon’s warehouses, and started digital marketing.
The manufacturing and shipping was the least problematic piece because it was the one with which I was most familiar. I was fortunate to get help from Jerry DeChristoforo. Jerry may be an accidental entrepreneur, but the truth is his hands have played a key role in three different startups over the last three years: Terrafugia, the BagPack, and now Global Flight Systems. Jerry produced far more, far better than I could have.
Alas, my marketing skills and split attention let us down. My work at ArtistBomb was at that time ramping up sharply. There I learned from Brian Bahia the power of WordPress for search engine optimization. While working on ArtistBomb we traded services, and my end of the bargain was HandsFreeGroceries.com remade in WordPress. It looks identical to the old SquareSpace, but it works far differently behind the scenes. When I switched to WordPress, many of the mechanisms Google uses to index and rank a site became more obvious and accessible. But it was too late. All my content marketing and search engine efforts were by then being directed into ArtistBomb.
BagPack Analysis
In retrospect, the BagPack business model – sell online as a stand-alone product – is critically flawed. Manufacturing BagPacks at low volume in the US drives up the cost of goods sold (COGS, as they say) to the point where profit is too little to sustain the needed marketing. Our best source of referral traffic remains a blog we posted on, but it took posting on a dozen blogs and getting a couple of bloggers to review the BagPack before we happened across that one source of traffic.
In retrospect, I suspect this would have worked better:
- Use the prototype to create a compelling Kickstarter video;
- If the Kickstarter were successful, use the funds to open a BagPack supplier at much lower COGS; and
- Distribute through existing channels.
Existing channels means Whole Foods and other urban grocers. Internet marketing had sex appeal for me (it still does), but it’s too expensive for this product. Think about this: lots of tech startups have a hard time making ends meet when their gross margin is 97% (the only thing it costs to sell another website subscription is the 3% credit card fee). So selling a BagPack with a gross margin of 3% is completely hopeless.
I tell you, though, it sure is fun when I get that email from Amazon saying they’ve shipped another BagPack.
If all this hindsight really is 20-20, then my marketing effort from this point on should go into a minimally acceptable website, a compelling Kickstarter video, and really nice consumer packaging. That traction and packaging could then be offered together to retailers.
Well, I don’t have the bandwidth to get this Kickstarted right now, but I may come back to it. I would also be ready to hand over the keys. So if you’re interested in picking up a hand-me-down startup, contact me, we can figure it out.
What’s the difference between business and self-employment? Is what I’m doing a business or a job?
I found myself asking this question this morning. Here’s what I told myself.
The key difference must be whether future revenue is directly the result of future labor. If I can earn $100 next week only by working on my business that week, then I’m self-employed. But if I can reasonably expect to get that $100 regardless of how hard I work, whether I take a vacation or work overtime, then what I have is a business.
Unfunded startup businesses are brutally difficult, and feel like unsuccessful self-employment, because you work 60 hours a week to earn that measly $100. Some weeks 90% of what you do is recurring, mundane work, and only 10% of it actually builds the business into a better state. That 10% is what you live for those weeks. If you do it right, over time you create an infrastructure of revenue that comes without regard to your personal effort that week.
There’s an inflection point in entrepreneurship. If you never get past the inflection point, your business ventures will always be low-wage jobs. That point is break-even. Not for the business, but for you. If you can break even every month, pay your rent, buy your food, and see the occasional movie (or whatever it is you do when you’re not working), then you no longer need to keep every last dollar you earn.
Here’s why that’s an inflection point:
Suppose you work 60 hours a week and earn $200 more than you need to live and be happy. 90% of that 60 hours may still be recurring, mundane work. It’s not building. But you’re supposed to be building, right? So don’t keep that $200. Take it and outsource the mundane work.
$200 goes a long way. If you hire someone at $20/hr, that’s an extra 8 hours you have to build your business each week (after taxes, overhead etc.). You’re still breaking even, so pretend the $200 wasn’t yours. And $200 can go even farther than that. Thanks to the Internet, you might find someone great to work for $4/hr, where $4 is a good wage. That’s a lot of time for you, and you’re providing needed employment.
This is why growth businesses don’t pay dividends. They reinvest them. So if you’re a bootstrapping entrepreneur, you shouldn’t dividend yourself, either. Break even and reinvest. The same is not true for self-employment. If you’re self-employed, you need to keep that extra $200 for a day when you can no longer work.
So, at the bootstrapping stage, that’s the difference between business and self-employment.
The Digital Gentrification of Facebook and the Internet
One of my concerns the last month has been a change Facebook made to their algorithm. They’re basically making it impossible to reach fans of business pages without paying to promote posts or get likes. They call it “declining organic reach.”
If you decide to pay for likes, the results may surprise you. I wrote in December about the problem of “promiscuous likers“. This is now getting more serious attention. One blogger created this viral anti-Facebook video in February. I like his approach and his larger dataset better than the work I did last summer. (Check it out if you’re thinking about advertising.)
Despite the twin pitfalls of declining organic reach and promiscuous likers, Facebook’s new algorithms still allow businesses with money to move into the neighborhood, set up shop, and get customers. Meanwhile, poor companies and startups vacate their properties. This process is nothing new. It’s called gentrification. Facebook is digitally gentrifying.
The same process is probably happening with Google AdWords. Years ago cost per click ads were an order of magnitude cheaper. Now you can easily pay $10 per click. For some keywords, it makes no sense. Then again, neither does overpaying for a brownstone in an up-and-coming neighborhood. But rich people do it, and the poor folks leave when they can’t pay the new rent.
There’s a serious issue being discussed right now that threatens to gentrify the whole Internet: net neutrality. In a nutshell, they’re talking about allowing Internet service providers to charge more for bandwidth needed to stream music and videos (mostly videos). Netflix and other established players will be able to afford these higher prices. Meanwhile, poor video startups may close up shop. If the current ruling stands, ISP’s could charge any company and kill any startup they pleased.
I’m not pessimistic about this. Facebook and Google aren’t the only ways startups can reach customers. ISP throttling will inspire creative work-arounds. But it does seem as if digital gentrification will take away the last of the low-hanging Internet fruit. The amount of capital already at work online will throw up barriers to entry, and in desirable neighborhoods like Facebook, startups and small businesses will need to pony up or move out.
It seems there ought to be implications for investors in startups, as well. If a company’s goal is just to “get eyeballs,” meanwhile deferring monetization and revenue in order to encourage fast growth, this strategy will probably require more capital than at any time in the past.
Fortunately, there are still two good ways to acquire customers for cheap: direct sales and search engine optimization. Each of these costs you nothing but your time. By working both in parallel, you can simultaneously interact with customers to find out what they want, and produce content that will attract future customers. Now, even SEO is gentrifying a bit, as it’s already impossible to catch up to behemoth, highly ranked sites for certain topics. But all you need to do is get started, and your niche is too tiny for the behemoths to fit into.
So if you’re upset that Facebook has undercut your online marketing, move to another neighborhood. Once you’re moving at a faster speed, you can set your eyes on that Facebook property you’ve been wanting.
Angel Investors in Boston
ArtistBomb, Inc. has not pitched in front of any investor or group of angel investors in Boston. We’ve had plenty of practice, and plenty of one-on-one conversations with mentors and gatekeepers. Their questions and comments have surprised me. These folks aren’t what I thought.
The Investor Spectrum
At the far “conservative” end you have Ben Graham, a conservative unsurpassed by anyone. Ben Graham was Warren Buffett’s teacher. He said, above all, you need to have a margin of safety. Value a business assuming:
- egregious omissions or misdirection may exist in the information you have,
- growth will be no faster than at any time in the past, and probably much slower,
- the best picture of the business comes only from looking at many years of performance averaged together, especially down years, and
- if all else fails, you can sell the furniture.
Consider all this when you value a business, and if the business securities still look cheap, you have a margin of safety.
Warren Buffett and Charlie Munger took the idea of margin of safety and combined it with the idea of economic moats. Find a business with something truly unbeatable, like Coca Cola’s global recognition, and you can sleep easier at night knowing that no competitor can hold a candle to you.
At the extreme other end of the spectrum is Yosemite Sam, prospector and speculator. His investment strategy is characterized by hope out of proportion to evidence.
I thought all startup investors were like Yosemite Sam. That was my limited experience, anyway. In talking to angel investors in Boston about ArtistBomb, though, I’ve been surprised by how many of them care about margin of safety (like, revenue), economic moats (like unbeatable advantages), and track record (strong team). These investors are, at best, only a distant cousin to Yosemite Sam.
But Yosemite Sam is out there. Shouldn’t you just try to find him and be done with fundraising for a while?
Three Kinds of Funded Startups
I think you should probably forget about Yosemite Sam. The crummy startups that I’ve seen him fund have been either
- Digging in Fort Knox, OR
- His personal friend.
The great startups that I’ve seen funded by others have what conservative investors want (at least, appropriate to their level of development). They have margins and moats and track records. And because they have these things, they’re most likely going to work out just fine.
Is your startup up to the task? What do you think you’d do differently to get towards margins, moats, or track records? Let me know in the comments below.
How I’m Spending My Time: Update
Back in September I wrote a short piece about how I was spending my time. Since it’s about six months later I thought I’d update the graph.
These are 40 day moving averages. When I think about where my financial future lies, I think it’s mostly ArtistBomb and partly MassLandlords.net. The way I spend my time backs that up.
The period in December where I focused less on ArtistBomb and more on the Worcester Property Owners Association (WPOA) coincides with the end of the restructuring effort at the WPOA. This put in place a new Board of Directors and a new action team, and roles were changed for most folks. Now WPOA is moving forward smoothly and the focus there is on MassLandlords.net, which I’ve spiked out separately.
MassLandlords.net has the potential to be a unified source of digital resources for landlords in Massachusetts. I’m enormously proud of the work done by Stellar Web Studios and the WPOA Board of Directors to help get this project off the ground.
You can see that other projects, like the BagPack for Hands Free Groceries, and even this blog, are getting less attention now. Partly this is because they’re getting less traction, partly it’s because they’re more clearly “lifestyle” activities. Yes, I like selling little grocery carrying straps on the side.
ArtistBomb.com and MassLandlords.net have been improved by what I learned with Hands Free Groceries and dougjq.com. So even if the latter properties aren’t as valuable, it’s not like the time spent there has been wasted.
Last month I commented on an article written by Rob Go that included the idea entrepreneurs should focus on “one company at a time”. I think about that when this graph gets updated every couple of days. Would either ArtistBomb or MassLandlords.net go faster if I wasn’t also actively landlording? Yes. Would they go faster if I were focusing on one and not both? Yes. Well, am I doing the wrong thing by splitting my attention so?
It seems like both businesses – ArtistBomb and MassLandlords.net — have the same kinds of challenges. In particular, can you reach enough of your customers at a low enough cost to make it worthwhile? The interesting thing about working both at the same time is that each has a different set of tools available. So in theory I can work with two different teams trying different tactics. What I learn at one can be brought to the aid of the other immediately.
From that point of view, I don’t think split focus is really so bad. Not right now, anyway.
Thoughts? Leave a comment.
The Ugly Truth Behind Paying for Facebook Likes on a Facebook Business Page
The Experiment
I recently tested paying for Facebook likes on a Facebook business page. It seemed like a low-effort way to build a channel for future marketing messages. Start with some good page content, put in some money, and watch it grow. In retrospect, maybe I shouldn’t have expected so much. Let me show you what I did and you can see for yourself whether there’s an underlying “ugly truth”.
The ad I created ran over the summer, around August. Facebook ads are undergoing new development, so what was true about the procedure this summer may now require modification. But I think the overall procedure must be the same. Start with an appealing image and some good text, like this:
I’ve completely distorted the ad because I don’t want any of my paid likes to see it here and think, “Oh man, he’s talking about me!” I’m not talking about you. Probably, you’ve never seen the Facebook page on which I ran the ad.
The ad used the full glory and power of Facebook targeting. Find me people:
- in certain US cities,
- between the ages of X and Y inclusive,
- who like culture, geneology, or the arts,
- who are not already connected to my Facebook business page,
- who are in one of the broad categories related to culture.
When someone likes your Facebook business page, you sometimes get a notice. Depending on their privacy settings, you can cyber stalk them (just a little, harmlessly) to see whether they might match your criteria.
The Data
Of my 38 likes, Facebook told me the names of 14 of them.
Of these 14 names, four of them had privacy settings that blocked some or all of my research. Based on reading the remaining 10 pages, I could see that four of them (40%) were what I would consider my dream customer.
What about the other 60 percent?
- One most likely lived in a city I hadn’t specified.
- One was devoted entirely to pornography (no, that wasn’t my ad).
- One had liked a lot of things with the word “respect” in it.
- One was devoted to hatred of the police (but he lived in the right city).
- One had such varied interests, I could only see that they had liked 2,100 things.
And this is where I became suspicious. Looking again at all of my new potential customers, I saw that the one who “liked” the fewest business pages liked 350 pages, the one who liked the most liked almost 3,600 pages, and the average “like count” was over 1,800. For comparison, in my own social circle, the average “like count” is something below 100.
The Ugly Truth
Imagine that you and each of these business pages are all posting on Facebook at the same rate. That means the “like” you paid for has a 0.05% chance of seeing your content. Once they see it,
- There’s some percent chance they click it,
- Some other percent chance they click towards making a purchase,
- Some other percent chance they actually make a purchase.
At about $1 per like, I could imagine having to spend over $50,000 (to get over 50,000 likes) before I could reliably turn a single post into a paid customer.
I think the ugly truth, therefore, is that Facebook lets you pay for Facebook likes by farming out your ad to users who will like anything. Facebook surely knows who these people are. The use of promiscuous likers, in the advertising context, means that the likes for which you pay are even less valuable than you think.
In the end, I decided to cancel paying for likes. It doesn’t make sense unless you have a marketing department with dollars to burn.
Ghostbusters: The Perfect Startup Business
A couple weekends ago I decided to go back to the 80’s and re-watch the original Ghostbusters movie (1984). When you revisit something you knew as a kid, you pick up on things you never saw before. With this movie, I saw the perfect startup business.
As with any startup, it begins with an idea. Catch ghosts. Good idea, there are lots of ghosts. And, as luck would have it, the founders are all trained in paranormal psychology. Motivated and qualified!
Rather than hunt down investors, they triple-leveraged the value of Ray Stantz’s parents’ house. Spengler does some math as they’re walking down the street that says they’re going to have to pay $95,000 in interest alone in the first year. Rates were at least 12% back in 1984, so that’s $791,000 of starting capital. In today’s money, that’s $1.8 million seed. Not bad, not bad at all!
Rather than test the market or bootstrap, they go full steam ahead and use their seed capital to buy a fixer-upper brownstone in New York City. They also buy a car. Then they hire a secretary to do nothing all day long except wait for the phone to ring. It doesn’t ever ring. They also take out an ad on daytime TV. Facilities? Check. Transportation? Check. Staff? Check. Marketing plan? Check.
We learn that they spend their last money on a Chinese take-out dinner. Luckily, they get their first customer that same afternoon. She heard about them on the TV.
About half an hour later they’re world famous.
Really, what more could you want from a startup? They even have a gnarly corporate theme song.
Small Business Challenges I Didn’t Expect
Everyone knows “when you start a company, it’s hard work.” But so far there have been a few small business challenges that I didn’t expect because they’re so lame, no one ever talks about them. Allow me.
Small Business Challenge #1: Business Bank Account
Some time ago I called a bank that was recommended to me about opening a business account. I asked what kind of paperwork they would need to see. Usually it’s an IRS letter with your tax ID on it, a driver’s license, and a company document saying that you are an officer empowered to open an account. They said that’s all I needed and that I should just “come on down, no appointment is necessary.” I walked in and waited 40 minutes to be seen by a business account professional. When we finally sat down at her desk, she asked me,
“Did you bring a copy of your license?”
“Yes, here’s my driver’s license.”
“No, I mean your license to do business in the city,” she said.
“What?”
“I can’t open an account unless you have a business license.”
“I wish you told me that over the phone!”
“I’m sorry.”
So I went over to city hall and applied for a license to do business.
“Did you bring a copy of your workers compensation insurance?” the clerk asked.
“What? No, we’re brand new. We don’t have any insurance. I need a license to get a bank account. I need a bank account to get other things like insurance.”
“Well, I can’t give you a license without workers compensation insurance. It’s the law, you gotta have it,” the clerk said.
I opened the account in a different city.
Small Business Challenge #2: Workers Comp. Insurance
In Massachusetts in particular, employers must have insurance to cover expenses for an employee injured on the job. This prevents employers from declaring bankruptcy in an injury lawsuit and thereby leaving the injured employee in a lurch.
The law grants some exceptions for founders who are also officers that own 25% of the company. The trouble is, the law mandates you have it as soon as you have a part time paid employee, no matter how little exposure there may be. A $300 premium for someone who’s only going to do 30 hrs of work for you at $10/hr doubles the cost of that person’s labor.
You might think you’d be set for a year, so just get it and forget it. But it’s very important that your employees be classified correctly. If you tell the insurer they’re a secretary and then you have them cutting pieces of wood, and they lop off their finger, that’s a big no-no. Talk about finger wagging!
Heaven help you if you pivot a great deal, you’re going to need to hire those employees as contractors or else keep calling your insurer to reclassify your laborers.
Small Business Challenge #3: Hiring Contractors
Contractors are appealing because, in theory, you just pay them straight cash and issue a single 1099 at tax time. You don’t even have to issue a 1099 tax form if they received less than $600 that year. That eliminates the burden of filing payroll taxes, and the extra cost of paying the required social security and medicare match.
Good luck hiring a contractor! There used to be a 20 point test — I think it’s simplified now — that basically says, “If you want to manage them like you’d manage an employee, there’s no way they’re a contractor.”
That means when you pay someone to do odd jobs, you need to withhold taxes, file those taxes, match those taxes with more money, and issue pay stubs. Very easy, once you know how. Those links are a good start.
Small Business Challenge #4: Any Kind of Underwriting
Underwriting is when someone vouches for your company and says that you’re respectable enough to receive their product. You need underwriting for general liability insurance, for unowned auto policies, and for merchant banking (i.e., taking credit cards).
Occasionally, you will find companies that recognize the underwriting problem. If I had known earlier about stripe, for instance, that would helped me avoid the headache of starting a legitimate merchant account. When you’re a startup, you’re so risky-looking that underwriters will rather focus on tried-and-true businesses than be faulted for going out on a limb with you.
With all these challenges, there’s a real gap between “zero” and “other businesses want to work with me.”
What do you think, was this helpful? Let me know in the comments below!
Does it Matter How Founders Split Startup Equity?
Ask the question, “How should founders split startup equity?” and you will most likely receive a hand-wavy answer. Some offer blanket statements like, “The programmer should get at least 30%.” Others offer calculators or other arbitrary measures. These answers have never satisfied me. Before I offer a more rigorous approach, I’d like to play Devil’s Advocate for a moment and ask whether rigorous founder splits are even necessary. Here are three scenarios that cover the spectrum of possible outcomes:
- The company fails and is worth nothing.
- The company becomes successful as a going concern but its stock does not command a premium on any market, private or public.
- The company is successfully sold in part or in total for a premium in the market.
The first scenario is clearly moot. The second leaves the founder without an “exit.” As a going concern, however, the company will provide salary, perks, and other recognition that can compensate the founder beyond what a partial or total sale would. In this case, founder’s equity doesn’t really matter.
The third scenario is what entrepreneurs hope for. Imagine the startup is sold at a significant premium to its value as a going concern. The difference between 20% and 45% founder’s equity has huge dollar value difference, but probably little or no difference in terms of their new-found quality of life. They’re a successful entrepreneur with vastly more money and cachet for their next project. In some blowout exits, founders become rich even with just a sliver of starting equity.
Such a focus on dollar outcomes could tempt you to argue that equity splits are a “champagne problem,” that the only scenario in which they obtain significance is one in which the founders are so successful they don’t really matter. But you’d be wrong to argue so. Equity splits actually matter crucially in two spheres of a startup’s early business, without which any speculation of an exit would be in vain.
The first sphere is in founder relationships. Founders must be able to talk candidly about their relative strengths and weaknesses, their relative contributions, and their mutual and perhaps uneven commitments to one another. These difficult conversations cannot be glossed over, or else down the road, when more serious matters of success and failure are at hand, there will be no professional basis for frank and searching problem solving.
The second sphere is in that embryonic stage where no one is getting paid for their work. Everyone must be counted on to lift their share of the weight. Shares must be allocated with foresight of individual founder availability, skills, and financial resources. Otherwise a situation may be created in which the most able have a diminished incentive to work hard, on account of the least able receiving an apparently unfair percentage of equity.
It’s imperative that startups start out on the right foot by discussing candidly and concretely how much each founder is bringing to the table and signing up to contribute.
If you’re sold that equity splits matter, let me know in the comments below. If you want me to take it to the next level and offer a rigorous method for how founders split startup equity, let me know that, too.
Time Management and GTD During My “Search”
I’d like to share some interesting time management data I’ve collected over the last nine months. When I first left Terrafugia, in October 2012, I started what my McKinsey friend called “search.” That’s when your full time job becomes finding your next full time job. I was busy with “search” the very first day off of work, finding entrepreneurial networking groups, looking into various business ideas, and meeting with all kinds of people about all kinds of topics.
After a time, it became clear that certain projects would earn my regular and ongoing attention. The graph below shows one series for each such project. The data begin on January 24, 2013, but they’re smoothed out as 40 day moving averages. The vertical axis shows “level of effort,” or what percent of my working hours went to a given project.
A short legend:
- “mtl 7” is my rental property. It’s a steady 10% effort except during vacancies, like in March and April.
- “ArtistBomb” is a bona fide tech startup with real potential; it’s where I put most of my effort now.
- “ghost bear” was the code name given to a project to develop a luxury consumer product. This was canceled due to what we forecast as shrinking margins and rising development costs.
- “stocks, finances, and accounting” is the time I spend keeping my financial house in order.
- “wpoa” is the Worcester Property Owners Association, a volunteer effort with far-reaching possibilities down the road
- “blog/consult/elance” tracks my time developing this blog, doing ad hoc consulting, and learning how to use elance both as buyer and seller. They’re grouped because these activities happen under the same entity.
- the “bagpack” is the BagPack for Hands Free Groceries, a consumer product that was able to get off the ground. (We’re still looking for a real model.)
- “search” includes the wide variety of projects with which I’ve had some contact, including apps for local search, hardware and software for robotic vision, and just over a dozen other concepts pitched to me. It also includes my networking time before I started representing ArtistBomb exclusively.
- “business of life” is my catch-all for things like “getting new tires” or “getting new cell phone.” They directly benefit my productivity but can’t be allocated fairly to any project.
I find it interesting to look back and see how my attention has shifted hither and thither. Some projects require constant nurturing, some develop wings and fly off on their own, some have to be taken around back and shot. But that’s the risk with any new venture. Good time management ensures that you’re getting the most out of yourself, even if sometimes you head down blind alleys.
If you’re interested in knowing how I track my time like this, check out my previous article.
What do you think? Have you pivoted your time away from some things and onto others in the past year?
