TechStars Reality TV Show

If you’re into tech then you’ll love this. Bloomberg have just started airing a reality TV series called TechStars. TechStars is a New York based startup accelerator similar to Y-Combinator. Think of it as The Apprentice for Startups, or Dragons Den, where the dragons are Venture Capitalists.

It follows a half-dozen entrepreneurs through the TechStars three-month accelerator program. It offers a fascinating behind-the-scenes glimpse of what venture capitalists think about entrepreneurs and their startups. You can watch the trailer here and the first episode here:

Unblock US!

Before the iTunes era content producers such as movie studios and the recording industry ran their businesses like any other global franchise. They would set up satellite offices around the world, license their creations to local operators around the globe and instruct them to sell content through their distribution networks such as video stores, television networks, CD stores and so on. We’d go into store, buy a DVD or CD and leave with a disc in our hands.

This way of consuming content has become increasingly extinct. Napster, Kazaa and then iTunes introduced us to a new way of consuming. It changed our habits, made us impatient and spoilt us for choice practically overnight. The world has shifted away from consuming content served on physical media (even video games are served digitally now – think iPhone games Vs Nintendo GameBoy!).  The internet, broadband penetration and the pervasiveness of smart devices has taken digital content to the masses.

With this in mind, we should be able to watch anything, on any device at any time, on demand. I might sound like an old IBM ad, but its true.

I say should because I live in Australia. Australia has great sun, surf, and beer, however what we don’t have is Netflix. We should have Netfix. We should have Hulu. We should have Pandora. We should have Spotify. We should have Turntable FM.

The problem here is that the world has changed and the archaic business models that were set up by content providers to serve us with CD’s and DVD’s have remained unchanged. They have created geographical boundaries around content ownership in a world where content is served digitally, and where no geographical boundaries exist. The services mentioned above have to grow with their brakes on because each global region is subject to its own content ownership agreements that were established before the web. This structure stifles the growth and natural momentum of these highly scalable franchises.

As an Aussie consumer I should be able to watch Netflix on my Apple TV, Playstation 3 or iPad without any hacks. If I lived in the US I could do this for $8 a month. I could listen to Pandora for free. I could watch Hulu too.

What prompted me to write this post was a website I recently stumbled across called Unblock US. For $5 per month I was able to update the DNS settings of my router to make my network appear as if I was connected to the internet in the US. With these settings in place I registered for Pandora, Netflix and Hulu on my prepaid US MasterCard.

It took me 5 seconds to get this working and it is not going to take much longer than that before the world catches on, forcing local content providers to rethink their business models.

In-App mCommerce

I was playing Angry Birds today and found myself in-between stages when a popup presented the opportunity to buy a plush Angry Birds toy. I clicked the image and was taken across to the Angry Birds web store where I could then browse and buy something.

This was the screen flow:

In-App mCommerce is a good example of mobile commerce which is set to explode. The ability for consumers to transact directly from their smart phones provides a huge opportunity. The flight toward mCommerce that is taking place is similar in many ways to the transition that took place from fixed line phones to mobile phones. Before mobile phones were around people were bound to a desk in order to communicate. Mobile commerce means we don’t need to be bound to a computer to transact online. We can do it anywhere, anytime, and the time to start thinking about this is now.

The building blocks are in place to take advantage of this opportunity as smart phone penetration rates have never been so high. Strategies include driving people online (from an offline setting) via mobile using NFC and QR Codes, and driving users to mobile shopping carts using SMS and in-app purchases.

Ups & Downs

render_Horizon_1.jpgOne of the companies I’ve been mentoring at PushStart recently applied to a Melbourne based incubator that was offering $20,000 in seed funding but unfortunately they never made it through. They missed out on a 1 in 4 chance from hundreds of applicants. These guys have a good product and a strong team but they are competing in a very competitive space with a product that does not monetize easily. It is their first attempt at a startup and they’ve made good progress from a development standpoint so far, but have no users yet.

They are in a chicken and egg situation. They need users on their platform and they will get some funding but in order to get users they need some funding. At the same time there is a land grab happening in the space they are playing in (group messaging) and the big players such as Apple and Facebook are entering the market with similar platforms so user adoption is going to become more difficult as the number of messaging platforms increase and the critical mass of users across large messaging networks begin to fragment (think iMessage, BBM, GroupMe, Skype, Facebook Messaging, SMS, WhatsApp). They are trying to do what Google+ is attempting to do to Facebook but on a much smaller scale, however when large interconnected networks gain critical mass it becomes exponentially more difficult to migrate users to a new platform, no matter how good your new technology is (Myspace to Facebook was the exception).

These guys have bootstrapped 85% of their app and will have a minimum viable product ready very soon so my advice is to keep bootstrapping and get it into the marketplace and to tell people about it, get some users and then try and get funding again. They can do this before Christmas. They are just around the corner from a public release so its worthwhile seeing if they can gain user adoption. They have some good technology so if it doesn’t gain a user base the next step might be a licensing deal to integrate their technology into an existing messaging app that already has millions of users.

The entrepreneurial path can be brutal. What I’ve learn’t is not to hang your hat up on one opportunity. Don’t get fixated on the outcome of a single deal or a single persons validation of your work. The higher your expectations are of a particular outcome, the more disappointed you will be if it does not come off as expected. Remain flexible in your thinking and try and maintain an unemotional bias so that you can pivot or change course if need be.

Stupid

Great marketing from Diesel.  Reminds me of Steve Jobs’s “stay hungry, stay foolish” mantra.

Free Cashflow & E-Commerce

An apple and an orange.

I’ve been looking at a few opportunities lately and one of the metrics I like to look at is the cumulative cashflow of a business. When I talk about cumulative cashflow I am referring to the cumulative sum of the businesses free positive cashflow or negative cashflow on a monthly or yearly basis.

This is by far one of the most overlooked metrics of investors and/or entrepreneurs starting out in the tech space, especially in e-commerce.

All businesses “need money to make money” as they grow and the internet provides for a platform that enables companies to scale in size (double, tripple, quadruple) with disproportionately less cash required to fund growth than the cash that might be required to fund a traditional bricks and mortar (or service) business that is growing at the same rate.

E-commerce businesses that have a requirement to hold inventory are not scalable in this sense as their cashflow requirements are inversely proportional to the revenue they generate. Put simply, the more sales you make, the more cash is needed to fund stock and operations. It means that for every dollar earned in profit, more than a dollar needs to be invested in the business to fund its growth whether that be inventory and/or operating expenses.

It does not mean the business is unprofitable but it does mean that your hard earned profits are more likely to be sitting on the shelves of your warehouse in the form of stock than in your bank account.

Generally speaking, fast growing online retail businesses have very low profit margins (Zappos 3-4%, Amazon 2-3%). What ends up happening in these kinds of companies is that growth has to be funded by debt, borrowings or shareholder dilution instead of free cashflow. If you’re a startup entering into e-commerce, you will most likely need to raise more money as the business grows to fund inventory (this is not true for private sales sites and drop shippers or e-commerce businesses that do not hold inventory).

The problem is that the small profits which they turn do not cover the funding requirements of the business resulting in a negative cashflow. A growing e-commerce businesses that has such small profit margins will almost always have a negative cashflow unless operational expenses stop growing, and inventory remains stable. Even then, it could take years before you are able to turn your inventory enough times to recoup your investment. This is true for Diapers.com, Zappos.com and Amazon.com.

The opposite is true for a Software as a Service company. Take 37 Signals for example. These kinds of businesses incur the bulk of their costs in the early stages of developing a product. Lets assume it cost them $10,000 to develop Basecamp. They might receive recurring monthly subscription income of $500 per month for software that requires $100 a month to maintain and improve incrementally. As the business grows the cashflow will always be positive as the maintenance costs remain relatively stable while subscriber numbers increase. A year later they might be earning $1000 a month in subscription income but their maintenance costs are still $100. Over time this kind of model becomes a cash cow and you can build nice offices. The key is to ensure your product serves a real need so that subscribers remain customers and your churn rate is low.

For this reason I’d rather a growing SaaS company doing $1m in sales any day over a growing online retailer doing $10m in sales.

So look closely before you start or invest in an “internet” business. They are not all created equal.

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Marc Benioff and Eric Schmidt Interview

This is a great video that all entrepreneurs should watch. A candid interview between Salesforce.com CEO Marc Benioff and Google Chairman, Eric Schmidt.