The Dubious Value of Starting a NEW Business …

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In the last couple of weeks I have had a re-birth of sorts. I have seen the new vision of entrepreneurship in another phase of the Internet industry that is just starting and promises to be the source of the next tide of wealth.

For the last 20 years I have been working in what had been an emerging industry — the Internet. It all started out with a lot of money and activity aimed at creating the future but, as with most new industries, the creation of the technology that would power the future was extremely expensive. Also, many of the startups of the dot-com era were just too far ahead of the technology, so they failed and the technology they spent million$ on was sold off for thousand$ and built the next generation of startups. This is how new industries get started. I wrote an article that went viral at the time: Bonfire of the eVanities.

Well, the Internet industry has emerged and is now mainstream.

For years, my thinking centered around starting something entirely NEW. You know, identify the pain and find a way to solve the pain. A whole decade of entrepreneurs have been searching for pain and ignoring the value that sits staring them in the face! Would-be Internet billionaires pitch ideas for products and services to serve niches that are only half-way interesting. I have to admit that I rarely hear a totally new and exciting business idea anymore. 

Perhaps this is why there isn’t a feeding frenzy on the part of venture investors anymore. They’re tired of backing good but not revolutionary ideas. They want to see at least 3 years of revenues before they’ll invest because they know from past experience that the totally new idea that will revolutionize the Internet is normally a chimera. 

I totally understand why people spend long dark nights of the soul devising startup ideas.

From where most people sit these days, the prospect of getting a great job is … well … daunting at best. You get out of school with a load of debt and the only jobs available seem low-paying and low-opportunity. Or you have been laid off from a great job and have no prospects of being re-hired by anyone at that same level. Or you took early retirement and need to work to supplement your income. Under these circumstances, putting together a startup can seem like the answer to all your problems.

The real truth, though, is that for most people a startup venture is just the beginning of their problems. 

A startup is pure risk. I don’t care how great the idea or how thorough the planning, it is still pure risk. That is why it is so difficult to get financial backing from anyone but Mom and Dad and your best friends.

One of my specialties has always been showing my clients how to bootstrap their startups to avoid becoming the victims of vulture capitalists. I believe in building a revenue base and using that revenue to power innovation. A flow of reliable revenue attracts even the most skeptical investors.

Do you think the cloud is where you want to create your innovative idea? Why not start with this already-established provider.

Have an idea for an eco-friendly product line or an entrance into cultivation of organic foods or medical marijuana? Your base of operations might be well served by an already-established enterprise.

There are three forces at work that you should know about:

The Builders and Sellers – There are tech-savvy people who build web properties, set up all the sophisticated SEO and advertising income, and then sell the turn-key operations. Similar to franchises where you buy a turn-key operation, these situations are better because they already have customers and revenues.

The I Want to Do Something Else Sellers – There are a lot of people who started web enterprises years ago and have built them up to be successful operations, but want to move on to something else. These web properties produce valuable consistent revenue and can be built on using your own ingenuity.

The Scammers – Yes, there are people who build a website and populate viewership using techniques that produce worthless traffic. That is why you should be careful to use a web property broker that does research into the validity of the seller’s claims. Not all do this.

The point I am trying to make is that it isn’t necessary to come up with a great new idea to get started in a business of your own. It is possible to buy an existing revenue-producing web property, get financing for the purchase, and use it to build out your most innovative ideas.

There is also another trend you should know about:

The Web Property Investment Funds – Many revenue-producing web properties require just a few hours a day to update the content,  SEO and advertising. There are investors who hire tech-savvy people to do this, and maintain a fund of income-producing web properties. This is a new space for the private capital crowd and it is going to grow.

I really encourage you to look into this emerging industry. As always, I am available if you have questions vduff @ abusinessplan.com

How to Write a Vision and Scope Document

You should be doing this whether you are just starting to plan your new business, working on your plans for the new year, or preparing a presentation for funding.

Sitting down to write a vision document and a scope document helps you see holes and inconsistencies in your business activities and can give you a great new idea …

http://smallbusiness.chron.com/write-vision-scope-document-73586.html

Vision and scope documents define what your customer or company has in mind as well as describe the work process necessary to reach that vision. For example, entrepreneurs benefit from writing a vision and scope document to define their business ideas and list how to develop them into reality. Project managers use such a document to identify the expected result of the project and to set forth the methods and activities necessary to achieve that result.

Three Signs You Should Read …

This morning an important economic indicator, Consumer Sentiment, showed a big drop. The talking heads blamed it on higher interest rates and consumer fears that those higher rates would choke off improvements in the housing market. What improvements? Most of the movement in the housing market has been due to hedge funds and other big investors buying bank REO (real estate owned) and troubled properties. New home sales, an area of the housing market that represents individuals buying homes, has been performing poorly.

Retail Sales, the economic indicator that measures about 70% of domestic US economic activity, also reported a disappointing number that was not in keeping with the image of economic recovery that has been promoted. That is particularly worrisome since August and September are ‘Back to School’ months that rival Holiday Season consumer spending.

And in case you haven’t noticed the price increases during your last trip to the supermarket, the Producer Price Index (a measure of wholesale prices) was up mostly from food and energy prices.

The Stock Market is still surging because the big institutional investors, who are mostly in the driver’s seat on Wall Street these days while average individual investors have been notably absent, expect the Federal Reserve to continue dumping money into the economy — money that is clearly not making its way to Main Street USA.

I have clients desperate to get funding for their good solid businesses, but the banks are not lending.  And why should banks lend? Banks make more money when they can charge higher interest rates. These days, they are making their money off overdraft charges and account fees — waiting for the Fed to allow interest rates to rise.

If you have been following this blog, you know I have been warning about the signs we are moving into another recession. If you think doing business has been tough, be prepared for more difficulties on the way. Conserve your cash and start talking with your partners and employees about how to survive an economic downturn.

I am putting together an online session to talk about how to survive another economic downturn, so stay tuned …

If you want to set up a private session, email me at vduff@confidentialbusinesscoaching.com …

A Look at the Economic Future

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I want to take a break from talking about re-inventing a business to focus on a trend I find worrisome.  One of my favorite economists, Joseph Barbuto has been talking about this.

This is a chart depicting the velocity of money, thanks to one of the best economists I knew on Wall Street –  Lacy Hunt at Hoisington Investment Management.

The velocity of money is important because it tells us where the money in the economy is going.

When money velocity is high, the money currently in the system is flowing freely throughout the economy.  Wages rise, banks make loans, businesses thrive.  Of course, when money velocity is too high it creates inflation.

When the velocity of money is low as depicted in the above chart, money in the system is not reaching Main Street.  This is important particularly now because the Federal Reserve has spent recent years pumping money into the system.  Where has all that money gone?  Well, banks [including the big brokerage firms that have shifted their legal identities to include that of banking institutions], and banks are lending to only the highest rungs of the credit ladder  — brokerage firms, big companies and institutional investors.

The velocity of money creates pools in specific asset classes  —  In the above chart, the velocity of money declined after 2000 and it pooled in the housing market.  After the housing bubble burst in 2005 the velocity of money increased until it became clear that a lot of this money was disappearing in loan defaults.  That’s when the Fed dropped interest rates and began pumping money into the system to try to get the economy back on track.

Note that this didn’t increase the velocity of money.

Money is pooling in institutional investment accounts where it created a bubble in the stock market, emerging economies, gold and may even be creating another bubble in institutional investment in housing.  Much of the improvement in the US housing market has been due to hedge funds and foreign investors buying blocks of houses/apartments to use as rental properties.  However, money has been conspicuously absent from job creation, wages, and consumer credit.

What a lot of top economists are wondering right now is when the investment asset bubble will burst.  This is something you should wonder, as well.

Another economic crisis will compound your struggles over the past years, so start conserving money and lowering your expenses now.

When money velocity is rising, it means the economy is expanding. Production capacity is increasing. Deposits from rising wages are being lent and invested effectively. Essentially, more money is moving around the economy, in the places it should. Late 1978 into 1997 was such a period.

When money velocity starts to fall (as we saw after 1918 or 1997), it means investment is increasingly speculative. Less money is spent on productivity enhancements or capacity improvements. Workers’ wages stagnate or fall, so they spend less. Basically, the money flow shifts.

Think of it like our circulation. When money velocity is rising, blood is flowing through all our veins and arteries smoothly, feeding our muscles and organs the necessary nutrients and oxygen we need to function optimally. When money velocity is falling, blockages form and the blood pools dangerously. Blood clots and strokes become a constant threat.

When money velocity drops below average levels, as the black line in the chart above shows, then those bubbles and the debt behind them are starting to deleverage, and that causes deflation and negative money velocity.

– See more at: http://survive-prosper.com/2013/08/28/why-quantitative-easing-has-not-created-inflation-and-why-it-wont/#sthash.kdoDLpyH.8FWgXJhU.dpuf

When money velocity is rising, it means the economy is expanding. Production capacity is increasing. Deposits from rising wages are being lent and invested effectively. Essentially, more money is moving around the economy, in the places it should. Late 1978 into 1997 was such a period.

When money velocity starts to fall (as we saw after 1918 or 1997), it means investment is increasingly speculative. Less money is spent on productivity enhancements or capacity improvements. Workers’ wages stagnate or fall, so they spend less. Basically, the money flow shifts.

Think of it like our circulation. When money velocity is rising, blood is flowing through all our veins and arteries smoothly, feeding our muscles and organs the necessary nutrients and oxygen we need to function optimally. When money velocity is falling, blockages form and the blood pools dangerously. Blood clots and strokes become a constant threat.

When money velocity drops below average levels, as the black line in the chart above shows, then those bubbles and the debt behind them are starting to deleverage, and that causes deflation and negative money velocity.

– See more at: http://survive-prosper.com/2013/08/28/why-quantitative-easing-has-not-created-inflation-and-why-it-wont/#sthash.kdoDLpyH.8FWgXJhU.dpuf

When money velocity is rising, it means the economy is expanding. Production capacity is increasing. Deposits from rising wages are being lent and invested effectively. Essentially, more money is moving around the economy, in the places it should. Late 1978 into 1997 was such a period.

When money velocity starts to fall (as we saw after 1918 or 1997), it means investment is increasingly speculative. Less money is spent on productivity enhancements or capacity improvements. Workers’ wages stagnate or fall, so they spend less. Basically, the money flow shifts.

Think of it like our circulation. When money velocity is rising, blood is flowing through all our veins and arteries smoothly, feeding our muscles and organs the necessary nutrients and oxygen we need to function optimally. When money velocity is falling, blockages form and the blood pools dangerously. Blood clots and strokes become a constant threat.

When money velocity drops below average levels, as the black line in the chart above shows, then those bubbles and the debt behind them are starting to deleverage, and that causes deflation and negative money velocity.

– See more at: http://survive-prosper.com/2013/08/28/why-quantitative-easing-has-not-created-inflation-and-why-it-wont/#sthash.kdoDLpyH.8FWgXJhU.dpuf

What’s in a Name? – Re-inventing a business

I have always felt that the name of a company should tell the viewer what the company does. That is why I chose Confidential Business Coaching as my new company name. I am still keeping aBusinessPlan.com active because it is so well-known, but it is more indicative of project work. My analysis of the services my clients have accessed and appreciated most during the past few years indicates a greater need for focused work sessions involving specific questions, brainstorming and problem solving. 

Value Identification

I spent a lot of time thinking about what my clients have valued in my services over the years, and what I feel is the true value behind my services. What came to mind was my extensive knowledge of economics, capital markets, business models, strategic thinking, contacts, and my direct and truthful approach. In short, they trust me to do everything I can to keep them safe and give them the advice they need to be successful.

Service Description

The word coach was not a favorite of mine. I didn’t think it sounded professional, but it has evolved in meaning over the years and is now as accepted and descriptive as other words such as attorney and accountant. In fact, it describes something both those words have evolved to mean: advisory sessions. I even tell my clients that I am like an attorney but I advise on business, not law. This pretty much describes what I do – entrepreneurs come to me to ask questions, present problems to solve, and brainstorm in sessions normally lasting one or two hours.  Not only that, the mainstream understands the word coaching as an occasional or regular session with a knowledgeable adviser. Bingo!

So the name of the business must include the word coach or coaching.

Defining the Service

As a coach, I am clearly offering advisory services on a focused session basis. Consulting evokes the image of project work, which seems to be less important to today’s entrepreneurs and business executives. The next task is to define what kind of coaching I offer. That’s easy. I offer business coaching … but that is a broad and overused term.

I thought about what has always been the differentiating professional element over my own business career. That’s easy: I have been a fiduciary for 35 years. TheFreeDictionary.com defines fiduciary this way: An individual in whom another has placed the utmost trust and confidence to manage and protect property or money. The relationship wherein one person has an obligation to act for another’s benefit.

Yep. That’s me.

People come to me with ideas they want kept away from those who might copy them, and problems they want kept secret. They want reliable advice customized to their needs, and they usually don’t have an objective person to consult confidentially. Relatives and friends tend to say only pleasant and supportive things. Business partners and employees are too close to the enterprise to be truly objective. Worse, all these choices might talk about things that shouldn’t be talked about.

I feel the most important characteristic of a business coach is confidentiality.

Branding

Confidential Business Coaching also presents a professional brand image, in keeping with how I want my business image to be conveyed. Yes, it sounds serious. Yes, it advertises fiduciary care. Yes, it is how I want my services to be perceived.

A business name that has attracted my attention, and has remained unforgettable, is Where the Fuck Should I Go to Eat –  I love the audacity and the fact that it presents a clear definition of what the website provides. I decided not to apply such audacity to my own business name – this time.  Hmmmm …

 

 

Is your idea really disruptive?

It may come as a shock to you, but your fabulous business idea is not disruptive unless you are producing a product or service that can sell at a lower cost, competing with products offered by big corporate industry leaders. The reason it’s disruptive is that big companies can’t afford to go after low-priced markets. They have so much overhead, that must be figured into the prices of their products, they have to focus on marketing expensive products to high-end consumers. This is the only way they can generate enough gross margin to pay for their administrative overhead.

In a blog article for Harvard Business Review, Maxwell Wessel argues:

If a start-up launches a better product, at a higher margin, to an incumbent’s best customers — that’s not disruption. That’s just…innovation….High-end disruption is an impossible proposition, because when innovation yields a premium product, firms can rationally respond. They can charge more, cover their costs, and adapt. And disruption itself represents exactly the opposite scenario….Not all successful products will fall into the category of disruptive innovation. Was the iPhone a case of “high-end disruption”? No. It was simply a better expensive smartphone than the BlackBerry; and RIM’s failure to adapt doesn’t mean they were “disrupted.” It just means they lost.

Most startups can be disruptive by offering good basic products that most consumers or businesses  can afford to buy. A  startup has a mighty advantage over large existing companies because it has less overhead.  This is why bootstrapping is a wonderful way to get your business launched. A  low-overhead startup can produce and sell a competing product at a lower price, and still make money.

Disruption refers to the ability of a startup to gain a foothold in the consumer marketplace, on the basis of lower price for similar products produced by major firms. This allows the startup to disrupt the status quo and use revenues produced by this strategy to grow the new enterprise into a major producer, itself.

 

 

Tips on pitching investors …

If you are trying to get your company funded, it is helpful to try to get inside the heads of your potential investors. Each person you approach, whether a friend, a family member, your dentist, or an angel investor, has plenty of opportunities to invest money.

Consider your competition for their investment dollars. Even though bonds are not paying much they represent relatively safe investments. The stock market is reaching new historical highs. Startups and existing companies are aggressively pursuing investor dollars because banks are not lending easily to small business. In addition, banks, insurance companies and other financial services firms have created a plethora of new investment products promising attractive returns. Not only that, many people are spending their extra money helping to support relatives and friends hard-hit by the Great Recession.

The investor’s dilemma. With interest rates at record lows bonds do not yield much return. The stock market is feeling toppy and our political system is producing more confusion about the future, leading many investors to focus on keeping their money safe rather than investing for total returns. Also, during boom times, investors look for investments that will either provide big returns or good tax write offs. During lean times incurring losses to provide tax write offs is something most investors try to avoid.

The entrepreneur’s dilemma. You need money to start and grow your business. To get that money you must convince a potential investor that investing in your company is a safe  investment that can return significant income and /or profits.  Many investors are seeking income in the form of interest, dividends, or royalties for their investment money. Equity in your company may not be enough to attract money. No matter how much of a sure thing you think your company represents, the brutal facts are that a majority of startups fail in the first year and many of those surviving fail in the second or third years. Face it, an investment in your company is risky.

What to do. There are two things you can do to improve the chances of getting investment in your company:

First, eliminate as much risk as possible. This involves scrutinizing every single one of your assumptions for delusional thinking. Figure out ways to bring immediate revenues into the company by selling basic products and services, and try to get letters of intent from potential customers. This dramatically reduces the risk of investing in your company. If you can bootstrap the launch of your company based on revenues from basic, less- disruptive services or products, you will create a proof of concept that may attract investors.

Second, don’t think of investment money as free. Approach your presentations to potential investors from a win-win mindset. If you have already created revenues in your company consider offering modest shareholder dividends or issuing debt that can be converted to equity.

Above all, ask your potential investors what they would need from you and your company to make them more likely to invest.