Putting it Together: The Credit Crunch, A Weak Dollar, and Entrepreneurship

August 27, 2007 1 Comment

Dow Jones Down 56 pts, Aug 27I am writing today in response to an Open Thread on GigaOM.

The credit crisis will have an important impact on entrepreneurs, but must also be considered in the context of a weakening dollar and the risk of an economic downturn. The likely affects are three-fold:

  1. “Exits” through acquisition by an established industry player or private equity buyout will be less likely
  2. Consumer dollars may shift away from startup businesses whose products look a lot more like “luxuries” than day-to-day essentials
  3. Top qualified job candidates and new entrepreneurs may delay their entry into the market until conditions improve

Exits: If acquisitions become more challenging, startups will be pushed toward IPOs as the most viable exit strategy. Unfortunately, with an overall economic downturn in sight, investors are also less likely to be seeking high risk small-cap startup IPOs.

Overall, if entrepreneurs and venture capitalists cannot exit on their investments, the engine that powers Silicon Valley could slow down (note: I deliberately refrain from using “grind to a halt”). At first, if VCs are flush with cash to invest, they will continue to do so. As the burden of their growing portfolio grows, however, investing would slow.

Consumers: With home values dropping or plateauing in many markets, consumers will be cutting back on spending on luxury goods. And yes, Premium Membership at Flickr counts as a luxury good. The same goes for a weak dollar. Imported goods like electronics and gourmet foods, which become more expensive as the exchange rate weakens, could easily force consumers to shift spending away from new web toys.

While it is true that many web 2.0 businesses rely on advertising money more than actual consumer spending, it is important to remember that advertising is also linked to consumer behavior. In hard times, advertising dollars shrink.

Top Talent: If exits are hard to come by, it means that one of the great attractions (mind you, not only) of working at a startup, the chance for a big payday after a few years of work, is much less likely. Without that big carrot to lure in the brightest minds, the best job candidates may stray to other businesses with more secure, lucrative paydays like investment banking, consulting, and jobs in “industry.”

If recruiting the right people to fill important roles becomes difficult, growth at startups could slow, further depressing the situation in places in Silicon Valley.

At Least One Silver Lining: It would be inappropriate to conclude a post like this without an explanation of at least one of the potential benefits of the current credit crisis and economic situation.

This is starting to look like a good market for buyers. It will be possible for businesses to acquire other companies and consumer to buy houses at more reasonable prices, assuming they have the cash necessary to afford them. While this won’t be the case for all buyers, those which are well prepared will find the situation to be quite favorable.

As the saying goes, “buy low, sell high.” Sometime in the near future, conditions might be just right to make that home purchase you’ve been waiting on.

What do you think are the other potential upsides?

My Previous Posts on these topics:

Filed under Entrepreneurship Tagged with

Off the Beaten Path: Tourism for Expats

August 26, 2007 Leave a comment

Camel During the first weekend that I stayed in Riyadh, Saudi Arabia while living as an expatriate consultant, I quickly realized that there was a significant untapped business opportunity to provide tourist services to expatriates in unusual locations.  Riyadh, and Saudi Arabia broadly, are not your typical destinations for tourists (in fact, there are no tourist visas), but there are, large numbers of expatriates who live within the country.  And there is very, very little to do.

Many of us benefit from expense accounts which compensate for having been pulled from our lives in places in London, Amsterdam, and Toronto to move to the desert in August.  Those accounts afford us the opportunity to explore the region every few weekends, but aren’t necessarily large enough to fly us home regularly, or even necessarily get us outside of the country (flights to most “destination” cities like Beirut or Cairo are upwards of $700 USD from Riyadh).  We can, however, afford fun, reasonably priced local activities that allow us to explore the cities and regions where we live – making the best of the opportunity while we are here.

The challenge, however, is that the tourism industry is substantially underdeveloped.  Beyond a large, good quality museum, Riyadh has little in the way of tourist attractions.  Some opportunities do exist, for instance, to take advantage of things that locals already do, such as ride ATVs in the desert, eat traditional foods, or smoke a hookah.  Others, such as visiting the local camel market, might result in the lucky coincidence of finding an enterprising rancher who will let you ride his camel.  By and large, however, it is a substantial undertaking the string together even a few interesting activities.  Some of us are young, adventurous, and enterprising enough to do it, but there are surely thousands who are not.

All it would take is formalizing a few key relationships with locals (e.g. the guy with a small fleet of ATVs, a camel rancher or two), creating some marketing materials, hiring a couple English-speaking guides/drivers, and you would be well on your way to having a lucrative local tour business.  The biggest challenge (and not a small one to overcome) would be finding someone who could manage and grow the business on the ground.

Taking it a Step Further:

Okay.  So, you could make a little money selling tourist packages to a few expats in Riyadh.  You could make a few bucks doing lots of things you say.  I think there is, however, a broader opportunity here.

The Middle East is not a typical tourist destination, but with business booming on the wave of high oil prices, the region is awash in money.  That money is bringing in a lot of skilled, highly paid workers who are eager to do something on the weekend, and are curious to see the world.

Expand Throughout the Region: I believe that this same opportunity is present in many countries in the region.  Bahrain, another country I have visited recently, had a number of activities which were available, but were poorly marketed and difficult to arrange.  What other cities might this work in?

  • Doha
  • Jeddah
  • Abu Dhabi
  • Others…?

Invest In Developing Your “Suppliers”: Because many tourist activities do not exist in these cities, you could become a co-investor in the development of several related businesses that would appeal to both locals and tourists.  These might be:

  • Go-karting
  • Up-scale local dining
  • Water sports (e.g. wave runners, parasailing)
  • Adventure travel (e.g. spelunking, climbing)
  • Cultural education (e.g. cultural etiquette courses)

As more people begin to venture into the Middle East (and the boom in Dubai alone is enough to ensure that will happen), the opportunity will only grow.

Filed under Business Ideas Tagged with ,

Blog Action Day: Collective Action for the Environment

August 22, 2007 Leave a comment

Blog Action DayAvid reader and comment-extraordinare Tony sent an interesting link this morning: Blog Action Day. I’ve signed up and committed to writing a post on The Strategy Fox on October 15th about exciting business ideas related to the environment. If you have any ideas or know of any exciting startups that aren’t well known, send them my way.

Bloggers can participate on Blog Action Day in one of two ways:

  1. Publish a post on their blog which relates to an issue of their own choice pertaining to the environment.
  2. Commit to donating their day’s advertising earnings to an environmental charity of their choice.

Simple enough. I’m happy to do my part.

Filed under Business Ideas

Why Wal-Mart’s DRM-Free Tunes Will Change the Way You Buy Music

August 21, 2007 1 Comment

DRM-Free Music from Wal-Mart Great news was announced today for music fans, and from an unusual source: Wal-Mart. A time when we can purchase our music online and do what we like with it (share it, copy it, play it on whatever device we like) is finally about to become a reality. From Reuters:

Wal-Mart, the world’s largest retailer, said its new MP3 music catalog included thousands of albums and songs from major record labels like Vivendi’s Universal Music Group and EMI Group without copy-protection software, known as digital rights management.

Wal-Mart said it would sell the “DRM-free” MP3 downloads of music by artists like the Rolling Stones, Amy Winehouse and Maroon 5 for 94 cents per track or $9.22 per album. It said the new format let customers play music on almost any device, including iPods, iPhones and Microsoft Corp’s Zune portable media player.

The news from Wal-Mart is going to mean a big change for the industry, and for two important reasons:

  • Wal-Mart is such a powerful competitor, it virtually guarantees that other music retailers (e.g. iTunes) will have to follow suit and reduce their prices on DRM-free music in order to keep customers
  • Wal-Mart drives such sales volume, Sony BMG and Warner Music will soon realize that they are missing out on a large number of potential sales by not offering their music in DRM-free format as well, putting pressure on them and their artists to come to an agreement to join Universal and EMI

Until recently, the buyer of digital music was given fewer rights for the use of his or her music than the buyer of a traditional CD. Recording companies required that digital music be protected in Digital Rights Management (DRM) software, in an effort to combat the online piracy of music. This created the frustrating situation wherein music bought on Apple’s iTunes store [by far the largest with 80% market share in the US] could only be played on one type of MP3 player: the iPod. Apple justified this by saying that its DRM software would be compromised if it was shared with other hardware manufacturers.

The first major progress toward giving music buyers back their rights came several months ago when Steve Jobs and Apple advocated that music should be available to consumers in a DRM-free format, resulting a few weeks later in the advent of “premium” iTunes downloads without DRM for an extra $.20 per song. It was a move in the right direction, but many songs remain unavailable without DRM, and paying more for the identical song just to get the same rights you had if you had bought the CD seemed unfair.

Soon we will quickly see both a drop in the price of DRM-free music and the unlocking of music from more recording labels. Thanks Wal-Mart.

Read More:

[And thanks Engadget for the graphic!]

Filed under Business Analysis Tagged with , ,

Consulting, VC, or a Startup? Best Career for an "Entrepreneur in Waiting?"

August 19, 2007 2 Comments

Entrepreneur in WaitingI am a part of the great swath of young professionals around the world who might be best described as “entrepreneurs in waiting.” We are people who aspire to one day start our own business, or partner up to create one.

We have in common the desire to be prepared to seize a new business opportunity when it comes our way, but many of us are currently working in other careers, waiting for the right moment to make our move. Jared Smith, a friend, former colleague, and junior partner at PICS (Pacific Industrial Contractor Screening) calls this “waiting for your pitch” — holding out for that great idea you can hit out of the ballpark.

Where, then, is the best place for me to wait for my pitch and optimize my chances of not only receiving the most pitches, but also knowing when I should swing and having the skill to hit the ball? How do I maximize my chances of meeting the right people, while also gaining the skills and experience that will make me an attractive business partner? What career will provide the most inspiration to dream up the big business idea I want to build my career upon?

The answer, obviously, depends very much upon the type of entrepreneur you want to be. Are you a developer or a business guy? How much do you have to lose if you leave your current career and mess up? I am writing today with the business-minded entrepreneur in mind; one who already has a good job and does not want to join just any startup, but the right one. I am, essentially, writing about myself.

Management Consulting [where I am today]:

Pros:

  • Build credible work experience and learn best practice
  • Develop important business skills in analysis, customer interaction, planning, and management
  • Cultivate a management mindset – consultants are trained to structure problems and think about how to grow businesses
  • Exceptionally diverse exposure to different industries and business problems, improving the chances of stumbling across new business ideas and innovative solutions to old business problems
  • Diverse exposure to different geographies and business environments, possibly giving insight into businesses which could be transplanted from one location to another
  • Relatively stable and low risk compensation [bonus based on a mix of personal and firm performance, not necessarily that of clients or a portfolio]

Cons:

  • Limited control over the industries, geographies, or business problems you face [i.e. You may be just as likely to be working for an "old economy" auto manufacturer in Detroit as a "new economy" biotechnology company in Silicon Valley]
  • Typically clients are fortune 500 businesses or governments, both of which operate very differently than startups, possibly limiting the applicability of some lessons learned
  • Limited networking opportunities with other entrepreneurs, for the same reason

Venture Capital:

Pros:

  • Exposure to diverse businesses and solutions within a narrow industry area (most firms focus on just two or three industries) – gain understanding of how different players are solving the same problems with different approaches
  • Gain an investor’s mindset, looking at businesses in terms of their relative ability to succeed, and understand a venture capitalist’s investment criteria
  • Network with entrepreneurs and venture capitalists, increasing the likelihood of running across a potential partner with a “big idea” you are excited about
  • Realistic possibility of moving from a position in VC to an operating role in a portfolio company
  • Relatively stable compensation, however bonus is tied to portfolio performance and forms a greater proportion of salary

Cons:

  • More time spent critiquing business models, management teams, and strategies than thinking about or learning first hand how to grow a business
  • Limited diversity of industries and geographies likely to be encountered
  • Limited opportunities to gain operating or management experience

Operating Role in a Startup:

Pros:

  • Network with other startup professionals in your industry niche and within your company, people who are likely to have very similar passions and might eventually make great business partners
  • Build deep knowledge of your industry, increasing the likelihood of identifying unmet needs which could be filled with a new product or service
  • Gain practical operating and management experience, improving your credibility as a potential partner
  • Understand the challenges faced by startups, and some common methods of overcoming them through personal experience
  • Spend part of your day worrying about how to keep things working (operating mindset) and part your day worrying about how to make them work better (growth mindset)

Cons:

  • Narrower networking opportunities – relatively less likely to meet potential partners in other industries or geographies, or think of solutions to problems that your company is not in the business of solving
  • Possibly reduced professional credibility if later attempting to rejoin the “corporate world”
  • More risky – compensation is highly correlated to business performance, which you may or may not have the ability to control

Of course, there are plethora options beyond consulting, VC, or working in a startup for any entrepreneur in waiting. I would love to know your thoughts. Are there other options which should be considered? Advantages and disadvantages of each that I have failed to consider?

Filed under Entrepreneurship Tagged with

An Exit Strategy is NOT a Business Strategy

August 17, 2007 1 Comment

Business Model GraphicBuilding on the comments I posted earlier today about the acquisition of Where I’ve Been, and partially motivated through comments on that post, I realize it is important to add two additional thoughts.

First, “Where I’ve Been” has managed to avoid one of the most challenging elements of business creation, which is to actually build a business model and strategy. That Ulliott was able to get $3 million for a business that had neither is surprising, impressive, and more than a little bit disturbing. Attempting to replicate his success in planning for an exit would be wise, but emulating Ulliott’s dismissal of the question of a business model would be foolish. He has passed on the question of how to monetize his application to a new owner, but the question will still have to be answered.  (Though TripAdvisor seems well positioned to answer it)

Second, in response to Tony and Jackson’s comments on the possibilities for SeedHive, this does, indeed, seem to be an area of possible unmet need. Could SeedHive help bridge the gap between developers with the skill to “build things” and the business folk with the ability to “sell things”? [Which is how I interpret Tony's "build great teams to do great things"] It’s an interesting proposal and one to noodle on. At the most basic level, it would require that the site was able to attract both sides of that puzzle by being relevant to both. It would also need to do this better than the likes of PartnerUp, which I believe it could do through the integration of social networking and idea collaboration.

Filed under Entrepreneurship Tagged with

“Where I’ve Been” and the Need for an Exit Strategy

August 17, 2007 2 Comments

Where I’ve BeenThe management consultant in me wants to tell you that in developing any new business, particularly a web 2.0 software application, social network, or web-enabled service, it is critical that an entrepreneur think about the “exit.” The questions are “Will I sell this? To whom? Why would they buy it?” It is the answer to these questions which should shape your strategy and business. Nevertheless, not ALL big success stories follow this logical path, and another just emerged yesterday.

It was announced yesterday that “Where I’ve Been,” a Facebook application developed by Craig Ulliott of Philadelphia, was acquired by TripAdvisor for $3 million. The application currently boasts around 2.3 million users, and has been in existence since June of this year.

Yes. JUNE.

What is phenomenal about this story is how quickly this all came to pass, and yet how little of it appears to have been down to planning and the development of a prudent exit strategy up front. Just about two months ago, Ulliott complained “I have 250,000 users, now what?”.

Well my application has become incredibly popular, and I’m very excited about it, don’t get me wrong!

But I’m a freelance developer, not a company, and its put a powerful 4GB $450 a month dedicated server on 3 backbones at maximum load and is pushing 2000GB a month in traffic. It doesn’t make me any money and I’m getting hundreds of comments and emails daily about it.

How can i support it and maintain it? What do i do with it now? its growing at a few users a second, so should i get another server each month?

It is amazing that a young guy can create a piece of software which fits a need he sees, and sell it to cash in big time. Just two months ago, Ulliott had no idea what to do with this idea. Today, he is $3 million richer. It’s a compelling “carpe diem” type story about just doing something you love.

Facebook App developers beware, however, the current landgrab will not last forever, and your chances of making it big are much better if you have a plan.  If you can tailor your software to better match the needs of a potential suitor, while still catering to the needs of your users, do it.

One final thought on this news is how it hooks into the SeedHive concept.  When I originally read about Ulliott’s post two months ago, I thought “this is exactly why SeedHive needs to exist.” It is exactly the kind of question that SeedHive users would enjoy batting around for an hour or two. It would also be the kind of place where people would ask up front what your exit strategy is, and if one doesn’t exist, encourage you to develop one.  Because we ALL can’t be this lucky.

Filed under Entrepreneurship Tagged with ,

Why the VMWare IPO Doesn't Dispel the Possibility of Crisis, But May Signal a Shift

August 15, 2007 1 Comment

VMWareThe successful IPO yesterday of VMWare does little to concerns I have flagged in two of my recent posts about how the credit crisis and shifting economic conditions may be making the US a less attractive and successful center for entrepreneurship (“Buckle Up: Why Entrepreneurs Should Be Scared of the Shifting US Economy” and “Will a Debt Crunch Drive Smart Minds from VC, Entrepreneurship?”). The basic reason is that an IPO is an equity event, with investors buying up ownership of the firm, rather than a debt-leveraged buyout or credit-based investment that will be paid back.  It neither proves that talent is continuing to flow to the startup world, or that weak economic conditions are not affecting the chances of successfully launching a business.

I am writing today in response to a short message I received from Tony, a friend and reader of this blog, asking whether VMWare’s IPO changed my opinion about current conditions for entrepreneurship. VMWare’s first day of trading witnessed the stock spending most of its first day well above the opening price of $29 a share, closing in the mid $50s (See Alarm:Clock – “VMWare IPO Crushes It“).

While the VMWare IPO says little, if anything, about the credit crisis, it may indicate that the market for “exits” for entrepreneurs may be shifting back in the direction of equity markets. In recent years, private equity buyouts have become a credible exit option for startups, with large investment firms using significant debt leverage to purchase an entrepreneurial business. This is in addition to the more traditional exit for startups, through acquisition by another firm in its industry, which would typically involve a significant amount of debt to finance the purchase. If credit is tight, and the cost of borrowing remains too high, these options could well become more expensive, raising the bar that startups must meet before they have a chance to be acquired.

Therefore, an IPO may very well become the most attractive way for entrepreneurs to sell their businesses and “cash out” on their work.  It is not dependent on the credit market, and relies instead upon the perceived value of the company.

Declaring IPO as the clear path forward on the basis of a single exciting tech IPO would, of course, be premature. More evidence in the form of other successful IPOs, weaker acquisition and buyout numbers would help support the conclusion. In the meantime, however, it remains an interesting trend to be on the lookout for.

So what about the gloom and doom facing entrepreneurs that I described in my previous posts? It seems a successful IPO (of a company that was doing well and preparing for this event well before the credit crisis began last month) will do little to convince smart candidates that moving to an operational position in a startup is the right move to make in todays market. Nor does it mean that a weaker dollar and slowing US economy are any less of a threat to startups and their VC backers.

Filed under Business Analysis Tagged with

Day One in Saudi Arabia

August 14, 2007 1 Comment

Al Faisaliah Tower, RiyadhMy first full day in Riyadh was quite an eye opener. Having arrived last night after dark, it was the first chance I had to see the city. Our office, located on an upper floor of the architecturally fascinating and beautiful Al-Faisaliah Tower, has a sweeping view over the city below, which reflects the bright sun from its white and tan color. The desert is just visible around the edge of the city.

After months of working with colleagues connected only via conference call, it is refreshing to have a team of coworkers here to call my team. Since we will live, work, eat, and travel together over the next three months, there will be plenty of opportunity for me to get tired of them, but right now, I couldn’t be happier with the guys who are here.

Ironically, the first time in my consulting career in which I have had to wear a suit to work every day is in a climate where it rarely drops below 105 degrees F during the day. Even tonight, while I sit and write this, it is nearly 95 degrees. Of course, life here exists in the form of short jaunt from one air conditioned building to another, so it almost doesn’t matter.

And heck, after three months enduring London’s wettest summer on record, seeing a forecast that looks like this simply makes you smile:

5 Day Forecast

Filed under Our World Tagged with ,

Will Traffic Die, Once and For All?

August 14, 2007 2 Comments

Congestion ChargingThere are a number of reasons why I am extremely impressed by how well managed London is compared to most cities in the United States. One area, in particular, is in transportation. One of the most controversial of these, when first introduced, was the congestion charge. Drivers are charged £8 (approximately $16 USD) to enter downtown London in their personal cars. The effect is that driving to work becomes too expensive to do it every day, encouraging commuters to use public transportation. At the same time, with less traffic, buses move faster, taxis zip from place to place more efficiently, and the city becomes an entirely more pleasant place to be. In the words of economics, congestion charging corrects a market externality.

As the New York Times reports today (“U.S. Offers New York Million for Congestion Pricing“) there has been a major step forward in New York’s efforts to replicate this important piece of legislation. While the plan is somewhat different, I have the utmost hope that it succeeds, and further demonstrates that public transportation can be successful in places outside of Europe and Asia (in one or two US cities at least…).

The secretary of transportation announced this morning that the federal government will provide New York City with $354 million to implement congestion pricing, if the State Legislature acts by March 2008 to put in effect Mayor Michael R. Bloomberg’s proposal for charging traffic fees in Manhattan.

Mayor Bloomberg’s congestion pricing proposal has attracted the broad support of business, labor, environmental and transportation groups, but he has been less successful at swaying state and city lawmakers representing the boroughs outside of Manhattan…

Nonetheless, the substantial federal support for the project gives enormous leverage to the mayor as he continues to press for his proposal.

The mayor’s plan, unveiled in April, proposes to charge drivers $8 and trucks $21 a day to enter or leave Manhattan below 86th Street on weekdays during the workday. Those who drive only within the congestion zone would pay $4 a day for cars, $5.50 for trucks.

Well done, Mr. Bloomberg. Let’s hope that he succeeds. It would certainly make that eventual move to Manhattan seem all the more tantalizing.

Filed under Our World Tagged with ,

← Older posts

Follow

Get every new post delivered to your Inbox.