Policy Wonking

Dan Managan and Bob Kronbauer - Hockey Day In Canada Photo by KrisKrug

Wojceich Gryc has an interesting post on the policies that he’d like to see the federal government implement to improve the startup ecosystem. The 5 key points are:

  1. Market Access Tax Credits
  2. Legal/Tax Advice for Market Access
  3. Sales-Oriented Startup Accelerators
  4. Global Benchmarks
  5. Global Branding

Not a bad list of things that could improve the startup ecosystem. However, I’m not sure they are not all necessarily things for consideration as governmental policy. Specifically, I have issues with 2, 3 and 4.

Legal/Tax Advice for Market Access

Entering new markets, particularly foreign markets, can be daunting. There are legal, regulatory, tax and other questions. And I would argue that the Canadian government already has a Crown corporation, Export Development Corporation, dedicated at lead to helping manage the financial risk of accessing new markets. Is there a step-by-step guide for emerging technology companies? (Let me know if you find one). There are access to the Trade Commissioners who continue to have a strong presence in the Bay area, New York and Austin, Texas.

The remaining advice and guidance about legal, regulatory and tax risks on entering new markets is provided by third-party services firms. I’ve worked with the teams at KPMGDeloitte, PwC and others on Canadian/US tax law and the implications for my firm. Also advice from Canadian and US counsel including BennettJones, CognitionLLP, LabergeWeinstein, Fenwick & West, Wilson Sonsini and others. You need to find lawyers and accountants that have experience with the risks and solutions and can provide you cost-effective advice.

Sales-Oriented Startup Accelerators

An accelerator feels like a red herring to me. Wojceich is 100% correct, companies should focus on focus on key traction metrics (see Getting Traction and Funding, Valuation and Accretive Milestones) including sales/revenue. But the idea that an accelubator is going to help you focus on driving realistic forecasts, and achieving milestones or traction feels lazy/wrong/not the right approach.

A startup is a temporary organization used to search for a repeatable and scalable business model. – Steve Blank

Depending on the type of business model, it can be okay to delay monetization. But if your business model is to sell software or software-as-a-service you need to determine if people are willing to pay you for it. I would argue rather than giving up 7% of company to an accelubator, you’re probably better to read David Skok’s Building a Sales & Marketing Machine and try to recruit an advisor that has experience selling to your idealized target segment. There are a lot of great sales advisors/board members including: John MacDonald, Howard Gwin, Andy Aicklen, etc. Most are accessible. Are they interested in working with you? On your business? Maybe, you need to convince them you’ve built something worth their time and social capital.

Global Benchmarks

Who gives a shit about where we fall on global benchmarks? It’s probably relevant as part of the next point, Global Branding, but I just can’t imagine that an understanding of the global startup benchmarks matters. Larger investment, more successful companies and exits probably have a larger impact on the overall startup ecosystem. It would be more interesting to see the creation of a Kaufmann Foundation with a focus on entrepreneurship.

“we develop and support programs that provide entrepreneurs with the education, tools, skills and connections they need to start and grow businesses. We also work to create a more entrepreneur-friendly environment, including lowering barriers to success and raising awareness of the important role entrepreneurs play in the economy” – Kaufmann Foundation

I’m unclear why federal, provincial or municipal policy should be based on a set of rankings provided by a private corporation. It just feels ill-informed view of the role of government and policy in managing the lives of citizens. But I am not a policy wonk and my understanding on the creation and execution of policy in the administrative branches of government approximates zero. (Take this free opinion for what it is worth, or at least what you paid for it).

The Greener Grass

It’s great to see entrepreneurs in the trenches think about the system and the support they need. It’s a honest view of the things that would help entrepreneurs improve their corporate performance, reduce their expenditures and risks.

I love the idea of a similar SR&ED tax credit for market access. Supporting companies as they experiment with distribution and monetization models is a great idea. Plus improving the Canadian brand through Startup Visa, Maple Syrup Mafia, The C100, and other activities is an amazing activity. It builds on the efforts that we as individual founders to support the ecosystem. Focusing on traction including customer acquisition, revenue growth and building a scalable business., I love that too. Using global metrics as a baseline to evaluate your business (see StartupCompass’ Navigating your Startup to Success) should quickly give entrepreneurs both the measures and the desired outcomes to compare against.

I don’t think it is going to be government policy changes, it is going to be founders and startups building successful companies that will ultimately improve the ecosystem.

Photo Credit: Photo by Kris Krug AttributionShareAlike Some rights reserved by kriskrug

Friday Night Fights

Whether you think of the UFC and mixed martial arts (MMA) as bloodsport or entertainment, there’s no denying that it is big business. Sure it’s still a bunch of individuals pounding the hell out of each other, but it’s an interesting brand building exercise capturing the attention and wallets of  18-34 year old men.

Dana White along with Frank and Lorenzo Fertitta, as Zuffa LLC,  purchased a near bankrupt UFC for $2 million in 2001. By 2006, the UFC grossed more annual pay-per-view revenue than any other ‘”combat sport” promotion, think boxing, mixed martial arts, etc. The 2008 estimated revenue was close to $250 million through a mix of pay-per-view, live event tickets, television deals, advertising, video game promotion deals, and other varied revenue streams. It had become a huge business. Big enough that Mark Cuban has creating HDNet Fights as a promotion and leveraging the HD television outlet to highlight other combat sport promotions.

Love it or hate it this is big business. It’s no longer “human cockfighting” as it was referred to by Sen. John McCain (R-Az).

So how do organizations like Zuffa LLC and Oscar De La Hoya’s Golden Boy Promotions make money. And what can software startups learn from these marketing organizations. MMAFrenzy provides “A Look Behind the Curtain: Zuffa’s Finances Come Into Focus” that provides a breakdown of the financial side of a private company. And Portfolio.com provides insight into the wheeling and dealing that is Golden Boy Promotions

Television Licensing & Promotion

Television promotion is about “the people who create something worth watching and the audience”. Both Golden Boy and Zuffa have crafted television deals to help them reach fans beyond their strong base. Golden Boy Promotions has a deal with HBO and Zuffa has a deal with SpikeTV to broadcast their shows to cable audiences. For both promotions this allows them to focus on building brand awareness, create superstars and sell their live pay-per-view events. In the case of Zuffa, this has resulted in the creation of new content specifically for their television broadcast partner with the reality television show, The Ultimate Fighter (orignially created for $10M), and a host of other shows out of the archive materials from live events. The networks either sell premium cable subscriptions (HBO) or advertising (SpikeTV) based on their audience reach and demographics. Better content equals more diverse people watching, which allows for a shift in advertising demographics (details on Traditional Television Business Model and Video on Demand). The Ultimate Fighter has become the “most-watched original series on SpikeTV” with over 1.8 million viewers.

Pay-per-view Revenues

UFC has 5.1 million pay-per-view (PPV) buys in 2007. The PPV are split with the PPV distributor. The PPV buys number is reported for most major sporting events, Yahoo!Sports has a summary of the 2008 business which the UFC was reporting $237.9 million on 5,315,000 buys (average price of $44.75/purchase). Assuming a 60/40 split between Zuffa and the PPV distributor that generated approximately $142,740,000 in revenue.

Live Event Ticket Sales

Average ticket price in 2007 was $250/ticket. For example, UFC 99 attracted 12,800 fans and had a live gate of $1.3 million for an average seat price of $101.56. Different venues and fighter cards have different results, UFC 90 drew 15,359 fans and had a live gate of $2.85 million for an average seat price of  $185.92/ticket. (As a side note, these figures include the seats/tickets that the UFC gives away as part of the promotion. If you assume that 30% of the seats are given away to promotion companies and others the price per seat changes to $145.09 and $265.61 for each event respectively). The interesting part is that these numbers do not include any of the costs associated with running a live event: arena, security, medical staff, athletic commissions, promotion, etc.

Other Revenue Streams

The great thing once you have an audience, content and a recognized brand you can look for an infinite number of ways to monetize it. You start to ask questions like how do you find new audiences? How do you increase the average revenue per user (ARPU) of your existing users? What are new channels for reaching the audience? What other partnership and revenue generating opportunities exist?

Video game rights licensing. Subscription internet video. Wait it seems that was tried and failed. No it looks like another opportunity presented itself with Heavy.com. Apparel deals with TapouT. Once you’ve built an attractive global brand, the world is your oyster. Zuffa has negotiated broadcast distribution rights in Australia.

What can startups learn?

  1. Build a product that people want to pay you for
    I know this sounds cliché. And is not always as straightforward. Just look at the broadcast licensing and pay-per-view revenues for sports promotion. There are complex relationships between the people that produce the content and the people that watch the content. It involves cable companies, advertisers, intermediaries. But it starts with creating a product that people will use, in this case a product that people will watch/use and pay you for.
  2. Engage and support your loyal fan base
    The goal of the adoption funnel is to move from awareness to loyalty. You need to nurture and support the audience that is passionate about your product/service. Go read Kathy Sierra or Saul Colt to learn about how to inspire your customers to become evangelists. It’s about figuring out how they help their customers “kick butt better than their competitors”. Who are your super stars? What are you doing to help them kick butt?
  3. Don’t be afraid to self promote and create superstars
    You’ve got to love Golden Boy Promotions, the UFC and Saul Colt. They are masters of self promotion. Dana White, who owns 10% of Zuffa, has become an instant celebrity from his appearance on SpikeTV’s The Ultimate Fighter. The non-stop promotion of UFC Pay-Per-View events through the SpikeTV audience (2.8 viewers million for TUF9) help reinforce known revenue streams while building characters and superstars. Do all of the commercials feel like their cross promoting other UFC events? Well there is a reason for that, 75% of the UFC revenue comes from PPV sales. Startusp need to find ways to promote the features and solutions that help solve problems, inspire users and make superheroes. Rinse, lather, repeat. By refining their messaging and telling a better story, startups make it easier for customers to tell their story. Saul Colt (who is a big deal) does a great job promoting his companies (Zoocasa, FreshBooks) the power of community and sharing and asking the audience to promote using the channels that are important to users.
  4. Diversify your revenue streams
    There are many different ways to diversify revenue streams. Look at consulting companies that run training events (educating others about great design). Music television channels that are game companies (isn’t it all about music distribution regardless of channel). Go read Peter Frisella’s 2 awesome posts for a review of the different types of business model (part 1, part 2) to figure out your business model. Have a look at Alex Osterwalder’s Business Model Generation and look at his presentations on SlideShare to learn his Business Model Canvas.

Building a successful startup is hard work! But after watching combat sports, building a startup sure beats the hell out of getting punch in the head for a living.