StartupNorth

  • Hockey sticks and consultants

    Exponential Growth Curve

    I’m always giving consultants a hard time. It’s not that I dislike consultants. It’s not that I think that consulting is a bad business model. It’s that a consulting model is very difficult to get exponential growth. You know that hockey stick growth curve, well it’s actually an S-curve but early it looks like a hockey stick, that is so important. I’m talking about real numbers, not projections. Revenue. Users. Customers.  (Need help figuring out what you should be tracking? Go read Dave McClure’s AARRR! Startup Metrics for Pirates). And go read Mark MacLeod about why compound growth changing your funding requirement.

    Consulting is a linear growth business. It grows based on:

    • # of consultants billing
    • # of billable hours
    • hourly rate

    Unfortunately, all of these are limiting variables. There are examples of very profitable firms and corporate structures that enable a very profitable model. I’m not discounting the profitability of the Big5 consulting firms. Consulting firms are generally limited to the number of consultants. Corporate culture are defined by the people.

    The number of billable hours is a limiting factor. There are only 8760 hours in a year. You can’t work every hour. You can’t bill every working hour. It’s just not possible. Billable hours are the currency of consulting and legal firms. Many firms require 1700-2300 billable hours/year. Just think about this: 2300 hours/year =  46 billable hours/week + 2 weeks of vacation. If you assume a 80% utilization rate, i.e., 80% of your time is billable and 20% is on overhead/email/meetings/etc.  To achieve 46 billable hours you need to work 57.5 hours per week.

    Hourly rate is generally set by the skill set and the market. Flippa. Rentacoder. 99designs. crowdSPRING. Elance. There are others willing to do it for less.The market determines a consultants hourly rate. 

    So for an independent consultant billing at $200/hour on a 57.5 hour work week at 80% utilization would have revenues of $460,000/year. This is an extremely high rate. Looking at the NASDAQ 100 using Cognizant averages $35,892 versus Apple ($1,014,969), Ebay ($551,049), Microsoft ($663,956) and others. This might be a little extreme. Don’t believe me, Hoovers.com suggests that IT/software consulting has average revenues of $160,000/employee (MarketResearch.com has this closer to $100,000/employee). Realistically the easiest way for a consulting firm to achieve exponential growth is to grow to the number of consultants working. And the risk of exponentially growing the number of consultants is that you kill the culture that attracts many people in the first place.

    “But isn’t the consulting company itself startup? No, not generally. A company has to be more than small and newly founded to be a startup. There are millions of small businesses in America, but only a few thousand are startups. To be a startup, a company has to be a product business, not a service business. By which I mean not that it has to make something physical, but that it has to have one thing it sells to many people, rather than doing custom work for individual clients. Custom work doesn’t scale. To be a startup you need to be the band that sells a million copies of a song, not the band that makes money by playing at individual weddings and bar mitzvahs.” – Paul Graham

    That said, consulting is a great way to take the risk out of a startup. The best consulting projects are the ones where you can build the software you want to sell as a product. This assumes that you have necessary legal agreements where you retain ownership of the intellectual property created during the consulting gig. This is often referred to as “bootstrapping” (read Paul Graham’s Fundraising Survival Guide to understand the tradeoffs).

    There’s nothing wrong with consulting. It’s a perfectly viable career. It’s a perfectly viable business model. But do the math, it doesn’t scale like a product company.

  • Weekend Reading

  • Entrepreneurship 101 starts Sept 30, 2009

    entrepreneurship101 MaRS is continuing it’s Entrepreneurship 101 program for the 2009-2010. Entrepreneurship 101 is an introductory program aimed at providing the “nuts and bolts of building a business”. The program is a 16 week program aimed at providing the basics around starting a company. Topics include:

    • financing
    • defining markets
    • hiring teams
    • protecting intellectual property
    • raising capital

    MaRS has done a great job publishing a Vimeo channel with all of the past content. These build on our Teaching Entrepreneurship with a local opportunity for Toronto entrepreneurs. This is a great way to see the theoretical side of entrepreneurship, but to gain exposure to entrepreneurial thinking and the basics of getting off the ground.

    ent101-vimeo-buildingapitch
    Building a Pitch     from MaRS Discovery District on Vimeo.

    ent101-vimeo-roleofboards
    The Role of Boards, Advisory Panels and Service Providers     from MaRS Discovery District on Vimeo.

    ent101-vimeo-marketingbasicpt1
    Basics of Marketing for Entrepreneurs, Pt. 1     from MaRS Discovery District on Vimeo.

    ent101-vimeo-marketingbasicspt2
    Basics of Marketing for Entrepreneurs, Pt. 2     from MaRS Discovery District on Vimeo.

  • Founders versus early employees

    Not everyone can be a founder. We talk about the founders of startups and companies. We focus on the founders. The founders get press coverage. They get invited to speak at events. Sometimes they get rich. But for every founder, there is an early employee that takes near equal risks in joining an early-stage company.

    Steve Blank divides the individuals associated with startups as:

    • Founders
    • Early Employees (Employees # 1-25)
    • Later Employees (Employees # 26-125)

    The majority of his division is about the temperament of the individual as related to risk and dealing with chaos and uncertainty. Not every one can be a founder, i.e., can you imagine trying to start a company with 10,000 people? It’s just unfeasible.

    “Being an early hire at a startup gives an individual the ability to make tremendous impact on an organization as it grows – and both the founders and those hires should know it.” David Beisel

    We need to celebrate the employees at startups. We need to make sure that early employees are compensated, incented and rewarded for their decisions to join startups. Early employees have a huge impact on the growth and culture of a company.

    How do you compensate early employees? Paul Graham provides a model for calculating value. As Naval points out that you still need to pay employees market rates, but with all employees you need to ask yourself “whether she [a new hire] is likely to increase the next round’s share price”. This should force companies to think about building value with each early hire, and not just filling a position.

    Title Range (%)
    CEO 5 – 10
    COO 2 – 5
    VP 1 – 2
    Independent Board Member 1
    Director 0.4 – 1.25
    Lead Engineer 0.5 – 1
    5+ years experience Engineer 0.33 – 0.66
    Manager or Junior Engineer 0.2 – 0.33

    Table 1: Options Grants in Silicon Valley for Series A from VentureHacks

    The numbers from VentureHacks are guidelines. They are rough estimates.Any one have sample option grants in Canada? Are the percentages different? I would assume that they are very similar but given the lower valuations and this may change the salary/options mix.

    Remember the goal is to incent early employees to have an emotional ownership of the product and company they are building. Equally said, potential employees need to understand what they are getting into. Darmesh Shah has a great list of insights for employees joining early stage companies. Early employees are critical for startups, and we need to recognize that not everyone can be a founder.

    I would love to hear your thoughts on being a founder or an early employee.

     

    Additional Resources

  • Weekend Reading

  • Hire a co-op!

    Looking for ways to get new talent? Hire a co-op! The Ontario Government has a great program to help offset the costs. It’s interesting how all of these programs are located in and around Waterloo. This is one of the benefits of starting a company in Ontario.

    I know that Kontagent, Extreme VP, Bumptop, LearnHub, Sysmos, FreshBooks, Well.ca, Idee and others have hired co-ops in the past. Here is some basic math, pay your students $15/hour for a 40 hour week for 16 weeks. It will cost you $9,600. The program will return you 25% which is $2,400. Cost for you for the 16 weeks is only $7,200. A steal!

    For each co-op student hired, your organization can take advantage of the Co-operative Education Tax Credit.  The Ontario Government recently increased the credit to 25 per cent of salaries or wages and benefits (30 per cent for small businesses) to a maximum of $3,000 per student, per term. For more
    information:

    Anyone know the contact details for UofT, Seneca, or Ryerson’s coop programs?

  • Teaching Entrepreneurship

    The first book I remember reading about starting a new tech venture was High-Tech Ventures: The Guide for Entrepreneurial Success. It is a book that was written about entrepreneurial ventures in the mid to late 1980s. Surprisingly much of the advice and particularly the venture economics remains valid. However, much of the manufacturing and marketing advice doesn’t apply 18 years later. The good news is that there are a ton of online resources that are available to round out the education for entrepreneurs.

    It’s great to see that Velocity, SIFE and Impact are making it easier for students to learn about entrepreneurship as a career path. Maybe I need to put some effort into adding content to StartupSchool.ca to make a valuable resource for entrepreneurs and students.

  • GigPark.com acquired by CanPages

    Gigpark logoIt’s hard not to like Pema and Noah. The two founders of GigPark have been two of the hardest working and (more importantly) most focused founders to have come out of Toronto in the last few years.

    We first covered GigPark in February 2008. I loved the site, and the focus on maintaining the integrity of the social network, but I wondered whether they could build the mass needed to go from walled garden to healthy ecosystem. Then, earlier this year GigPark partnered with Metro, a free national newspaper.

    Today CanPages is announcing that they have acquired GigPark. The deal also received a nice mention in the Globe and Mail.

    Pema and Noah are examples of what a laser focus on product will get you. They released early and they continued to develop GigPark with regular releases and improvements. The key here though is that they got the product out early and didn’t try to come up with the perfect product from day one.

    When I first started using GigPark, I didn’t remember to go back to the site regularly, but over time GigPark became an integral part of how I found new places to eat and businesses to call. As my network slowly grew, it became not just useful, but critical.

    I am feeling especially proud to know these guys and to have had the chance to watch them grow from first release to acquisition. They have been behind-the-scene supporters of a lot of the community and have always encouraged the entire Toronto community.

    Noah and Pema will be staying in the CanPages family for a little while, but I am sure it won’t be long before they are back in action.

  • Weekend Reading

  • Pitching fastballs

    “Do you have some time for a coffee or beer to chat about my startup?” – Anonymous entrepreneur

    I’m happy to talk to entrepreneurs, learn about your startup and even help you out if I can. Since I have a bad habit of over committing and taking on too many activities. Let’s see there’s DemoCamp, Founders and Funders, StartupEmpire, my job (yes, I work at Microsoft), and a personal life (think 2 kids under the age of 2). Things are chaotic and busy, I’m starting to ask entrepreneurs to help me. So without more information, the answer to the above question is “maybe, help me understand why we should me”.

    This sounds familiar. It’s similar to the problem faced by investors (made more pronounced with time-constrained applications), and journalists, and customers.

    “If we get 1000 applications and have 10 days to read them, we have to read about 100 a day. That means a YC partner who reads your application will on average have already read 50 that day and have 50 more to go.” – YCombinator How To Apply

    We talk about an Elevator Pitch. Except this isn’t a world where you might have forced my focus of attention by being artificially trapped in an elevator. The goal is like a newspaper headline. It’s to make me read the rest of the story. You need to stand out. You have to be able to simply, clearly convey what your startup is going to do. The YCombinator team do a great job describing what they look for in How To Apply. The initial filtering criteria for a YC application are obviously different than the criteria that journalists use to find stories, and different that what I use when determining to take a meeting or how I can help a startup. But the process is the same.

    “What is your company going to make?" This isn’t the question I care most about, but I look at it first because I need something to hang the application on in my mind.

    The best answers are the most matter of fact. It’s a mistake to use marketing-speak to make your idea sound more exciting. We’re immune to marketing-speak; to us it’s just noise.” – YCombinator How To Apply

    This is about stand out from the pack. And helping the reader/journalist/audience member figure out who you matter to and why. Think of this as demand generation. You’re driving awareness and interest in your company, your team, your solution. The number one key is to be empathetic to the person whose attention and imagination you are trying to capture. Put yourself in the shoes of your intended audience, and help them understand what is special about your company, your product, you.

    “Boil down your elevator pitch to one sentence. Tell us what you sell or do in very concrete language. This sets the context for the rest of your presentation.” – David Rose

    Here’s an attempt to write that opening description for a few local startups.

    • FreshBooks is a QuickBooks killer. It is a web-based accounting system allows small businesses to have accurate, professional estimates, time tracking, and invoicing.  
    • Well.ca is Canada’s online drugstore. Strong sales growth over past 3 years, raised $1.1M from angel investors in July 2009, technology focused with strong customer service.
    • Rypple is a web application that gathers anonymous feedback from anyone. Peter Thiel is an investor. Founders have a strong track record at Workbrain.
    • Dayforce is an rich internet application and web service that allows managers to visualize and plan their employees schedules and the employees to enter their timesheets. Founders have strong track record including Workbrain.
    • Kiiro is a social project management application built on SharePoint. It uses the web and Microsoft Project to improve collaboration between the project managers and the team on larger projects.
    • CoverItLive is web application for live blogging events. Companies, conferences, individuals can connect photos, tweets, live video, and rich media during events.

    This is just the beginning. But that is the point. The goal is to entice the reader to want to know more. Ideally I’d love to see a short description of what you’re building. A clear identification about how you think you’re going to make money. What you think your secret sauce is. And a brief summary of key team members. Sound familiar. It’s very similar to the advice that David Rose provides as a Pitch Coach. The goal is to take basic pitch information and digest it into a smaller, customized components for your audience. It means that entrepreneurs are going to have stop being ego-centric and start thinking about others. You need to understand what is important to the individual that you are trying to reach and to shape your message appropriately.

    For me, I want to understand what your company does/builds; the management team; the market opportunity; the business model; the stage of corporate development (pre-funded, funded, pre-revenue, etc.); why you think I care about this; and what your ask is of me. Is that too much to ask?

    Open challenge to local startups to “pitch” for a meeting in a 140 characters or less in the comments (more realistically less than 420 characters – basically 3 tweets).

    Resources