Project: Liftoff

The new Facebook timeline: it’s gorgeous, it’s interesting, it’s… bound to fail. Why? Because it’s about Facebook listening at its users, not listening to them. For a long time, Facebook has been barraged with requests for privacy controls. If you’ve ever been involved in product design, you’ve heard requests like these too: clear, concrete feature requests from users who know your product well and who are valuable customers for you. You must always ignore these reasonable, specific, actionable requests. I call them “coffeepot toothbrush” requests, as in “please put a toothbrush charger on my coffeepot, so that I can do all of my morning stuff at once.” Seems reasonable, right? Except the user has misdiagnosed themselves: they think they’re trying to “do their morning stuff.” I’d say they’re trying to “get clean, so that they can be seen by other people” and also “get energy, so that they can drive to work and then do work.” The feelings that are associated with “clean” and with “energy” are completely opposite here: fresh peppermint toothpaste, and then smoky, earthy, hot coffee: the one will ruin the other. It’s not that the two needs are unrelated — they are related, and that’s why they’ve been conflated. They’re just necessarily separated, because of their context. Facebook has heard a lot about the need for privacy controls; it also has an internal vision of Facebook truly being someone’s data manifestation of their life. These appear related, but, again, have different contexts. So Facebook has misdiagnosed the cause of user requests: users don’t want privacy controls — although it’s reasonable Facebook would try to supply them, since what Facebook can bring is controls. Users want privacy because the various people they know need context. Some people have context for what they see, some don’t; and context is a big, difficult thing to provide. Context isn’t a category, it’s not a control, it’s not even privacy — it’s related information. If you keep seeing pictures of me drinking booze on Facebook, you might think: oh, he’s an alcoholic! Let’s not hire him. Or, if you spoke to me that week, you might know: oh, he went to a single-malt scotch tasting, because he occasionally enjoys one single glass of scotch in the evening! It’s hard to know, if you haven’t spoken to me lately. Privacy controls are a simple, clear, specific, actionable replacement for context: with a privacy control, I can simply hide the photos of me at the tasting so that I don’t have to explain to you whether or not I’m a drunk who’ll pass out on my desk at work. That’s a lot easier than showing you a long history of me not drinking too much and enjoying a scotch now and then! Privacy controls are Facebook’s coffeepot toothbrush. And, when you match that coffeepot toothbrush with your wider vision that you can manifest someone’s life in data, well, you confuse yourself with LinkedIn. And then you create the Facebook Timeline.

At heart, I’m an idea guy. I love coming up with them, I love playing with them, and I love hearing about them — that’s why I went to TEDxUSC 2011. This year’s theme was “Actions Speak Louder,” and the speakers were all people who had come to believe something — and were doing something about it. Their speeches all showed how they crossed the boundary from thinking to doing, all in their own way, all in their own industry, from professors publishing, to motivated individuals starting non-profits, to the less-restrained and more-flexible starting clown colleges. At many start-ups, and for many entrepreneurs, the actions fall to the wayside, and the ideas keep your attention. There is no start, no changing the world. So it was great to hear about how all of these different people got to start. Everyone who doesn’t take the plunge has a different reason, of course. But the two I see most — and these are actually true of not just entrepreneurs but operating companies as well — are:

1. They’re too comfortable with the way things are
2. The idea is endlessly optimized

It’s a truism that the clients who have just lost their jobs, have gone into default on a loan, or who have just lost a key customer are more than happy to throw themselves into a new company or a new product; it’s the ones with good jobs, other successful businesses, or lucrative product or service options that end up being comfortable with where they are and end up letting an opportunity languish. Of course, it’s hard to criticize someone for focusing on something that’s working well enough. The root cause here often is that the client isn’t prepared to be honest about their own goals with themself — they talk a good game about doing something innovative, but it turns out that they really love to go home at 5pm, to spend their free time fly-fishing, and to accept a lower income in return for security. All valid goals, indeed, but too few people are prepared to admit them to themselves. Be honest: if you like things how they are today, that’s fine. Just own it. The other type is the client seeking perfection. As Voltaire said, “the perfect is the enemy of the good.” Of course, every idea can be continually refined and made better; for many people, this activity is just darned fun! And, again, good for them; but at some point in time, like the speakers of TEDxUSC 2011, you have to turn your words into actions, or all you’ve done is create words. Usually privately. In some document on your computer. That nobody else has the password to. Yeah, let’s not end up with that. Go for it. Take your first step. Don’t know what your first step is? Well, then, you need a business plan. Many people give the advice “don’t write your business plan, just start the business!” Done correctly, your business plan is how you figure out how to start the business. It’s not about grand ideas; it’s about your next step. If you know your next step, without a plan, then go for it. If you need to do some digging to find that next step — to turn your words into action — then a business plan can help you speak louder.

A lot of experts will tell you, as soon as you start up, “Incorporate!” Well, that’s not the right advice for many start-ups. You need to look at the issue more closely to know if forming an S Corporation, C Corporation, or LLC is right for you, or if you should continue as a Sole Proprietor or General Partner. Often, the main thing you’re told you’ll get from incorporation is “protection” – you’ll be safe from lawsuits. Well, that’s true, but that’s not the whole story. First of all, in many states, incorporating will subject you to a minimum tax; in California, where I work, it’s $800/year, no matter how little you make. That can be a lot more than many small businesspeople just starting up would pay on taxes if they remained Sole Proprietors or General Partners. Then there’s that asset protection. Incorporating means that your own personal assets will be safe from lawsuits – but not those of your business; others can still sue your business and put it out of business. And if you’re worried about being sued for loans or other credit that you can’t pay back, well, if you’re a start-up then you probably had to guarantee them personally anyway, so they’ll go after you, corporation or not. Worst of all, if they go after your corporation and drive it into bankruptcy, then you have no source of income and you’ve lost everything you worked for. No, incorporation alone isn’t the solution. The only way you can protect what you’ve built – not just your own assets, but your livelihood – is to carry proper insurance. For many kinds of business, insurance is relatively inexpensive – maybe just twice that minimum tax – and can give you a cushion against a wide variety of problems and mistakes. So, for many small businesses, it’s not liability that makes them incorporate – it’s either:

• Credit, because a lender or vendor will only extend credit to business entities, or
• Sales, because a customer will only deal with business entities

Before you incorporate, while you’re still thinking of starting your business, talk to potential vendors and customers and see whether or not they will work with a Sole Proprietor or General Partnership, or if you need that incorporation. (For instance, many large companies will only deal with vendors that are incorporated.) And then talk to an insurance agent and a lawyer. They’ll tell you if you can protect yourself against the risks you have with insurance, and if you need the additional protection that incorporation can give you. But do the math first! Blindly incorporating every single start-up is a prescription to pay the most taxes – without getting real protection.

I just got back from a lovely trip to France with my even lovelier wife. We hear a lot about how different France is – 35-hour workweeks, socialized medicine, government-sponsored retirement at 60 – but the fact is that there are a ton of small businesses in that country. Wherever I go, I find it really interesting to see how businesses work and how different situations and different systems result in different outcomes. After all, what could be a more fun way to learn than by traveling around, seeing the sights, and eating great food? Here’s what I learned from many of the businesses I interacted with in France. What’s Your Exit? One thing you always hear about countries like France is that you can find little cafés everywhere. That’s certainly true, and, the smaller and the more off the beaten path, the better the food, coffee, and service. But why should there be so many little places that have been there for decades, when we’re just now getting a place you can plop yourself down, in the form of Starbucks? My theory is that it principally comes down to retirement. France has long had a fairly generous government-provided retirement, so most French don’t need to save much. Social Security in the US doesn’t provide nearly as much. When you don’t need to worry about retirement, you can start a business that’s a nice job, rather than a complex, comparatively risky entrepreneurial venture that will grow and provide you a shot at a nice exit. Many people in the US who start small businesses – especially professional services ones like mine (oops!) – are surprised by how little they can sell them for. These cafés wouldn’t offer enough of an exit to be worth the capital investment in the US, but, in France, they don’t need a big exit to have a comfortable retirement. What’s your exit? Do you have one that provides for your retirement, or do you just own your own job? What’s the Customer Expectation? If you’ve sat in one of those cafés in France, you’ve probably been shocked by how few waitstaff they have. There’s often no busboy, maybe one runner for the whole place, and then a server or two with a section 3-4 times the size anybody would be expected to cover in the US. The result: things move much, much more slowly than they would around here, and good luck if you need a refill on your drink! But then, there are different customer expectations. We regularly took 90 minutes or more for a relaxing meal, and, even when we met French friends for lunch on a workdsy, they never rushed through their meal. When the customer doesn’t expect fast turn-arounds, then slower service isn’t a problem. Heck, it seems like the French didn’t even expect a refill on their waters anyway, so who cares if somebody comes along with a pitcher or not? There was a comparable change in the employee expectation – since they aren’t counting on a tip to make their income, there’s no push-back from servers on having more tables and providing less service. And, I’m sure, as a result of having less waitstaff, the café was able to be more profitable. What’s your customer’s actual expectation of service? What does your employee expect to provide? Can you take advantage of those to be more profitable? The Small Player Can Compete on Cost – In the Right Niche One of our favorite things to drink at meals was the pitcher de vin – a bottle-sized ceramic pitcher of the local wine, for about 6€. The wine was always unique and delicious, if not great, and, best of all, it varied by city and even by restaurant. A lot of start-ups try to compete on price, but it’s hard to do that unless you have a really unique product or process that gives you a cost lower than the big players. These local producers clearly knew how to keep their costs down; they probably operated in a low-capital-investment manner, running older vineyards without a ton of expansion or use of new techniques. They didn’t have to spend on packaging, because their wine was just being served in a pitcher. Distribution is easy, since the wine travels no more than a couple of dozen miles. Would the winery be able to compete on a national basis? Probably the investments required to increase volume would be prohibitive, and their quality – fun at the price and as a local tipple – wouldn’t be notable at any higher price, so no. But locally? It seems like every table had a pitcher on it, just like ours! Can you use your unique cost structure and niche to survive in a world with larger players, like these wineries do? Don’t Overvalue Your Big Investments (Don’t Undervalue Them Either) After we left Paris, we went to the Loire Valley. Countless wars have been fought in this part of the country, and practically every hilltop found itself home to a fortified town or castle. As time passed, and the Kings of France became powerful enough to protect the whole country, the need for the fortifications passed. So the castles were torn down and turned into luxurious châteaux – beautiful centers of local administration that showed off the noble’s wealth and power. When the power of the nobles was broken in the Revolution, the châteaux were sold off by the state and fell into disrepair. But, today, the owners – or the local government, which has taken many châteaux over – have invested money into restoring them, and turning them into jam-packed, cash-generating centers of tourism. Every big investment will eventually turn into an obsolete asset. Are you prepared to tear it down, or repurpose it, to end up with what you need today? You Can Own It Even If You Don’t Own It We finished our trip with an incredible stay on an island off of the south of France. This island is famous for its sandy beaches, but none of those beaches are private. Nonetheless, our hotel had basically taken ownership of one of the best beaches on the island, by offering free umbrellas, cushions, and towels for its guests there. So all of that hotel’s guests spend their time at that beach, and, in fact, many of the TripAdvisor reviews mention just that beach. People from other hotels aren’t blocked or kept away – but, by providing exceptional service, that beach has become identified with that hotel. They own the idea of that beach, even if they don’t physically own the land. Can you own a market by being the most strongly-identified with it? It was great to get out of the country and see how things are elsewhere. But maybe now I’ll have to see what I can learn about business from Los Angeles’s best fine dining restaurants.

I think I mentioned that I recently took a vacation – a great trip around France, if you’re interested in the details. Of course, to get there, we flew. The way there we took Air France, but, on the way back, we flew Delta and saved a lot of money. Along the way, I saw several business lessons. Air France is pretty well-known as a premium airline. They offer good food and their in-flight entertainment deservedly gets high marks. Delta is the biggest airline in the world and offers your standard US airline experience – older equipment, bad food, and cranky flight attendants. Of course, that Air France ticket is a lot more expensive than that Delta ticket. Air France offers a premium, distinctive product that I can’t get elsewhere; does it  at a premium price; and hasn’t recently been tremendously profitable, because of relatively higher costs. That’s OK; they couldn’t be lower-cost and still offer the level of service that makes them distinct. Delta is low-price provider of commodity service that I can duplicate by flying any other airline, but they’re profitable because of their low costs. I can switch to anybody else and get at least the same experience, but, because Delta is so large, they have economies of scale and can offer that return ticket a lot cheaper than their competitors. You need to pick: cost or quality. Delta and Air France did. Even if you can do both, like Virgin America, your customers will talk about one, just as everyone always talks about the great experience of flying Virgin America with its food, in-flight entertainment, and distinctive cabin lighting. And you need to pick one and stick with it; the other won’t be sustainable for you. For instance, Delta put fancy wood floors in their bathrooms. I could tell they were nice, but we were flying older equipment and, years after these expensive floors were installed, they just looked dirty. Easy-to-clean plastic would’ve been better. It’s not a bad thing to be a commodity provider, undistinguished by quality. There will always be many customers who are price-motivated. If your exit is to be acquired, it may be smart to be a commodity. For instance, Northwest was a commodity provider. Initially, they had a defensible position because they served unique geography. Recently, Delta was able to buy them because Northwest offered exactly the same kind of commodity Delta did. Delta couldn’t acquire, for instance, Southwest, because that company is run too differently from Delta’s model to be integrated into their service. If you can imitate Northwest’s strategy, being a commodity may offer a unique benefit to you in the long term. But remember: few start-ups are actually low-cost. Southwest was a low-cost startup, but that airline is an exception because they have very unique business practices. Usually a startup appears to be low-cost because it’s small and can make low-cost, low-volume choices. When you increase the volume in which you provide your product or service, you suddenly find yourself buying the same expensive equipment that your larger competitors are spending their money on – and that is keeping their prices high. It takes practice and diligence to be low-cost. For many start-ups, going the premium route is more sustainable. And it can last too: just look at Air France.

I just returned from vacation, and came home to find that some things just weren’t working… (As you can probably guess, this video was made before Time Warner fixed things, but posted after, so the Internet’s working again!)

I had the good fortune – and good fun – to sit in as a judge and hear the pitches from the entrepreneurs in this year’s Knight Digital Media Center News Entrepreneur Boot Camp. These professional journalists were all working on new ways to create successful news- and information-based businesses, and many of them came up with exceptional ideas. I’m excited to see how big they can grow – because I’m confident that many of them can succeed. Their big problem was: none of them were planning to get rich off of it. And that’s a little sad. They all brought immense expertise and know-how to the business, and, for all of those hard-earned skills, were charging their clients nothing. Or, next to nothing at any rate. I see that a lot: passionate entrepreneurs, with real, important knowledge, who relentlessly underprice themselves. (As my wife would say, I’m one of them!) There are a million reasons to underprice yourself, including:

• Lack of confidence in the market, so you try to price down to what you believe the market will bear
• Being used to making a salary, rather than running a business, and thinking of charging in terms of making a salary, not in terms of making a profit
• Close identification with a philosophy or idea, and wanting to make sure you don’t take resources away from others with that philosophy or idea
• A warm heart that just makes you want to be able to help everyone

I have all of those problems, in spades. Especially the last one. But there is a way out. The first step is to realize that greed, really, is good. Not in the Michael-Douglas-in-Wall-Street way, but in the keep-your-business-running way. A good dose of greed is the surest path to a viable business. At the end of the day, only a lucrative, prosperous business that gives you and your family the life you strive for is a viable business. If you aren’t making enough money, then:

• Eventually you’ll leave for a better opportunity – no matter how much you love what you’re doing.
• You don’t have the resources to help those you want to help.
• It’s hard to grow and hire others. If you do hire talented staff members, you’ll be unlikely to be able to pay them and give them the job stability they deserve.
• Somebody else who enters the same market, making enough money to support themselves and grow, will eventually develop more resources than you and gobble up the whole market, even if you are priced lower.

So be greedy, charge that higher price. Instead of having a business in which you struggle to meet expenses every month, have one in which you:

• Have specialist employees who do what they’re good at, so you can do the things you’re good at. I’m particularly talking about administrative assistants, bookkeepers, and the other kinds of detail-oriented tradespeople who do the crucial jobs that entrepreneurs usually hate.
• Grow and hire new employees who share your values and goals.
• Serve and work with a constantly growing group of consumers.
• Get to go on a great vacation every year!

So what price should you pick? Well, that’s another blog entry for another time.

When my clients get their financial projections, they tend to be very happy. Also, if they are coaching clients who did the projections themselves, proud. And then they find out that they need to distribute those financials, and that means printing them out, and then the romance ends. Because it’s not obvious how to print a spreadsheet in Excel in a useful way. For the experts, that’s probably because Excel is mostly an on-screen tool: they fool around with sums in it, e-mail spreadsheets back and forth, and change each others’ figures. For the new-to-Excel, well, it’s a somewhat intimidating program (VLOOKUP anyone?) and, worse, the financial projections are themselves vastly intimidating. As a result, most people spend very little time trying to print Excel spreadsheets. Until the day before their big investor meeting; then they need four perfect copies. This is how you get your perfect printouts of your Excel spreadsheet.. Here you see my standard pro forma income statement template. At the top are 36 months of month-by-month data, below are the three year-by-year roll-ups. We want one page for each year, plus the three-year roll-ups all on one page. First, go to Page Break Preview mode. In Page Setup – or on the Page Setup ribbon in recent versions of Excel – set the document to be 3 pages wide by 2 high, all landscape orientation. Now, drag the vertical dashed blue lines representing page breaks to after months 12 and 24. Drag the horizontal one below the 36-month projections. Go to Page Setup. Set the A column – or wherever you put your row titles – to repeat on all pages. The months and years at the top will take care of themselves. Set it to print over, then down, so that the three years of monthly projections end up in order. And print away. That’s all there is to it. You’ll end up with readable print-outs. (If there are too many rows to fit on one sheet vertically, try hiding unimportant ones. Just make sure you keep every line that totals up other lines, so that the financials make sense.)

Did you have fun this week celebrating Cinco de Mayo? I did – we had great, authentic Mexican food from one of our favorite nearby places. (One thing about LA: it’s filled with awesome Mexican food.) Turns out that Cinco de Mayo , while it’s a fun holiday, isn’t a very important one – it’s just one important battle in the history of Mexico. But that one victory in battle has turned out to be a big celebration worldwide. Running your own small business or start-up is a life filled with battles, most of them pretty unimportant. Every day, you’ve got to make your calls and e-mails. Every week, you have to get out there and network. Every month, you have to balance your Quickbooks. And then you have to do it all again. That’s why entrepreneurs tend to be bad at celebrating the little victories. We put our heads down, knock things off our to-do list, and go back to it. Rarely do we say “hey, that was awesome,” and when we do, we usually are still focused on the end goal, rather than the step we just pulled off. And, of course, when you’re starting or building a company, every end goal leads to another set of goals that you want to achieve to grow. We’re always looking to the big win in the end, not to what’s in our faces. So we don’t celebrate what we do get done, and that can be tough on the soul. Growing our businesses can be enough of an uphill climb that keeping our eyes only on the summit will actually drag us down. At the very least, it’ll keep us from enjoying the journey there. Cinco de Mayo celebrates the battle of Puebla, during the French Intervention in Mexico. But Puebla would never have been fought if not for the battle of Camerone, six days earlier. This battle is widely celebrated not by the Mexican nation but by the French Foreign Legion. At Camerone, a unit of the Foreign Legion held out long enough for a supply caravan to get to the French army at Puebla – but the Foreign Legion unit was wiped out. Yet the Foreign Legion celebrates the battle every year, because they fought bravely and well. Take a lesson from the Mexicans and the French both – celebrate both your small victories and your valiant failures. Building a business, there’s enough of both, and the celebration will make your life, and the journey to your goals, that much richer.

With the headline-grabbing launch of the iPad, much of the coverage has taken a short paragraph off to mull on the effect of Apple’s new toy on Amazon’s Kindle. That’s the wrong question; they should really ask what the iPad will do to Amazon. Sure, the iPad may kill the Kindle, but, as Obi-Wan said at the moment of his death to Darth Vader, “if you strike me down, I shall become more powerful than you can possibly imagine.” Amazon put the Kindle out there to die, and they will be happy if its time is now. To understand this you need to look deeper at the process of product development at Amazon and ask why that process could have resulted in a product like the Kindle. After all, Amazon moves product around the country, and occasionally makes some Web- or cloud-based software; it’s not a computer manufacturer. Digging a little into their financials, we see shipping costs trending somewhat upwards (you wonder how much of that they eat with Amazon Prime), and value of inventory climbing as they built focus on having products in-stock for immediate delivery. Inventory also means investment in warehouse space, which Amazon specifies in their 2008 financial statements is both owned and leased. Amazon would approach the idea of creating a new product by looking particularly at:

1. What could increase their overall sales
2. What could offer a higher profit margin
3. What could decrease their costs, especially variable costs

One approach that could clearly achieve goals 2 & 3 was to switch to delivery of digital product via the Internet, rather than hard product via shippers like UPS and FedEx. Switching to digital delivery offers higher margins and lower costs by essentially removing all variable costs, replacing them with modest fixed costs that can be distributed across a large number of products sold. Amazon took to this approach with verve, launching both the Kindle and their MP3 store in 2007. The MP3 store had a fairly simple, obvious model: get the tracks in the hands of the consumer, because the consumer already has the ability to store and play them. The same was not true for books; few people at the time owned book readers. And that wasn’t likely to change. Back in 2005 I worked on a e-book reader project; a big reason that didn’t go forward was the very high cost of the e-ink screens you’d ideally like to read a book off of (high as in, just the screen would cost as much as an iPad). That price problem wasn’t going to change without somebody buying those screens in bulk, which just wasn’t happening at the time. Thus the genesis of the Kindle is clear: Amazon wanted to decrease its costs and increase its profitability by moving to digital delivery for books, but that wasn’t possible without a reader, which wasn’t possible without a lot of people buying readers first. This is the classic chicken-and-egg problem that’s bedeviled many an entrepreneur. But Amazon had an advantage: Amazon is rich. They could solve the problem by taking any initial losses required to build volume and the market themselves, considering those as investments in future profitability. So they made the Kindle. And now the idea of owning an e-reader is commonplace. Publishers have responded: many titles are available in a digital format via Amazon.com. And that means they don’t need the Kindle anymore. After all, they’re not a hardware company, they’re a sales and shipping company. The iPad has delivered the culmination of Amazon’s plan: the wide market availability of devices that can read e-books. Now it’s just left to Amazon to become the preferred distribution channel of those books for consumers. (That’s where the money is, as Apple proved with iTunes.)