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The Power Focus Time: A terrifying way to make sure you'll actually get stuff done this week.

A terrifying way to make sure you’ll actually get stuff done this week.

Today, I’ll share one of the simplest, most effective ways I know to make mega-progress on a project. Be warned: it‘s simple, and to most of us, it’s terrifying. Expect to scream in horror. You‘ll laugh in denial. In your shock, you will retreat into rationalization: “That’s impossible. I just couldn’t do that. Stever just doesn’t understand…” But if you follow today’s advice, you will be in for a major transformation.

Let’s ease into it. The 50,000-foot strategy is simple: create focus time. We often get bogged down because we just don’t spend enough time in "flow" on a project…

This article is continued in “It Takes a Lot More than Attitude … to Lead a Stellar Organization!" Click here to purchase.

Get a Life While You Still Have the Chance (it's easier than you think)

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From my newsletter of December 2000

I’ve spent the last four days bedridden, recovering from oral surgery, unable to eat, and barely able to think. It’s been wonderful. It really underscores the value of time away from work. And life balance is possible without major surgery. You just have to know how…

Most importantly, you must decide that having a life is a priority. Many claim they value balance—they just have to work late this once… Make the decision and commit to it. Don’t wait for a brush with death to decide. My friend John needed a mid-30s heart attack to slow him down. For me, it was caring for a dying parent. Be good to yourself. Decide on your own to have a life!

Time is precious; no amount of money can buy back time. Set firm boundaries on the time you spend at work and home. Within those boundaries, only take on as much as you can do in that time. If you decide you will work eight hours each day, turn down work that will require a ten hours a day.

Use the 80/20 rule: you get 80% of your results from 20% of your time. Track how you spend your time, identify the tasks that produce the most results, and orient your work around those high-leverage activities. Use the extra productivity to pay someone else to do the low leverage activities.

Respect your boundaries. When you’re playing, really play. When you’re at work, really work. Your unconscious mind will know if you’re cheating—if you truly honor your commitment to yourself, you’ll be surprised how much more you’ll get done in both places.

If you find yourself having business thoughts during free time, buy an 89-cent notepad & pen and carry it with you. Jot down those thoughts when they happen, and go back to playing. When you get to work, start by reviewing your notepad for critical ideas.

Read a (fun!) book, go on a trip with your family, or see a movie for pleasure at least once a month.

Assignment: identify one high-leverage activity you do that produces lots of results. Identify one low-leverage activity that takes time but doesn’t do much for you. Arrange to have the low-leverage activity taken care of some other way, and use the time you save to do more of the high leverage activity.

EBITDA: The Phantom Measurement. (What's EBITDA all about, anyway?)

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At 04:55 PM 7/3/00 +0200, a visitor asked:
Are you familiar with the term EBITDA and do you know:
a). Why it is used as an indicator for new-economy businesses in general?
b). How Depreciations of <Assets directly related to earnings> are handled?

EBITDA stands for Earnings Before Taxes, Interest, Depreciation, and Amortization. It has become wildly popular with the New Economy set. Is it useful? Well… there are many useful financial measurements that are very similar to EBITDA.

EBIAT, earnings before interest, after taxes, is meaningful: it measures raw earning power, independent of financing sources. It measures earnings available to flow to all financial sources.

EBT is a measure of earning power, given current capital structure, but not taking tax management into account. It measures earnings available to flow to the equity holders. When calculating return on equity, use EBT as the earnings number. The return to equity holders is the earnings after netting out interest.

But what of EBITDA? I side with Warren Buffett in considering EBITDA to be a meaningless financial indicator that seriously distorts and misrepresents a business’s earnings. EBITDA has become popular because people want to value businesses which have essentially unviable business models. It’s often been used in biotech, as well, where companies are valued long before they’re shown to be viable enterprises.

The theory is that depreciation is a non-cash expense, and thus should be backed out of earnings before measuring a company’s earning power. However that ignores the fact that cash actually must be spent on assets in order to run the business. Backing out depreciation without adding in cash expenses is akin to claiming that the business’s capital expenditures aren’t relevant in measuring its earning potential. In fact, the very businesses which use EBITDA are typically the ones in which the expenditures are very relevant in measuring the company’s earning potential!

Which would you rather invest in:

  1. a business which requires $100mm in capital expenditures [which presumably you have to supply!] to produce $100,000 in earnings (but backs out depreciation and presents their EBITDA number of $10,000,000 to you)?
  2. a business which requires $10mm in capital expenditures to produce $100,000 in earnings, but leaves the depreciation in and reports an EBIT of $100,000?

The second business will ultimately give you a far better return on your money.

Only where the depreciation or amortization truly represents a non-cash expense does it makes sense to back it out of the equation. When a company is acquired for more than its asset value, the different between the purchase price and asset value is recorded as “good will.” The good will is then amortized over several years. It does make sense to back out this good will, as it doesn’t represent a use of the business’s cash.

Why is EBITDA used in so many new-economy businesses? Many new-economy businesses spend much of their money on hardware and software infrastructure that’s capitalized as an asset on their balance sheet. Using EBITDA lets entrepreneurs and their bankers produce a positive number with the big up-front expenses backed out of the earnings calculation. It’s certainly not fraud, simply creative misrepresentation aimed at investors who in many cases don’t think particularly deeply about the numbers reported by a business.

The practice is sometimes defended by claiming that a one-time large development expense shouldn’t be used to judge the ongoing attractiveness of a business. But many new-economy businesses have not demonstrated that development is a one-time expense. In fact, technology changes so fast that it is fairly certain that a whole new round of hardware and software purchases will be happening every few years.

All this said, if you‘re raising money or going public, EBITDA subtleties may not matter. If investors are willing to give you an EBITDA-based valuation, that’s their decision. But when using your numbers to actually manage the business, remember that capital expenditures are a genuine cost. Removing them from the equation is wishful thinking, nothing more.

Making Space for Success: Controlling Clutter

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Clutter kills our dreams. It fogs our vision. Cleverly disguised as temporary convenience ("I’ll just put this here … for now"), clutter undermines more progress than TV, soft-money campaign contributions, and badly designed web sites put together. Who can be a visionary leader, when vision is obscured by a stack of magazines waiting to be read, twenty signature pages to forgotten contracts, a file folder of "time-critical stuff" dated 4-17-1998, and an e-mail inbox the size of Texas?

For many of us, getting a handle on clutter is remarkably freeing…

This article is continued in “It Takes a Lot More than Attitude … to Lead a Stellar Organization!" Click here to purchase.

Division of Equity: How equity gets divided initially and at harvest

How equity gets divided initially and at harvest

One of the most common questions I get is about how equity should be distributed. I’ll warn you in advance: there are no hard and fast rules. Equity is negotiated on a case-by-case basis, which makes it hard to give any generalizations. I’ll try to give some thoughts on what to consider when you give out equity.

Dividing equity among founders

Founders receive equity for what they bring to the table. How much of the company they own as a result of their contribution is purely up to the group to decide. There are several factors which need to be considered, however.

Timing, size and duration of contribution. The earlier, bigger, or longer the contribution to the company, the more equity a founder should receive.

Power.Equity conveys voting power and control over the business. Generally, founders who intend to stay with the business long-term should retain the most control. I have heard it recommended that one individual own at least a 51% of the company, to provide consistent decision making when resolution is needed. Equal partners, while great in theory, can destroy a company when the partners don’t agree and have no way to resolve fundamental disagreements.

Money. Early money is a contribution for equity. Money has the side-effect of valuing the company. If you give 10% of the company for someone contributing $50,000, it implies a company value of $500,000. If you try to raise money immediately thereafter, that valuation could hurt your negotiating ability. But if substantial infrastructure has been built in the meantime, if customers have been acquired, or if more of a team has been built, then a higher angel/VC valuation is justified.

Kind of contribution. A founder may contribute in many ways. Some bring patents or product ideas. Some bring business expertise and ongoing work to build the business. Some bring capital. Some bring connections. Some may bring big names or reputations which convey credibility with VCs and/or clients. One big name that provides instant credibility may, in fact, be worth more to the company than a founder who actually puts in the work to build the business. Make sure to understand what each founder’s contribution is, and value it appropriately.

We have 5 founders, what do we do?

Negotiate, big-time. Too many founders can be a big problem. As the company reaches for outside funding, you make many decisions about equity, contribution, and dilution. The more equity-holders, the more negotiation has to enter into each of these decision.

Having several founders makes it hard to keep everyone adequately compensated. By the time of harvest (IPO or acquisition), the founding group can expect to own about 20-30% of the company. With one founder, that can mean riches. With several founders, that may mean splitting the pie into so many pieces that no one is happy with the value of their piece.

In short, fewer major equity holders are better. If you’ve already got several, make sure that you tie each founder’s vesting to the contribution you’re expecting from them.

How much will investors expect to own?

The basic formula is simple: if you need to raise $5 million, and an investor believes the company is worth $15 million, you will have to give them 33% of the company for their money.

Different investors value companies in different ways. Some look at the quality of the idea, assets, market size, and management team. Some rely on financial projections. Some simply look for “big ideas” and determine their percentage ownership purely through negotiation.

I asked a couple VCs, some entrepreneurs who recently received funding, and an angel investor how much of a company is typically given up in the first round. While one VC has seen investments as low as 5%, the majority thought that first round investors will usually take from 25-45% of the equity.

One entrepreneur remarked,

The better thing to ask is: how much should management and founders try to hold onto before the IPO. Answer: as much as possible, but no less than 25%.

The entrepreneur has an important point. If it comes down to the money (as it often seems to, these days), what matters in percentage ownership at harvest multiplied by the valuation at harvest. Owning 1% of a company with a billion dollar valuation is still more interesting than owning 10% of a company with a fifty million dollar valuation.

What equity should part-time contributors expect?

Not very much. The reality of the situation is that startups usually require 150% commitment by everyone involved. Venture capitalists insist equity be given in return for ongoing commitment. Even founders who stay with the company have a multi-year vesting schedule. Many VCs will not allow equity to be given to part-time employees or contractors.

There is a one-time contribution for stock that is routinely made: giving capital itself. A cash investment for stock lets the investor own the stock free and clear, with no further contribution required. Having part-time contributors purchase stock outright may be the best way to include them in the deal.

How can we increase the company’s valuation?

From an interview with Ron Conway in Bankrolled by an Angel, part 3,by Lawrence Aragon, Red Herring 12/22/99.

Angel investor Ron Conway says:

To get a $5 million valuation, you need a great market, a great idea, a crisp business summary, a really good elevator pitch, a compelling product prototype of your software or solution, and two or three members of your management team in place. For a $2 million valuation, none of the software for the solution is written yet. It’s just a CEO without a proven track record and a market to attack.

Q. Given the number of questions, many entrepreneurs seem to focus too much on valuation. Generally, what do you advise?

A. If you’re building a company like Yahoo (NASDAQ: YHOO), Ask Jeeves (NASDAQ: ASKJ), or eBay (NASDAQ: EBAY), you shouldn’t worry about valuation on the front end. If you’re worried, then you probably don’t have the confidence to build a large, significant company. A CEO who’s completely stuck on valuation is a warning sign. That’s a CEO who’s confused about his role. The bottom line: if the idea is great, you’ll end up with a multibillion dollar market cap and everyone will make more money than they can ever spend.

Rather than focusing on valuation, focus on execution.

Q. A guy wrote that he’s worried about not having a Harvard MBA. How would you rate a college dropout with a brilliant idea, an excellent prototype, but no team? Would you fund him?

A. Yes, but that would definitely be in the $2 million pre-money category. If the prototype is excellent, he might get a valuation of $3 million to $4 million.

What does ownership look like after the first round?

According to Ann Bilyew of Advent International, a typical first round is:

  • Founders-20-30%
  • Angel investors-20-30%
  • Option pool-20%
  • Venture capitalists-30-40%

What does ownership look like at IPO?

From an article by Anant Raut published on www.techound.com.I do not have the exact URL.

A May 1999 study by the William M. Mercer, Inc. consulting group [showed] the Internet companies reserved 15.7 percent of their common shares for compensation, compared with traditional industry’s 10.7 percent; after their IPO’s, however, traditional industry had 5.3 percent of their reserved shares still available for option grants in the future, while the Internet 32 had only 3.7 percent to offer.

The same study found the following distribution of median equity stakes among members of the executive team (following an IPO):

  • Founding chairman-20.4%
  • Founder-9.6%
  • Non-founding CEO-4%
  • Other executives-0.79% (0.96% before IPO dilution)

It’s hard to quantify percentages that non-executives should expect. Variables include the age of the company, the degree of financing, and the strike price. Kersey Dastur, an independent consultant based in McLean, Virginia, has assisted a number of high tech companies in establishing stock option plans and explains, "If I am a company with no financial backing yet, I will be likely to set aside 10 percent of my company for non-executive employees because they are taking a risk working for me. I may, however, set a high strike price to ensure that the value of the company is not diluted." It is not uncommon for companies with financial backing to offer no more than 2 percent to non-executive employees, because someone else has already assumed the financial risk. Remember, these allocations are spread out across all employees so, unless you have something truly unique to offer, don’t expect a large piece of the pie.

Fund Raising Destroys Value! Do it wisely and carefully.

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“I just hit a major home run!” exclaimed the entrepreneur.
“Did you ship product? Did you make your first sale? Did you get a large contract?” asked his friend.
“No, no. Something much better: today we closed on a $20 million round of financing.”

Congratulate yourself for raising money, but don’t think it was time well-spent. You need money to stay in business, but raising it destroys value: money changes hands, with a big chunk siphoning off to lawyers, filing fees, travel expenses, and phone calls. You’re left with less than when you started, and that’s before buying your first paper clip! Money may make the business viable, but it doesn’t make it valuable.

Nor does fund-raising use your time wisely. Your investors are betting on what you uniquely bring to the table. Your competitors have all raised money. Most entrepreneurs out there have raised money. fund-raising ability doesn’t distinguish you one whit. Spend your time bringing your vision to life by building your organization.

Actually, your investors would love it if you never raised money again! Every new share of stock issued dilutes current shareholders. With every dollar you raise, your investors wince. In the late 1990s, many companies raised so much capital that they’ll need to be in the Fortune 10 to give investors a decent return. Some may make it. Most won’t.

And beware! Successful fund-raising can snare a CEO. It let’s them avoid their real challenge—building a stellar business—in favor of the “success” of a $20 million closing. You see, fund-raising is easy: the customers are VCs, angel investors, and banks. Their buying criteria is simple and public; most of them will even outline it on their web site. And the product, your business plan and sales pitch, can be created by one or two people.

Running a company is much more challenging. You don’t necessarily know your customers. In fact, you may find they don’t even exist! If you do have customers, you may not know their buying criteria. In fact, they may not know their buying criteria! And delivering your product and services means coordinating dozens of people, each with different priorities and demands on their time. Yet knowing the customer and delivering the product will make or break you. fund-raising is a stressful—but much safer—place for an entrepreneur to spend their time.

So yeah, you have to do it. You have to raise money. Businesses need money to operate. If you aren’t yet profitable, that means pitching investors, haggling over terms, and repricing your round at the 13th hour. Just remember that getting the money merely opens the starting gate. Then it’s time to add value, and you add far more value as a leader and manager than you do as a fund-raiser.

So raise your money, then run your business. Run it well and profitably and you’ll repay your investors a dozen times over.

Thoughts of a Business Plan Judge: Who Gets $30,000?

A quick digression on who gets $30,000

May 1, 2000

The Harvard Business School and Brown University Undergrad business plan competitions are in the final stages. I read and listened to several plans, presentations, and write-ups. It sobers me to realize that $80,000 in prizes have been influenced by my thinking.

Here is some of that thinking, made public, in case it helps you with a presentation you’re making. When I say “the best” below, I mean the best of the plans I saw. These observations may not be representative of the whole contest.

The best-written plan was from a Brown undergrad team.

The best demo was from a Harvard Business School team.

The best industry research was done by an HBS team.

The best pre-launch, idea-specific research was done by a Brown undergrad team.

The worst plan was from an HBS team.

The team which had their business up and running and was proving it profitable did not win their semifinal round. Maybe because their business was not sexy and high tech?

The judging criteria contained implicit value judgments about “good” businesses. High growth, huge market cap, original ideas were given a premium. In fact, my personal favorite plan in each competition was for a limited-growth opportunity. In the Brown competition, it was a limited opportunity with a me-too product!

(It makes sense that the judging is biased towards huge-market companies. It attracts more involvement in future contests if “our winners go on to found billion-dollar companies.” VCs and entrepreneurs are less likely to participate in a contest whose winner had a $100,000 idea, even if the plan was perfect and the idea was executed flawlessly.)

The judging criteria sometimes judged qualities of the idea, not whether the plan handled those qualities. For example, a criterion was “originality of the idea.” Originality is fun, but it isn’t necessarily a good criterion for a business plan competition. How about: “do the entrepreneurs recognize how original their idea is[n’t] and have they taken steps to get the most out of the opportunity, given their degree of originality?” Sometimes originality is detrimental! Me-too products have produced spectacular market successes (can you say, "Windows?" "Blockbuster?" "General Motors?").

My actual rankings reflected my feelings about the team, as expressed through their writing. The well-thought out, clear, concise plan left me with the thought that even if the idea didn’t work as expected, the entrepreneurs would find a way to make things work. Other plans had good product ideas, but wildly unrealistic marketing-speak plans left me afraid that their business judgment would be more influenced by Business 2.0 buzzwords than by their ability to respond to the real world.

In many cases, my lack of specific industry expertise left me judging based on the research process the team seemed to use, rather than on the results of that research.

Operating at Your Peak; Sleep and Good Food are Underrated

Sleep and good food are underrated

One of my clients was feeling under the weather last week. Motivation was down, stress was up. Instead of an attitude of optimism and cheerfulness, the world was melancholy gloom. Overall, a bad scene, and not one to set a good tone within the business–a CEO’s mood can infect the entire company. The problem? He wasn’t getting enough sleep, was working through his normal exercise time, and was making up the energy deficit with coffee during the day.

This is an all-too-common spiral. Too much work means too little sleep. Too little sleep means a drag on energy, less productivity, less creativity, and a sudden fondness for Starbucks. All that caffeine-induced energy makes it easy to work on into the night… and the whole thing starts over.

Unfortunately, chemically induced energy isn’t enough. Our bodies and our minds need time to recharge. Sleep rests your body, and it also gives your mind time to explore and file everything that’s happened during the day. The eighth hour of REM sleep, in fact, is where much of the most intense dreaming and creativity happens. Chemicals can keep your body awake, but your mind won’t produce your best work unless you’ve had time to recharge.

It’s all too easy to let the occasional late night slide into a habit of not taking care of yourself. Breaking the downward spiral can be mentally difficult, but it’s quite simple in practice: leave the office by 6:30 pm every night, even if stuff doesn’t get done (the world won’t end). Get a full night’s sleep. Throw away your coffee maker. And start the day with a glass of water or juice. By the next week, you’ll start feeling a lot better.

One reader asks:

I totally agree with it in theory, but I don’t see it being feasible for my startup any time in the near future. I was just wondering if you had insight into how other companies follow this?

I actually do believe companies would survive. The "savings" from pushing people hard are usually short-term. You may need all-nighters in an emergency, but over time, too little sleep impairs thinking ability. In a knowledge-intensive business, poor thinking can be deadly.

Though startups often get away with a year or two of very intense work, you’re risking burnout if it goes much longer. And burnout’s unpredictable and hard to manage. You can easily ask a healthy workforce for occasional bursts of intense work. But when someone flips into burnout, they literally can’t get started again. They stop caring, and often check out completely. At best, burnout is unmanageable, and it worst, it can be a complete disaster.

A young workforce can take longer to burn out, but it still happens. Twenty-year olds can be hard on their bodies without feeling the effects as severely as we older folks. Several of my MBA classmates have been going full-tilt for a decade, and at least one had his first heart attack from stress and overwork (so said his doctor). These are folks in their mid-30s. That’s pretty young, career-wise.

One way to promote health is lowering the workload. It means saying "No" to work that would hurting people’s health. It means building systems to save work, separating out the "must do" from the "we’d really like to do," and setting realistic client expectations if you’re a service business.

But even if you don’t lower the workload, sacrificing quality of life for short-term progress may be a fantasy. The basic math suggests that damaged immune systems still don’t get the desired results. If someone loses three days to sickness that could have been avoided, that is equivalent to them having worked one hour less per day for an entire month (assuming ten-hour day, five-day workweeks)! It may be better to cut the extra hour off in the first place, and keep people in good health.

Scenario 1 Scenario 2
10 hour days 8.8 hour days
3 days sick no days off
risk of spreading sickness n/a
low quality of life high quality of life

The scenarios are equally productive, but scenario 2 is probably a lot more fun for the individual and the company.

Most startups are run as pressure cookers. I suspect it’s a misguided romantic notion that confuses movement with progress. A company I worked with closely took pride in their overwork, though any experienced project manager could instantly see the overwork came from poor scheduling, poor resource allocation, and a lack of attention to infrastructure that would have sped up later projects. The haste to get early contracts out the door sacrificed the opportunity to build systems for later productivity and later quality of life.

Because people think startups require sacrifice, they ask themselves, "How can we keep running the company the way we currently do, but avoid burnout?" The answer: you can’t. At best, you start giving out sabbaticals, which in one fell swoop lose the gains of several years’ worth of overtime. That’s the wrong question, and the wrong question will always lead to the wrong answer. The question to be asking is, "How can we run the company in a healthful way?" The answer will depend on your company, your people, and your culture.

It’s possible. My formerly caffeine-addicted CEO runs two companies staffed by people in their late-30s to fifties, and they don’t need 100 hour weeks. But it takes care, planning, and constant attention to workload, infrastructure, and the like.

So in short, I’m sure that there are limited times–especially in startups–when deadlines and circumstances demand Herculean effort. But part of building a sustainable business is learning how to channel part of that effort into systems and structures that reduce the need for such effort in the future. And even in startups, the gains from super-effort crunches are only gains in the short term. Most of them are more than made up for by decreased productivity, decreased creativity [which necessitates later rework], and time lost to sickness and required vacation.

This month, take steps to restore your life to an upward spiral:

  • Commit to getting enough sleep every night for the next two weeks. Find out how that changes your outlook.
  • Each day, substitute a glass of water or juice when you would normally drink coffee or soda. Learn to distinguish between caffeine energy and energy from health.
  • Help your long-term balance by scheduling four weeks of vacation next year. Do it now. Yes, I know that "there’s no convenient time" or "emergencies happen." There’s never a convenient time, and there will always be emergencies. Schedule your vacations and stick to them, realizing that the world around you will do its best to keep you from taking them.

What is a Business Model? The anatomy of how a business makes money

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Note: This article was written several years ago, when PayPal.com was a humble startup, Eudora Pro was still a leading desktop e-mail client, and cameras still used film.

Q: Many people say that they want to see your business model. What exactly do they mean by that? Do they want to know your target market and strategy, or do they need financial information as well?

A: A business model is quite simple: it is a brief statement of how an idea actually becomes a business that makes money. It tells who pays, how much, and how often. The same product or service may be brought to market with several business models.

Here are several sample real-world scenes, showing how similar products can have very different business models.

Consumer Reports vs. TIME Magazine

Consumer Reports makes money solely from grants and subscribers . It has a subscription-based business model.

TIME makes money both from subscribers and from advertisers. It has more of an advertising-based business model.

The difference in business models tells you a lot about the two businesses. Consumer Reports is going to concentrate on selecting content which will be of high enough value that people are willing to pay a subscription fee. Since it doesn’t depend on ads for income, no one but the editorial staff influences the articles.

TIME Magazine, on the other hand, also must take advertisers into account. TIME needs content for its readers, but it is largely concerned with growing a demographic for the advertising it sells. Since TIME makes most of its money from ads, an advertiser’s threat to pull advertising may put pressure on the magazine to pull or rewrite a story that the advertiser finds objectionable.

Movie Theaters

During the first several weeks of a movie’s run, almost everything in a theater’s box office goes to the film’s distributors and producers. The theater makes its money from the concession stand! The business model: sell tickets at cost, and make profit on refreshments.

This model implies that staffing the refreshment stand should be high priority. When the theater is crowded, bring in extra staff to keep refreshments flowing. Since that’s where the money is made, losing sales from too-long lines is losing the only profitable sales the theater makes.

A theater near my house rents second-run movies that have been out long enough for the theater to be able to keep most of the ticket revenue. They make much more of their money on ticket sales, and put far less emphasis on the refreshment stand.

Razors vs. Shavers

Gillette is happy to sell you their Mach III razor handle at cost, or even below cost. Because they then sell you the profitable razor cartridge refills. Again and again and again… Their business model is virtually giving away the handle and making their money from a stream of razor blade sales.

Electric shavers have a different model. They cost a lot more than the Gillette handle. They cost enough that the manufacturer makes all their money up front, rather than from the stream of blade refill sales (electric shaver blades do wear out, but it takes a much longer time).

Digital vs. Film Cameras

Traditional film cameras cost a bunch of money. And then, you buy roll after roll of film to take pictures. Then you spend even more getting the pictures developed. If you’re using a Kodak camera, Kodak film, and Kodak developing, then Kodak will be very happy. Their business model makes them money from camera sales, film sales, and processing fees.

Digital cameras eliminate film sales and processing fees. Kodak needs to find a new business model before the cameras catch on more widely. And they are working on it. They are establishing digital printing centers, where you can have your digital camera pictures printed on genuine Kodak paper. The business model that was based on film sales and processing is becoming a model based primarily on photograph printing.

paypal.com … who knows?

Sometimes a business’s business model is not obvious. The web site www.paypal.com allows you to send money to a friend via e-mail. The money is either charged to your credit card or taken in cash from your cash account at paypal.com The intriguing twist is that paypal takes no commission on the transfer.

How do they make money? What’s their business model?

I don’t know, yet. From interest, perhaps? If enough users deposit money with paypal before paying it out, they collect interest on that money until the recipient finishes the transfer. If this is their business model, then they should concentrate on increasing float: getting more interest on their money, encouraging people to fund their paypal accounts long before they will send money to friends, and encouraging people to leave the money sent to them in their account just a bit longer.

Other models they could use:

Charge a fixed transaction fee on each transaction. Resulting business goals: encourage lots of small transactions.
Charge a transaction fee that is a percentage of the transfer. Resulting business goals: encourage large transfers, since they make as much as many smaller transactions, but without the overhead of doing many transactions.
Or, since electronic funds transfers are cheaper for banks than processing check, paypal might have banks give them a percentage of the savings from doing transfers by EFT rather than by check.

Brick-and-Mortar Brokers vs. E*Trade

Traditional brokers make money by charging a commission on purchases and sales. The commission is a percentage of the transfer amount, so brokers may be happy with clients who trade infrequently, as long as they buy and sell enough at a time to generate a nice commission.

E*Trade charges a low, fixed amount per trade. Their business model is to attract high-trade-volume customers. The customers are more likely to trade often when commissions are fixed and low, and E*Trade is pushing to make up in volume what the traditional brokers make by charging a percentage.

Adware: take your choice

First pioneered in the late 1990s by Qualcomm’s e-mail program Eudora Pro, some software lets the customer choose the business model! A customer can install and use the software for free, and ads will be shown as they use the program. Or, they can pay full price and install the program without the ads.

For users who elect ads, the business model is that Qualcomm provides software for free to build an audience, and then gets income from advertising. They must spend their time selling ads and distributing their software widely to create the audience.

For users who pay for the program, the business model is the same as for any shrink-wrapped software: Qualcomm gets paid up front for a product which the customer can use forever. Qualcomm then spends their time coming up with later versions which they hope will entice customers to upgrade, sending more money into Qualcomm’s coffers.

Retainer vs. Hourly Consulting

Some freelancers charge by the hour for services delivered. Others charge a flat fee retainer which entitles a client to a certain amount of the freelancer’s time. Once again, they deliver the same service, but the different business models will result in their negotiating businesses, administering their business, and controlling costs in a very different way.

Stever's flame on why ASPs, Web 2.0, and everything new is really just old again

It’s always something; if only it were something new.
Stever sounds off about ASPs

Inc. Magazine, April 2000, Alessandra Bianchi declares on page 29, “The entire software industry is about to be turned upside down [by ASPs].” ASPs, for those of you who don’t know, are Application Service Providers. They provide central services on their computer, which you run from your machine, usually through a web browser.

Hi, Alessandra. You must be young, unfamiliar with the computer industry, and
probably didn‘t think to talk to anyone over 23 while researching your story. Yawn. I continually wonder whether I was as myopic and self-absorbed in my 20s as the current generation of 20-somethings seem to be (at least in the Internet start-up world)? Probably not. But I’m working on becoming that myopic and self-absorbed now. Better late than never.

So, Alessandra, come and sit upon my wizened knee. Let me share with you a bit of perspective from 23 years in the high tech industry. No, really. Come on. There’s a good little reporter. Please just humor an old fogey for a moment…

The idea of running software on a central machine and having it delivered to distant desktops has existed for decades.

In the 70s, it was called time-sharing, and featured “dumb terminal” (text-only) distant desktops.

In the 80s, it was called client-server, and featured “smart” distant desktops (entire computers).

In the 90s, it is being called ASP, and features stupider distant desktops (entire computers whose processing power is ignored except for one poorly-written Web browser).

There’s a lot to celebrate about the last three decades of computer science, but the idea that we have a new model for software services distribution isn’t one of them.

There are lots of good reasons to run a program on a central server:

  • You only need to upgrade the server, and all the users get the change.
  • For a big ole application, only your server needs to be huge. Your client machines can be dinky, inexpensive doo-hickeys.
  • Any data stored centrally on a server can be backed up by the server’s staff.
  • You can pay-as-you-go, so for expensive programs you rarely use (e.g. the non-professional designer who uses Photoshop once a year), it saves you money.
  • The server can collect tons and tons of personal data on you by watching everything you do with that application, and the ASP providers can sell that information to marketers and terrorists so … um, whoops. That’s not a reason to use a central server. Never mind.
  • … and that’s about it.

There are lots of good reasons to run a program on your desktop:

  • You get to control upgrades, so some stupid unanticipated upgrade doesn‘t tank your machine and your productivity as you desperately try to untangle the unwelcome new interface, or the mush that a bug in the new upgrade has made in your locally stored data.
  • You don’t have a single point of failure. If you use an ASP for a mission-critical application and it crashes (or anything along the path between you and it crashes), your work stops until the breakdown is fixed. If your entire company uses a centralized server, a break in the network or the server can stop your entire company for a day. That costs more than just the cost to fix the system; it’s essentially your entire company’s output for the time it takes to fix the breakdown! (See The Goal for details about that last one…)
  • It runs faster. Period. The Internet, especially, is dog-slow. And the slowness can happen anywhere along the path between you and your host. With a desktop, you know how to speed it up: buy a new disk and processor. With a network-based program, there may be no way to speed it up.
  • It’s pay-once, so for programs you use often, you don’t have to worry about being reamed by deceptive pay-as-you-go fees that seem cheap until you realize that over the next two years, you will spend ten times more on the software rental than you ever would on a piece of shrink-wrapped software.
  • You can backup your data yourself, so when the central database server has a disk-destroying crash and it turns out that the support staff wasn’t actually making those backups they had promised, you won‘t lose a decade’s work.

Once, and only once, I used Yahoo calendar for a week. My ISP was having connectivity troubles right as I had to rush out to a meeting and had forgotten where to go. Alas, my Yahoo Calendar didn’t leave me yelling “Yahoo”—it left me yelling “G*d f**king damnit!” Which wasn’t nearly as much fun.

If you like the whole ASP model, however, then please indulge. You feel like you’re out of control technologically, now? Just wait. Hee, hee, hee. And please—send me your now-useless PC, since I really need one to use as a print server…

Update in mid-2010: Now we have “software as a service (SAAS)” and “cloud computing.” Guess what? Same stuff, different day. Everything old is new again, only “old” in this case means two years old, not two decades old.