Category Archives: startups

Persist, Pivot, or Swap: Startup Strategy

A classic problem for entrepreneurs: Persist, Pivot, or Swap.

There are arguments for each.

1) Persist: startups are never easy, so a slow start is to be expected.
e.g., It took 2 years from Google’s initial development in 1996 to receive its first investment of $100,000 in 1998. For most entrepreneurs, two years without an investor seems like a very long time, indeed!

Advantages: overcoming barriers to entry takes time and is to be expected. In the long run, high barriers to entry are a good thing!
Disadvantages: risk of running out of capital before the business becomes viable (either through profitability or ability to raise additional capital). Risk of pursuing a non-viable business model either because lack of market or lack of competitive product/service.

2) Pivot: use knowledge and experience to find a better niche that can support growth/profitability.
e.g., Starbucks operated for its first 13 years selling coffee beans and equipment, not brewed coffee. Only once it pivoted to the coffee shop model in 1984, it began its rapid expansion.

Advantages: after gaining startup experience, founders can pivot business version 2.0 to target market conditions or specific niches. Various methodologies such as “fast failing” or the OODA Loop all describe the concept of learning from experience and reacting accordingly.
Disadvantages: Switching strategies too rapidly may confuse cofounders/employees. All business take time to develop, so pivoting before devoting sufficient efforts to a concept will only lead to perpetual failure.
3) Swap: a new, exciting opportunity comes along, completely unrelated to the first. With limited time / capital, is it better to abandon the first, and work on building something new.
e.g., Before founding Slack, a startup that reached a valuation of $1.2 billion, Stewart Butterfield was working on a computer game called Glitch. The game was a flop, but while developing the game, they built the communication technology that they realized was a marketable product. They gave up on the game, and swapped to the messaging product.

Advantages: leveraging experience from one industry into another is a classic way of creating innovative and disruptive businesses. Some markets are highly competitive, while others seem frozen in the past.
Disadvantages: “the grass is always greener” applies particularly to areas where one has less familiarity. There is high risk of either being unable to overcome the new challenges in the new business, or even being unaware of critical factors necessary to succeed.

How to decide?

In my startup career, I have persisted for years, pivoted multiple times, and swapped a couple of times. Here is the approach I have taken:

a) I generally persist at a startup concept until I develop a viable product/service that has the possibility of generating revenue. Quitting earlier means the venture never had the possibility to succeed.

b) I like trying new things, so I try to either pivot the business or make a spinoff product/service each year. The disadvantage of this, is it takes energy away from improving the core business and after a number of years there is a lot to keep track of. The corollary of pivoting is the need to prune out the old, less successful businesses if not immediately, then over time.

c) I’ve swapped ventures after I’ve put in enough time (sometimes years), there is a viable business model in my mind, but the business is getting no traction in the market. When something new and better comes along, I jump at it.

 

 

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What Is Uber’s P/E Ratio if it’s valued at $41 billion?

Uber raised $1.2 billion that valued the company at $41 billion. Some people are skeptical that Uber could have the same market cap as Time Warner Cable or ADP. Projecting future P/E may give some idea of the scale and scope of Uber.

The entire Taxi & Limo industry in the United States is well shy of $15 billion. If Uber has 50% market share and 20% commissions, its revenues would be $1.5 billion. Net profit margins for a mature internet company (such as Ebay) are 18% – or $270 million. That’s a 152x P/E ratio.

Factoring in the rest of the world (based on GDP) brings the P/E ratio to 33x.

In sum:  33x forward P/E ratio for the startup assuming 50% control of the industry throughout the entire world. The S&P 500 is cheaper.

So, perhaps Uber has grander visions – ride share / carpooling, car share, ambulance service logistics, military applications…. there must be a larger market it plans to tap into, or its latest investors got caught up in the hype.

Uber Ballooning P/E Ratios

Uber Ballooning P/E Ratios

How to Make a Bad Idea Good (or at least less bad)

I’ve been reading a lot of pitches lately, and many are obviously ill-fated. Here are some themes that would benefit most of them:

1) Cut the budget in half. Costs will be higher than expected, and returns will be lower than expected. Inflated numbers won’t fool anyone.

2) Plan the project in multiple phases. Then focus on phase 1 – it should make sense on its own.If it’s only value comes from the success of future phases, then that’s a problem.

3) If you can’t even explain it clearly, then what chance does it have of actually working? Simplify.

4) Money does not equal marketing does not equal success. There is often low correlation between each.

5) Time is not money. Spend the time, don’t spend the money. If your team doesn’t have the in-house capabilities, then it’s not the right team for the project.

6) Experience matters – but experience doesn’t matter. Past successes are great, but what’s even better is experience that will help with the current idea.

7) Think small – but be ready for success. How will the idea scale if it turns out to work?

8) How will it fail? How long will it take? How much will it cost? Will there be any salvageable value?

Inc Magazine: Best Industries for Starting a Business

Inc Magazine article highlighting 16 industries for starting a business. A few of the industries are a little goofy (e.g., selling homemade goods online and sperm banks), but others come from the just-released Top Industry data from AnythingResearch.com. Cool, huh? There are certainly a lot of other factors that go into identifying venture opportunities, but many of these  less well-known industries are worth looking at.