Archive for December, 2010

A few more words about cash
December 23, 2010

I’ve posted a lot about cash in the past, mainly about how important, misunderstood, and difficult cash flow management is to the success of a business. It can be shocking to see how increased sales without cash will kill a company while flat sales at decent margin can be a huge position of strength. Believe it or not, a million dollars in sales at 10% margin on Net 60 terms might be AWFUL news while $50,000 in sales at 2% margin on COD terms can be AWESOME.

The most misunderstood concept with regard to cash and cash flow is TIME. I used to think that healthy A/R and constant business meant that our business was in good shape. Problem was, there never seemed to be any money on hand and you can’t take a P/L to the pulse machine.

The obvious answer is to get your customers to pay on time, even early. You can offer a discount if they pay in 10 days instead of 30, for example. The next answer would be to get better terms from your vendors; instead of paying COD ask for Net terms. Or get a credit card and wait til the last minute to pay, etc.

Any consultant or bookkeeper is going to bring up (1) getting better terms from your vendors and (2) getting your customers to pay faster. Gee, thanks for the advice.

Problem is that everyone is playing the same game – your vendors are trying to get you to pay faster while delaying payments to their vendors who are doing the same thing, over and over and over. So what are you to do? Well, here are some things that have helped our company….

1. Ask vendors with whom you have a good relationship for a low, Net 1 credit arrangement. When you order $100 worth of widgets from them, call the next day and pay it over the phone with a credit card. While this doesn’t do anything for your cash flow issues since you’re still basically paying COD, it DOES create a powerful reference for you. When asking for credit from any vendor, the first thing they are going to ask is who else is currently extending you credit. Being able to tell them SOMETHING is worth the small amount of trouble it takes to get a few NEt 1 accounts set up.

2. Get a short term Line of Credit with the bank. Predictably, banks typically want to loan money to companies that don’t need it. They make safe bets to make sure that the money is coming back and safe bets are most often made on companies without cash flow problems. But having a good relationship with a bank is a great idea and its never too soon to get started. My suggestion is to find a banker and bank you like and try to get SOMETHING from the bank. A $5,000 line of credit that matures in 6 months, for example, would serve a few purposes: first, it shows you the rigors of getting money from a bank. You’ll learn a LOT about financial statements, business planning, forecasting, etc. as soon as you start working with a bank to get a loan. Second, if the bank makes a bet on you for a small amount of money and you pay them in full and on time, they will be much more agreeable the second time around. Rinse and repeat a couple of times and you might find yourself with an 18 month revolving line that essentially makes your cash flow problems a thing of the past.

3. Most importantly: Learn to calculate. Let’s say a COD vendor is charging $1 for a product and a Net 30 account is charging $1.10 for the same product. You are going to sell 1000 of these for $2.00. And let’s say your customer will pay on time, Net 30. Using your net 30 account would cost you $100 for the month. Not using it costs you access to $1,000 for the month. So you have the option to spend $100 to keep $1000 in the bank. Whether or not this is a good deal is up to you (and really not the point here). What is important is that you know what your “Cash” costs you and how to make it work in your favor.

Cash flow is a problem in all businesses. Even the ones that have plenty of cash worry about what to do with it, whether to horde it, use it to grow, etc. The truth is you are NEVER going to be free from cash flow concerns as long as you have your business. The key is to understand what does and does not work for your business and to give yourself options.

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Groupon turning down Google – Why? And what does it mean?
December 22, 2010

I started this blog by posting “Rules” for startups. You can still find them somewhere around here. Those rules were my experiences-turned-blog-posts about things you should or shouldn’t do when starting a business. I posted them with the hope that I would help someone out there not make some of the same mistakes I made.

But I’d like to change rule #1 from “Get Started RIGHT NOW.” to this:

New Rule #1 for Business: If someone offers your company 1 Billion Dollars as a purchase price, you accept it. ONE Billion. And if someone offers you FIVE Billion, you don’t let them get off the phone before the contract’s have been emailed, signed, and returned.

Seriously, I think that Andrew Mason and the Groupon folks are suffering from (1) a lack of appreciation of how much money 5.3 BILLION dollars is and (2) a hubris found in most startups, a hubris that usually is the undoing of them eventually (see: Digg).

Turning down Google’s ofer signals that the Groupon folks view their company as a portal-in-the-making and not a marketplace. This is, of course, very ambitious. It’s also incredibly stupid. From the Groupon side of the table I’m sure the board laid out the following arguments:

– We are BY FAR the market leader in the Group Buying space.
– We have a bigger email list then everyone else in the space.
– We have a greater geographic presence (mostly through acquisition) then anyone else in the space.
– We are the fastest growing company in the history of the entire galaxy (or something like that).

I’m sure that the “we can be a platform!” concept is rooted in the idea that the current single-offer-per-day model can be developed to increase sell-thrus. Maybe ad some ads or sponsored listings. Keep bringing on big brands like GAP. Get in to new markets. Allow Vendors to have a place to sell coupons/vouchers whenever they want outside of the featured deal. The Groupon As A PLatform boils down to the board thinking that they can make their site a one stop shop for the intersection between online marketing and offline commerce. I applaud their ambition. But they are incorrect and it’s going to cost them. Here’s why…

The first mistake Groupon is making is in thinking that their model is worth a lick right now. As it stands, the entire Groupon platform needs a LOT of work to remain a viable business. The entire point of Groupon is to offer a voucher as a loss-leader (or at a very small amount of profit) and get new customers through the doors of a business. Andrew Mason (CEO) says that Groupon exists to get people in a community to explore new things to do in their cities. That’s of course poppycock – Groupon exists to sell whatever deals they can. There’s nothing exploratory about going to The Gap.

For starters, there is not a shred of evidence that Groupon vouchers create repeat customers. NONE. Groupon’s (and similar companys’) vouchers bring people through the doors who are there only because they think they are getting a good deal. Is it possible they will return? Perhaps. It’s also possible that instead of becoming a repeat customer at ABC Spa, they’ll simply wait for XYZ Spa to be featured on Groupon so they can save a little money on a manicure. Will the customer return? Will they tell a friend about a good experience? Did they spend enough during their visit that the vendor made a small profit? No one knows. Groupon definitely doesn’t. The merchant support tools from most every group buying site are DREADFUL or non-existent.

Aside from no evidence that Groupon creates repeat customers (which is the entire point of running a Groupon for your business), there is no way for the merchant to continue interacting with the patron in the hope that they will return as a regular customer. There is no way for the merchant to track if the campaign was a fiscal success unless they do it themselves. Furthermore, Groupon locks in merchants for 90 days as well, so if Jimmy’s Auto Shop offers a Groupon and it succeeds, Jimmy has to go to the end of the line at Groupon AND can’t run a similar campaign anywhere else for 1/4 of a year. This is similar to FOX telling Coca Cola, “if you want to advertise during ‘American Idol’ then you have to sign a contract stating you won’t advertise during this season of ‘Dancing with Stars’ over on ABC.” The ENTIRE point of brand advertising is to create frequency of impression, to actually BUILD the BRAND. How is a vendor supposed to build a brand if key player in the wonderful-world-of-group-buying is keeping the customer from extending his reach? (Groupon should be going the other way – encourage vendors to advertise on other sites. Why? Because this helps the vendor but also means more and more people in the world get exposed to group-buying and get comfortable with it. And as the Big Man On Campus, those people will eventually find Groupon and Groupon will make more money.)

So Groupon is foolish so far for two big reasons: the platform sucks for merchant tools and there is no proof that the concept of creating repeat customers is actually working. Those are two REALLY significant issues, and I would think 5.3 billion dollars would be reason enough to let those issues be someone else’s problem.

So before Groupon can think about itself as a platform, it needs to fix the myriad problems it already has. Unfortunately, the hole in the hull gets bigger when you realize that the competition Groupon is facing right now is bottom-up. Most group buying sites are copying the Groupon model exactly and trying to launch in a market or two and build up lifestyle businesses for the owners. Groupon sits at the top, king of the group buying world, mostly because a lot of their competitors are companies made up of three college kids with a Mac Book Pro – one battleship, lots of barnacles, rising tide lifts all boats yadayadayada. Why is this a problem? Well, the largest ecom web properties on earth aren’t even in the game yet (Amazon’s investment in Living Social notwithstanding). What happens when Twitter integrates daily deals in to their promoted feeds? What happens if Google buys Yelp and does the “Groupon as PLatform” idea but does it BETTER? What happens when Amazon starts opting in all of their user accounts for offline deals as well? Nevermind that the gorilla in the room (yeah, that one) has more data on more people then anyone in the history of the world. You think Zuck and company don’t see a way to print money by taking their business, which is already a PLATFORM, and leveraging it in to the group buying space?

Groupon is riding high, and they should be proud. They also should have taken Google’s money. Competition is coming from all sides. Their product and the entire market are in their infancy and there is no real reason to think that Groupon is the company best positioned to develop the group-buying system over time. The internet is littered with early market creators (Prodigy, MySpace, Alta Vista, etc.) who were eaten alive by people that came along and saw the next iteration of the idea and did it BETTER. Is Groupon the company you’d bet on to succeed as a market creator AND long term market leader? Would you bet 5.3 Billion dollars on it?

Autopsy of a Startup. Part 1 – The Backstory and plan
December 22, 2010

So, last summer I started a new business and it crashed and burned. Well, not really. I only halfway started it and it only halfway crashed and burned – the former is probably the reason for the latter, actually. Frankly, the entire experience is full of entrepreneurial cliches like “fail quickly if you’re going to fail!” and “always have a partner!” and so on and so forth. Truthfully though, there were a number of lessons to be learned (as there always are). Some I had learned before and hadn’t remembered (doh!) and some were new. Here’s the story…

In May I read an article in Inc. magazine about some guys in Ohio who started a company selling discount cards for golf courses. Basically they sold the cards online and at some of the course pro shops and the buyer was entitled to various discounts on green fees, range balls, etc. The numbers in the article were appealing: they were working three markets and had generated about $320k in sales in 2009. That’s not bad at all for a niche product with very little need recurring cost outside of marketing. I decided to dig a little deeper….

The golf discount card is a fairly common business in a lot of markets. But in my market, Austin, there is nothing like it. So I fiddled around with some ideas and talked it over with some of my sounding boards and decided I’d make a go of it. I built the website (HERE) in two days while sitting in the hospital with my wife as she had our first child. I had a friend set up a meeting with a club pro at a course in town and I met with him to pitch the site/product. The reception was lukewarm. He asked me for more details and data. Over the next month I put together a fairly sharp powerpoint presentation that I thought was pretty sharp. It included a product summary, marketing data, our plan of attach, anticipated sales, etc.

See the Powerpoint Here

I sent the document to the first guy I met with and never heard back. My mutual friend would later tell me that “the owners didn’t want to do it.” I emailed and called 12 other public courses in the area and had only one response. I met with her and she was VERY enthusiastic. Come to find out her course was owned by a company that had three area courses and they had a management meeting the following day. She would discuss it with them and I should follow up the beginning of the next week, she said. Next week came and went and my emails were left unanswered and phone messages left unreturned.

My entire gameplan was centered around getting launched between Halloween and Thanksgiving and running a Groupon or Living Social voucher for half off the $80 sales price. I’d take that money and produce a couple 30 second TV spots and run them on HGTV and Food Network between Thanksgiving and Christmas with hopes that wives would buy the voucher online for their husbands/boyfriends for Christmas.

But since I couldn’t a single course signed up, let alone the 8 or 10 I needed to actually have a viable product, I stopped working on the project.

Next: Part 2 – What went wrong

Why Google’s price for Groupon makes sense, but only for Google.
December 3, 2010

The rumored acquisition of Groupon by Google for 5.3 billion dollars is jaw-dropping. I am on record saying that if I were Andrew Mason I would sell Groupon for anything over 1 billion. 5.3 > 1 Billion, so it looks like I would have left a lot of loot on the table.

There are some new Comscore numbers saying that Groupon gets 80% of the social shopping action while living social gets less then 10%. These numbers are wrong by the way, because they oversimplify markets. Let’s say Groupon sells 800,000 coupons a day in Des Moines and none any where else. Living Social sells 100 coupons in 99 markets. The Comscore numbers would hold up, but which business is more valuable – the one that can grow through market expansion or the one that can grow by adding buyers in existing markets? Well, seeing as how establishing a presence somewhere is harder then simply getting more people to sign up in a market, Living Social would have the quickest path to growth using the example above. As a note, I have it on good authority that Living Social is larger then Groupon in some markets (like Washington D.C.). I digress…

Google buying Groupon for 5 billion makes sense. For Google, it would be a bargin at twice the price. Why? Because Google is an advertising company that happens to sit on the largest dataset of consumer and product information in the history of the known universe. Groupon provides them (1) a direct sales vehicle and (2) increasing depth of their data set. It’s a PERFECT match. In a few years (or sooner) it’s possible that everyone subscribing to Groupon’s daily deal will receive a different discount offer, an offer that more aligns with their interests and spending habits then the current model. I have purchased 1 Groupon in a year and I haven’t yet used it. There hasn’t been anything else offered that compels me to pull the trigger on a buy. But much of that is due to the offers simply not being relevant enough to my life and interests. What do I need with a spa treatment or a photography class voucher?

Interestingly, I think the whole “Daily deal” phenom as it currently exists is a sham. Groupon CEO Andrew Mason talks about how Groupon gets people doing things they would never do otherwise like taking a helicopter ride or trying Indian food. That is, of course, not true. I’d be very interested in seeing Groupon redemption rates and – more importantly – the number of vendors that (1) earn repeat business from Groupon users and (2) choose to advertise on Groupon, Living Social, KGB for a second time. I would imagine the repeat business from both Groupon redeemers and vendors is staggeringly low. And I think on a long enough time line, where there is currently over-demand from vendors that demand will drop off considerably once all the interested vendors cycle through the circuit once.

That’s not to say the model can’t be saved. There are two things necessary for “group buying” to truly be the “future” or consumption: greater buy-thru rates and higher redemption rates. And of all the companies positioned to mine a data set and make that happen, Google is BY FAR the most qualified.

I think Groupon might have been worth a billion to Amazon. It might have been worth a Billion to Yahoo. Maybe the same for AOL or Facebook. But for Google, the price could be infinite – and it would still be worth every penny.