Monday, October 12, 2009

Does Too Much Money Too Early Hurt Startups?

I attended a presentation at UVEF today by Skullcandy Founder & CEO Rick Alden.  By the way, Rick is being considered for the Entrepreneur of the Year award for 2009 by Entrepreneur Magazine.

Rick brought up a thought-provoking question that no one had an answer for, including himself.  We have all heard of the start-up companies that started in the Founder's basement and grew into wildly successful and profitable ventures.  But how many success stories have we heard of companies that start with millions of dollars in the bank and an "A" management team in place?

We can logically build out a sound reason why both situations foster success, but the underlying premise is that perhaps early-stage success has less to do with lots of capital and an impeccable management team.  Perhaps the struggle to scrape by and bootstrap at the beginning builds a discipline that makes the start-up more likely to succeed.  Maybe well-funded start-ups don't appreciate the struggle most encounter to raise capital and they spend it unwisely.  Or, we may find that having all the capital and the complete management team improves a ventures chances for success.


HERE IS SOME OF THE FEEDBACK I HAVE RECEIVED IN ADDITION TO ANY COMMENTS TO THIS BLOG POST:
@greggwitt: absolutely too much capital can hurt. saw it happen first hand.
Paul Herron: I like the analogy of an infant becoming a toddler, child, adolescent, and adult. You start with a newborn invention or idea and a founder's vision of how "success" will ultimately be achieved. Execution of a business plan in a nurturing environment may lead to tangible, measurable accomplishments, and each step toward maturity is rewarded with greater resources and more variables to manage. If milestones are met and feedback is positive, healthy growth takes place. Slow and steady progress is always preferred, but every industry has examples of erratic, unexpected successes and failures. Drug development, for example, is a very high-risk proposition, requiring close parental supervision all along the way (and perhaps just a bit of luck). Accordingly, many "infants" just don't survive.
John Kogan: The garage/basement, scratching month-to-month teaches you good habits and forces you to make tough decisions. This all leads to maximizing capital efficiency and your own inventiveness. When there are plenty of funds around you tend to substitute money for work and thought. It's not that you aren't putting in the hours, it's that you don't have to consider every decision quite as hard. Also, it's much easier to say "we'll hire someone" or "let's pay someone outside to do this" rather than hunkering down and doing it yourself - which is how you really learn when you are a young startup.
Could too much success hurt? Sure. But I think it would hurt for the same reasons as too much money, and primarily b/c it would bring a flush of funding and the sloppiness that follows. Of course that's just my two cents (and as a scrappy startup, we can't afford a penny more).
Larry Davis: I have worked with more than two dozen start-ups since 1999, and I find that the probability of success is driven more by the perceived tangible beneifts of the product in the eyes of potential customers as opposed to the amount of capital raised or the quality of the management team. If you are developing a product that offers measurable ROI or enhanced performance, you will generate revenue more easily than many others can offer. Then, it's a matter of controlling costs so that your venture is profitable.
To answer Ken's question directly, I would suggest paying attention to Ning. This is yet another social media company, but it is headed by internet legend Marc Andreesen, who has no trouble attractive investors and certainly has plenty of money of his own. Thus, Ning has plenty of capital and as "A" CEO as a company could have. Let's see how they do!
Mark Macleod: I think it's way better to start off without a lot of capital for many reasons:
- keeps you focused
- keeps intensity up
- keeps your ownership high
In the bubble days I was in a startup where we raised too much money. We got defocused and comfortable. Startups do best when they are lean and mean. So, I come down very strongly in favour of the lean approach.
Twitter is one example of a company with may more cash than it needs now. We'll see whether they execute and deliver on their billion $ promise.

Tuesday, October 6, 2009

Times Are Changing, Are You Keeping Up?

When I was young and received a new baseball hat, I would work the bill of that hat until it formed a symmetrical arch - in the general shape of a rainbow.  This was accepted as the best and most stylish thing to do at the time.  Today no young people engage in this ritual.  They take their new hat, flat bill and all, and put it right on their head – and they never work the bill into an arc.  It is straight-as-an-arrow and, in my opinion, not very attractive.

This is a small example of a world that is constantly changing.  Business is no exception to this rule.  In fact, unlike popular fashions and trends that may come and then go as quickly as they came, business change is about finding more value, efficiency, cash flow, and profit.

Some of the traditional business models, or old ways of doing business, are under serious overhauls in our new economy with the help of technological advances, social media growth, and a general philosophy that leaner is not only meaner but powerfully more effective.

Here is an example: the professional services industry, as a whole, has been shifting towards a flat fee business model in opposition to its entrenched hourly-rate model.  Those leading this charge are seeing phenomenal success.  Those unwilling to change will continue to see their revenues, and more importantly, their profits fall.

I recently met a manufacturing firm that has had the same ownership and leadership since 1976.  This is impressive, with the exception that the leadership has failed to adapt their business to more effective business models through the years.  Their inefficiency, lack of technology, and resistance to change in general has them teetering on bankruptcy.  In other words, they are still focused on putting the arch in their baseball hat when the rest of the market, especially their competitors, has a new and better way.

I’m not going to change the way I wear a baseball hat – I guess that makes me old and I am willing to deal with the very minor repercussions of my decision.  Some changes in business are fads and will not have any impact on the most effective model for an industry.  But some of these changes are monumental and must be adopted if a business hopes to survive.  The executive team is to continue to drive the business model towards acceptance of those changes that will bring great value and true competitive advantages.  This should be at the premise of any strategy  a company develops for its future.

Thursday, October 1, 2009

QuickBooks Statement of Cash Flows is Wrong for these Three Reasons

The statement of cash flows is the most valuable, the most under-used, and the least understood of the three main financial statements (profit & loss, balance sheet, statement of cash flows). Since a lot of businesses use QuickBooks, I feel it is critical to make sure we all understand what needs to happen to make this reporting feature more accurate.The statement of cash flows is the most valuable, the most under-used, and the least understood of the three main financial statements (profit & loss, balance sheet, statement of cash flows). Since a lot of businesses use QuickBooks, I feel it is critical to make sure we all understand what needs to happen to make this reporting feature more accurate. It is likely that our QuickBooks-generated statement of cash flows is incorrect for the following three reasons:

CLASSIFICATION OF ACCOUNTS
Each time a QuickBooks user creates a new account the system looks at the type of account and, if that account type is on the balance sheet, it is classified into one of the three sections of the cash flow – cash from operations, investing, or financing. QuickBooks is often right in its inclusion of accounts on the statement but it can be very wrong on the section of the statement in which the account should be included.  For example, a working capital line of credit is often coded as a current liability. QuickBooks assumes this account should be in the operating section of the cash flow, but that is not always the case. A line of credit is usually reported in the investing section of the statement.  The classification of all accounts can be manually changed in QuickBooks by going to Edit, Preferences, Reports and Graphs (Company Preferences), and then click on the Classify Cash button in the Statement of Cash Flows section. An account is placed on the report when a checkmark is next to the account in one of the three fields, which represent each section of the report.

DEPRECIATION
The whole purpose of the statement of cash flow is to adjust the net income reported on the profit and loss to the cash position of the company. Depreciation is a non-cash expense, and, therefore, is added back to net income as a first order of business on the statement of cash flow. Since depreciation is not a balance sheet item, QuickBooks, by default, does not even include it on the statement of cash flows. QuickBooks does, however, include accumulated depreciation on the report, but it is reported in the investing section (depreciation is technically part of the operating section).  To correct this situation, two things must be done. First, follow the instructions above and remove the accumulated depreciation account from the report. Second, add the depreciation account to the operating section.

CHANGES TO PRIOR PERIODS
This issue causes problems with all three of the financial statements. Once a period is complete, all of the accounts are reconciled, and financials have been issued, there should be no more changes to that period or earlier. By simply using the Closing Date and Password functionality of QuickBooks, the company can lock prior periods and protect them from any attempts to add to, delete from, or change any transactions in the closed periods. This is easy to use and can save the business from a lot of headaches in the near and long-term, not to mention safeguard the accuracy of it’s reporting. This is done by going to Edit, Preferences, Accounting (Company Preferences), and then clicking on the “Set Date/Password” button in the Closing Date section. This will allow you to set the date of the close as well as only allow people to make changes prior to that date if they know the closing date password.

CONCLUSION
If I could only receive one of the three financial statements, I would always pick the cash flow statement. It is the most valuable for any business, especially start-up and emerging businesses. It is the best measurement tool of cash sources and uses for any business, especially start-up and emerging businesses.  By setting up QuickBooks correctly and then using it correctly it is capable of cash flow reporting that will help entrepreneurs and CEO maximize their cash flow.