Tag Archives: business

A coming revolution in startup financing?

I remember when my parents got their first credit cards. This new method of paying for things materialised in the UK in the mid-60s, shortly before I did, but they only became widespread in the 70s and 80s, and my childhood was filled with advertisements for them. Anyone else here old enough to remember “Access – your flexible friend”?

American Express was also desperately promoting its alternative charge-card model with advertisements promising the earth. These were nicely satirised by the brilliant team from Not the Nine O’Clock News.

For some reason, it was a very memorable sketch for a young teenage boy, not used to seeing anything like that on British TV at the time!

Two other things, though, made a lasting impression on me at that age:

  • The first was a presenter on a humorous BBC radio programme starting a new section with these words: “Credit, of course, is a nice new word for the nasty old situation we used to call debt”.

  • The second was a speaker at a youth camp who gave some exceedingly good advice, which I have followed ever since, and strongly recommend to the youth of today: “Never borrow money for anything smaller than a house.” Seriously, I recommend it.

Debt, however, is not always bad. If you’re a business with reasonably predictable future revenues, debt-based financing can be attractive when compared with the alternatives, but in the tech industry of the last couple of decades, it has very seldom been a viable option for small companies and we’ve had to resort to venture capital instead.

But in a fascinating article entitled ‘Debt is coming’, Alex Danco suggests that this may be about to change, and that the trend for technology products and services to move to subscription-based models opens up new ways of financing startups, that may not depend on selling your company’s soul to the VCs.

Here is a widely believed cause-and-effect relationship I bet you’ve never thought to invert before: because most startups fail, therefore equity is the best way to finance them. Have you ever considered: because equity is how we finance startups, therefore most startups fail?

The article’s worth reading in full if you’re at all interested in this area.

Maybe, if I can get over my dislike of subscriptions, I’ll also be able to get over my dislike of debt!

Thanks to Pilgrim Beart and Tim O’Reilly for the link to Alex’s article.

Reflections on Inflections

“I expect our sales”, says the marketing manager confidently, “to have an inflection point in Q1 next year”.

This is a pet peeve of mine. I’ve often heard sales and marketing types, and even economists and scientists who should know better, use ‘inflection point’ simply to mean ‘a sudden change in the direction I’d prefer’. Perhaps they think an inflection point is the sharp bend in a hockey-stick-type curve, or the lowest point on a line that is about to turn upwards.

In fact, an inflection (or occasionally ‘inflexion’) point on a graph is technically where the second derivative is zero and changes sign: i.e. where the gradient changes from decreasing (or increasing) to increasing (or decreasing). Another way to think of it is that, viewed from the side, the line changes from concave to convex, or vice versa.

So, typically, an inflection point looks like this:

But, when touting your sales figures, remember that this is also an inflection point:

And so is this:

Doing a quick search, I came across an article from Thoughtworks all about inflection points and how they are important to your business. Sadly, they get it completely wrong.

As a technology leader, a portion of your analysis should revolve around determining inflection points, the critical phases of transitions along a technology’s journey from an abstract idea to maturity.
Inflection points are the points at which a product becomes a trend (something that will be used by a critical mass and therefore likely to drive value) instead of a fad (something that will fizzle out).

And here’s their illustration:

But you, gentle reader, know better. That’s not an inflection point! This is an inflection point:

And if your strategy was to catch technologies there, I think you’d write a rather different article.

The Subscription Dilemma

money

Ten years ago, I wrote a piece for the IEE Review entitled “If You Love Your Data, Set it Free”, where I warned that Microsoft and other similar companies were experimenting with a subscription-based model of software.

This is a perfectly reasonable way of running the IT economy, but it has an important implication. If your data is stored in a proprietary format tied to one software package, as much of it probably is today, you may not have access to it if you don’t keep paying. Do you want to finish working on that book you started a few years ago? Sorry, that will cost you. In such a world, it’s worth asking yourself who actually owns your creative work…

Well, it’s taken a while, but Microsoft and Adobe are now actively pushing the subscription-based ‘Office 365’ and ‘Creative Cloud’ respectively. If you go to their web sites, it’s getting harder and harder to find a traditional buy-and-install product.

Software prices have been dropping dramatically recently, and it must be hard to persuade people who are used to paying under a fiver for the latest iPad app that it’s worth dropping hundreds on the latest Office or Creative Suite, however good those may be. This is particularly true if they already have an older copy. I’ve never felt a desire to upgrade my Office 2008 or Photoshop CS3, but I don’t use them very often. However, my wife, who uses Word all day, every day, also has no reason to upgrade, and in fact would probably view it as a retrograde step. So they had little choice. When you can’t innovate enough in your product, you have to innovate in your marketing.

Now, the subscriptions are not extravagant (at least compared to these companies’ traditional prices). If I used the software on a regular basis I wouldn’t mind paying. The problem is that you’re not just paying for upgrades, you’re paying for continued use. If you stop paying, you don’t, as in the past, continue happily using your current version. You get dramatically reduced functionality, in the case of Microsoft, or none at all, in the case of Adobe. So this is not a decision to pay for ongoing updates, it’s a commitment to continue paying indefinitely unless you want to go through the process of exporting all of your documents to some other format. The issue is particularly acute since these are apps into which you are likely to pour a large amount of your creative output, something you’re unlikely to want to discard. If you want to keep upgrading your software to the latest version, the pricing isn’t bad. But what you’re losing is any option about whether or not to keep upgrading.

So, on the one hand, this spurs me on to even greater enthusiasm for open file formats. And on the other, it makes me wonder about upgrading my copy of Office. Why? Well, it looks as if I won’t have the option very much longer of buying Office 2011, which, though already two years old, may be the last version for which I only have to pay once…

FreeAgent

Here’s a quick and unsolicited recommendation. When I first set up Telemarq, I was looking for some accounting software that I could use on my Mac, since MYOB, of which I was rather fond, is no longer in existence.

I tried GnuCash, which is free, and now really quite good. I used Ledger for a bit, which is splendid if you’re a geek who likes everything in text files. Both of these gave me a lot of control, but they also swallowed a great deal of my time.

Friends suggested I should look at cloud-based offerings, and after experimenting with a few I came across FreeAgent.

I was, I must admit, rather hesitant about this. As a limited company, albeit a very small one, we needed to pay their top rate of £25/month plus VAT. A total of £360 per year. That’s quite a lot for accounting software in a small company. (If anyone decides to try it as a result of this post, please click this link and you might save me a few pennies!).

In addition, I understood ‘real’ double-entry bookkeeping, and this hid a lot of that behind the scenes, so it couldn’t be a real accounts package, could it?

Well, several months on, I just love it. It saves me a huge amount of time – much more than 30 quid’s worth per month, I suspect – does almost everything I need, and is very UK-oriented (so it tells me when my VAT returns and annual company returns are due). It produces nice invoices and send them to our clients, along with links for electronic payment options if they want to use them. It’s very good at importing my bank statements with minimal manual intervention, it makes submitting VAT returns a breeze, and on the rare occasions when I’ve contacted support, they’ve been very prompt and helpful.

Finally, there’s a good API, and various apps for smartphones which make it really easy to log expenses and timesheets.

There are some things I’d like changed: I wish the pricing was a bit more competitive for small companies, I wish they offered a low-cost ‘personal’ version because I’d like to use it on my own accounts, I’d like a few more options when configuring invoices… but all in all, it comes highly recommended.

© Copyright Quentin Stafford-Fraser