Entrepreneurs are always looking for capital to grow their business or build the foundation of their venture. Most people raise money from family and friends, then borrow against their house or use credit cards.
That is not always bad but the current crisis on Wall Street is a great example of why building your house on sand aka debt can lead to tremendous blowback.
"Therefore, everyone who hears these words of Mine and acts on them will be like a sensible man who built his house on the rock.
The rain fell, the rivers rose, and the winds blew and pounded that house. Yet it didn’t collapse, because its foundation was on the rock.
But everyone who hears these words of Mine and doesn’t act on them will be like a foolish man who built his house on the sand.
The rain fell, the rivers rose, the winds blew and pounded that house, and it collapsed.
And its collapse was great!”
This is not a quote from some billionaire like Warren Buffett - this is a parable from Jesus (Matthew 7:24 - 27 to be exact).
Building a business on debt is exactly like building a house on sand. You can use debt to grow, but you must first have a sound foundation of rock - capital that is not accruing interest payable but instead investors who are prepared to lose their money if the venture fails.
Leveraging is great at amplifying returns but a knife can cut anybody.
Yesterday evening my wife and I discovered an Asian boutique store in our mall and grabbed a copy of the Chinese Uncut version of 'The Forbidden Kingdom' starring Jackie Chan and Jet Li (I collect Hong Kong movies and have over 45 Jackie Chan movies).
One lesson that Jackie Chan was teaching his student stuck with me and made me reflect on the Tao Te Ching that I read every night.
The student constantly spoke about all the various styles of martial arts - Crane, Snake, etc. - and Jackie Chan asked him to hold out his cup.
The student did so and Jackie Chan started pouring water into it. When it started overflowing, the student said that his cup was full and Jackie could stop.
Jackie Chan kept pouring and the student said it was overflowing.
That was when Jackie Chan responded by asking: "How can I fill your cup if it is already filled?"
Then he explained:
The cup represented the student's brain - a vessel for knowledge - and it was Jackie Chan's job as the master to fill it but the student already believed he knew everything and his vessel was full.
Anything he would now be taught would merely overflow and he would not learn anything new.
You believe that your cup is already full and so your mind is not open to learning new things.
I love Chinese culture and lessons, afterall, they have been around for more than 5,000 years (contrast that to 200 for America).
I was attracted to the Tao Te Ching in college while I minored in Religion and studied Asian Religions. The Tao Te Ching says this:
The thirty spokes unite in the one center; but it is on the empty space for the axle that the use of the wheel depends. Clay is fashioned into vessels; but it is on their empty hollowness that their use depends. The door and windows are cut out from the walls to form an apartment; but it is on the empty space that its use depends. Therefore, whatever has existence serves for profitable adaptation, and what does not have existence for actual usefulness
The most useful part of a wheel, a jar, a pot or a house - are the hollow parts.
Are you creating the space in your own vessel to be able to fill it with knowledge?
If you have been following the news, you must know about the trials and tribulations of Wall Street firms. Sub-prime losses continue to wreak havoc and all their Ivy League MBAs aren't saving them.
Some people actually believe that people on Wall Street are smarter than the average person. Hopefully the Lehman Bankruptcy, Bear Stearns crash and bailout and the sale of Merill Lynch break down that barrier.
One of my favourite movies is Wall Street, which stars Charlie Sheen as an up-and-coming stock broker who idolizes a character by the name of Gordon Gekko, played by Michael Douglas. Gordon Gekko turns out to be an amoral corporate raider who only cares about profit and short-term returns, putting on mental blinders to avoid seeing the damage he causes to the lives of other people.
Rent it today!
Gordon Gekko is what I call a "Super-Capitlaist" - a person who is motivated only by greed and will abuse the free-market system for their own personal gain, regardless of the possible consequences in the long-term.
You need to focus on what is good for the medium and long-term if you want to ensure success instead of a quick payday and then a big crash at the end.
Warren Buffett, one of my idols, is profiting right now from sub-prime loans, the same stuff that is bringing down Wall Street firms and banks around America. Read the recent Fortune article that explains how Warren Buffett avoided the sub-prime crisis.
Warren Buffett is famous for saying a few things about Wall Street and investing. Now more people know why:
The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities -- that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future -- will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There's a problem, though: They are dancing in a room in which the clocks have no hands.
Be fearful when others are greedy and greedy when others are fearful.
You only find out who is swimming naked when the tide goes out
What doesn't work is when you start doing things that you don't understand or because they worked last week for somebody else.
You can't buy what is popular and do well.
If you're an investor, you're looking on what the asset is going to do, if you're a speculator, you're commonly focusing on what the price of the object is going to do, and that's not our game.
We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.
Success in investing doesn't correlate with I.Q. once you're above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.
If you don't feel comfortable owning something for 10 years, then don't own it for 10 minutes.
It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.
First, many in Wall Street - a community in which quality control is not prized - will sell investors anything they will buy.
I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.
The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.
We believe that according the name 'investors' to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a 'romantic.'
Warren Buffett has consistently ranked in the top 5 richest people in the World since the 90's and is worth an estimated US$62 Billion.
How different the World would be if more people just paid real attention to even one of his quotes above.
I am following TechCrunch50 (TC50), the event for startups put on by popular tech blog TechCrunch. A friend of mine, Ryan Coleman, engaged me in discussion about Yammer.com by asking me what I thought of it.
Yammer is a tool for making companies and organizations more productive through the exchange of short frequent answers to one simple question: "What are you working on?
Yammer was founded by former PayPal COO David O. Sacks and officially launched on September 8, 2008.
Yammer's management team includes seasoned industry veterans drawn from the ranks of PayPal, eBay, eGroups, Tribe, and other leaders in the software industry.
I have been using Twitter for over a month now. At first I didn't get the hype, but now I love it and use it both to keep Realvibez in touch with super fans and for me to personally interact with some great people, like Om Malik from GigaOm.
Yammer takes this new micro-messaging trend, similar to sending an SMS to friends who subscribed, and adapts it beautifully for businesses of all sizes.
I intend to implement it in our venture as soon as possible.
Many companies use IM clients to allow employees to communicate but that is mainly one-to-one communication and there is no archiving. Yammer improves efficiency and productivity because:
archiving - Email is not required for everything and IM offers no archiving. Yammer allows you to archive conversation
understand upper management - If you want to know what upper management is thinking about or working on, just 'follow' them. Might get some great book recommendations or a heads up on new initiatives before that meeting
fewer meetings - Companies love to have meetings for things as simple as status reports and ideas. How about virtual updates and idea suggestions? Fewer meetings = Saved money and increased productivity
Ryan asked me if I thought it would be adopted easily, pointing out that "those who are collecting a paycheck for lack of better terms will A) not adopt it and B) have their spot blown up because you can see where work stops rather than flows. I see a big HR push needed to get it used company wide."
My response was:
"I see this being more than HR, this is a mandate that has to come from the CEO. We may think that people will push back but look at what the Zappos CEO has achieved with twitter usage in his company by leading by example. If this can truly benefit a company and an employee pushes back, it means that they are wrong for the company and HR hired for skills instead of attitude. People with the right attitude for the company will embrace it easily."
Ryan replied:
"I agree with you that young progressive, innovative companies can easily adopt this service. But a vast majority of large companies are going to have a hard time integrating this because like you said they have the wrong people in the company."
I agree with him 100%
Check out Yammer for yourself and let me know what you think.
Before anyone starts on the "it's not original", "it's a clone of twitter", blah, blah, blah, I say the following:
There are only 3 types of entrepreneurs:
Inventors - create something new and try to monetize it
Innovators - Adapt and modify something else for a new market
Investors - they just invest in the ideas of other people
Facebook and MySpace - not original, don't you wish you had started them?
Michael Dell, based on some of these comments, is lame because he didn’t invent computers.
Today: Multibillionaire
Richard Branson didn’t create his own music or invent the airplane, etc. - Multibillionaire
Nintendo - didn’t invent videogame consoles. Atari = dead, Nintendo = crazy profitable
Warren Buffett - Buys profitable companies and allocates capital, doesn’t invent a thing
Bill Gates - don’t even get started on Microsoft
The point is, business school (which I went to btw) has always taught that invention is overrated and the real money is in the application of an invention to solve a specific problem.
Entrepreneurs are nothing more than problem-solvers who get paid and Yammer is going to get paid.
And give them credit for having a business model from day one, unlike so many other startups.
We have two presentations to potential investors coming up this month and I wish I could send them this article beforehand (or that they read it on their own):
Online video ad network LiveRail has just released a 'State Of The Industry Report' for Q3 2008. It reports that video ad spending currently only represents 2.36% of all online advertising, but that it is expected to grow over 55% next year. Right now only 20.95% of internet video streams are being monetized.
Realvibez has always focused on professional content instead of allowing users to upload their own videos...
Hulu is more successful because it has the ability to sell out its inventory.LiveRail suggests that this is due to Hulu's less 'risky' content. Hulu's "policy of only serving high-quality original content, and securing licensing deals from content owners, rather than allowing users to upload the content themselves [...] has removed the risk of copyright infringing content, or content of questionable quality; risk factors that most advertisers are anxious to avoid being associated with."
In the last year, the site's traffic has more than tripled, to 700,000 monthly users. A source close to Fearnet says the company expects to turn a profit next year.
Only 700,000 users and getting into Fortune plus projected to be profitable - I am confident that we can do that too.
Fearnet is doing well because it's not betting solely on Web video and the advertising to support it. The company also sells ads on its television channel and collects fees from cable operators who carry it.
That has been in our executive summary and business plan since day one.
"What Fearnet.com has done well is create a community around it," said Ben Mogil, an analyst at Thomas Weisel Partners. "In many respects, it is similar to fan sites for sports teams. It has a very non-corporate feel which is a plus for fans."
And it is the same for fans of musicians and genres.
So Realvibez.tv is doing the same things for a different niche that already has a fan base to reach out to easily - Reggae music alone is a US$1.25 billion-a-year industry according to a recent U.N. report released in June - is gaining traction, is the only official Caribbean media partner for YouTube and already has a licensing deal with the number one Caribbean entertainment television station.
Since Comcast announced in the USA that it would start capping bandwidth usage by residential customers to 250gb per month, there have been lots of discussions about how this will affect people and why these companies are doing this (other companies are following suit).
Comcast claims that most customers only use 2gb per month so this won't be a big deal for most but HD video on the web has yet to take off and that will cause bandwidth usage to balloon in the next 2-3 years so I hope that these ISPs will be upping the limit as content consumes more bandwidth.
The reasons for having caps today however seem lame when it isn't meant offer tiered pricing with cheaper access for smaller bandwidth. If you only have 1 package, what purpose do caps serve, except:
Comcast doesn't like you watching shows on sites like Hulu.com.
Metered broadband more importantly really does hurt innovation. We at Realvibez.tv are working on HD content and are planning to purchase our first serious HD videocamera this week.
Caps mean that fewer people would be able to access our HD content because they don't want to exceed their limit for the month. That means reduced pageviews and video views, which means we need to revise our revenue projections for the HD content downwards.
That affects our incentives to invest in that online video HD technology.
I wouldn't be surprised if Comcast turns around and tries to charge websites to not have their content count towards the monthly cap.
That would result in a ton of lawsuits and be the beginning of the end for 'net neutrality', something the world wide web was founded on.
Metered broadband wouldn't be such a big problem if it wasn't for the current state of the US market - lack of competition is all too common thanks to relaxed acquisition rules. Too many consumers are stuck with no real choice due to the lack of competitors.
People would be able to vote with their wallets under better circumstances.
There are those who say that broadband should be billed like cellular phone minutes, water or electriticy - pay for what you use.
That is a bad analogy and it is much better to compare broadband to television (broadcast or cable) - pay a monthly subscription fee to access as much or as little content as you want.
Why?
With broadcast television, cable and Internet access, you are bombarded with ads in exchange for content.
I have told many people that when they start paying for tv by the minute, including the advertising, I will gladly pay for my internet by the gb.
In the meantime, for me to pay for gb downloaded thanks to rich media banner ads loading on websites in order for me to get access to content is ridiculous and no one would ever do that for television, especially cable.
People use pay-per-view or order HBO because they want to avoid advertising. I don't have that option on the web (well I technically do, thanks to ad-blocker programs).
I predict that metered broadband on a wide scale would be a disincentive for people like me to invest more money in delivering better online video experiences at the same time that video has proven to be a major part of the future of the web.
It will also result in the exponential rise of ad-blocking software to reduce the amount of bandwidth people use when they surf, especially in Firefox, which makes it so easy to add such programs.
Ad-blockers hurt my business and so sites would have to move to the same model as network television (who are afraid of DVRs) - charge based on the estimated audience size, NOT based on how many people actually saw the ads.
Otherwise a site could easily go bankrupt (most sites are only ad-supported unlike ours).
I don't care about tiers with caps - that just gets more people to finally get broadband and increases my potential audience (I just have to compete harder for their gigabytes).
I just expect to have tiers that have no caps just like broadcast television and cable.
The basic story is that 3 brothers wanted to chop some wood for the house. Each one went to the woods with food and drink from their mother but the first two came back injured. They had met a little old man in the forest who said he was hungry and thirsty and asked to share some of their food.
They replied that "If I give you my cake and wine I shall have none left for myself; you just go your own way"
The third brother went off with stale cake and bad wine but when he was asked to share, he still offered. He was rewarded with a goose with golden feathers that lead to him marrying the princess.
The parable of the fairy tale is two-fold:
(1) It never pays to be mean
(2) Even when you don't have much, you can still share
A number of business people I have spoken with and observed, pass up countless opportunities to help others. The typical excuse is that they don't have enough money as yet or they don't have the time.
I was taught to make time for what was important to you and that money wasn't the only thing you could give.
Reading blogs by entrepeneurs, angel investors, VCs and managers has been great for me, especially when combined with speaking events I have attended.
I have far more respect for those people than the ones who have achieved amazing success but could care less about sharing pointers with others.
Recently I was asked to endorse a book on entrepreneurship, The Toilet Paper Entrepreneur, written by Mike Michalowicz, a frequent contributor to CNBC's The Big Idea with Donny Deutsch. Even though I am sitting on tons of debt, haven't completed raising capital and can't even pay myself a salary, I felt that it was important to fly him to Jamaica to speak at the University of the West Indies about entrepreneurship.
This is one way that I intend to give back and I don't need to wait until I am a millionaire to start helping others. If one person walks away from this free event with more knowledge to benefit their business idea, it was worth every cent and what I gave up.
Luckily, I have secured a sponsor who is willing to cover all the costs, my former employer in Jamaica, which obviously places high value on supporting youth and entrepreneurship.
The event is a simple 2-hour lecture and discussion about entrepeneurship with Mike providing actionable advice. Jamaica rarely has speakers of this calibre from the USA coming to present and even rarer still are events related to entrepeneurship.
As a 27 year-old struggling entrepreneur, I value helping other entrepreneurs and inspiring young people enough to make the sacrifices necessary to make such events a reality.
There is no doubt that it will also help our venture and maybe even make it easier to raise money for it.
The most important thing though is converting a few more business people to my belief of helping others regardless of how much or how little money you have.
Are you helping others even when you have little to share like the third brother or are you being selfish like the first two brothers?
Even though I do not run a video-sharing website (we do not allow users to upload video), I welcome the judgment for a few reasons.
It establishes the rules that online video sites need to play by in order to not be considered copyright infringers (e.g. clearly demonstrate that you do not exist solely to provide access to infringing material ala Napster)
Provides some timeframe for removal of infringing content so copyright owners have an idea of when their content will be removed
I have seen some of our content on YouTube but they have smartly allowed me to earn revenue from that content by placing ads against it instead of having it taken down.
Why is this better?
The user uploaded it because they liked the content and wanted to share it with others, NOT because they wanted to rip us off.
I like brand evangelists and I want to leverage their support - less marketing to be done on our part AND we make money.
I have also uploaded content to YouTube and gotten notices from record labels, through YouTube, that the copyright owner has claimed the video and prefers to place advertising beside it, thus leaving the video up.
I like those labels a little more because they seem to get it (I still think that record labels are backward). A music video is promotion for a song and album so why would you take it down?
The ruling also makes it clear that the copyright owner is the one who has to shoulder some responsibility in finding infringing content on a site (the sites have to take reasonable actions to prevent that content from showing up too).
Some copyright holders will complain that they cannot possibly police all the video-sharing sites on the web.
As a copyright holder, I say that it is foolish to try to police all the sites. You should only focus on the popular sites.
If no one is watching your content on a site, it doesn't matter if it's there - you aren't losing any money and the time and effort it takes to remove your video that has a measly 100 views is not evern worth it in dollars.
Sites that are backed by VCs, angel investors or are generating revenue from your content - those are the ones you should care about.
As one of my advisors loves to say: "Singing in the park all by yourself is worthless"
Focus on where your content is in the middle of a party, then figure out how to make money from it and promote your brand.
If you can't do that, issue a takedown notice.
p.s. I still don't see us allowing users to upload videos, even when we launch the new version of Realvibez.tv
This post is inspired by a book I just finished reading:How To Be A Creative Genius (in five minutes or less).Gary Unger, the author, sent me a signed copy after he wrote about me on his blog for taking Guy Kawasaki's advice and it is one of those books that will be kept within easy reach at all times.
In my post,Don't Allow History To Repeat Itself, I spoke about being able to say no to "once-in-a-lifetime opportunities" because they are more frequent than we realize.
As you add more successes, more projects end up making their way to you and at some point you will have to make decisions on which projects to pursue, which to put on a shelf for later and which to pass up. You will undoubtedly see the potential in each project, but you need to figure out what is required to execute properly:
Resources needed
Capital required
Timeframe for project to generate cash flow
Return on investment
Timeline to positive returns
Benefits to the brand and the company
These are a few of the most important things to consider when selecting projects to pursue. If you can't execute properly, don't bother, no matter how great the idea is.
Great ideas are a dime-a-dozen,executionis what matters.
The Washington Post recently carried an article about Pandora's struggle to stay alive. The article raises some serious questions about the people running record labels.
SoundExchange, the organization that represents artists and record companies, managed to get the per-song royalty rate for web radio to be doubled last year.
"Traditional radio, by contrast, pays no such fee. Satellite radio pays a fee but at a less onerous rate, at least by some measures."
Justification?
"SoundExchange...said it supports the higher royalties for Internet radio because musicians deserve a bigger cut of Internet radio profits."
The key phrase here is "Internet radio profits". They don't exist. Even Pandora is not profitable yet and with this kind of attitude, web radio will be effectively dead in 2 years and only the ClearChannel's will be left to stream online.
In business school and all my readings, it has always been said that "it is better to have 10% of $1 million than 100% of nothing" but it seems that these brilliant businessmen do not think that way.
Independent artists, to my knowledge, welcome something like Pandora because it helps their music get discovered. This will only cause fewer artists to want to sign with record labels, which already suffer from a very negative perception amongst musicians.
So in the end, they have finally found another revenue source but have decided to choke the goose that lays golden eggs to get all the gold at once.
