Ten Ways Profitable Companies Go Out of Business Everyday

When planning a new company, many entrepreneurs think of these three milestones, if applicable:

1. Get funding
2. Get a patent
3. Become profitable

Make no mistake, they’re all good milestones to reach. But in and of themselves, they’re not enough.

“Whoa there, Numbers Boy, the whole point of starting a business is to become profitable. That’s when you know you’ve arrived. Or did you miss the day they taught business in business school?”

Make no mistake, profitability is an important milestone. (And for the purposes of this article, I’m referring to Net Income profitability, or breakeven) It’s a necessary but not sufficient condition, however. Companies that are profitable go bankrupt all that time. New entrepreneurs are often rudely introduced to that old saw “Cash is king.” Put another way, profit is theory, cash is fact. I’m sure you’ve heard someone say that they made money / were profitable “on paper.” That’s where profit lives, on paper – and it’s not the kind of paper they print money on.

Profit is really just a theoretical accounting term. Other than people being impressed that you finally made it that far, it won’t get you far in the real world.

Here, are ten ways you can still go under after reaching breakeven.

1. Debt

Loan payments aren’t part of your operating expenses, only the interest on them is. So if you’re turning a profit of $5,000 a month, you have little money in the bank, and you have a $35,000 debt payment come due, that’s all she wrote.

2. Receivables

If you’re using the accrual method of accounting, you book revenue when you make a sale. But what if your customer(s) suddenly can’t pay you? Now the $5,000 profit is even more theoretical, and you can’t pay your bills.

3. Key Personnel Challenge

Business aren’t sales, they’re the people who make them. Few small businesses can withstand the loss of a truly essential person.

4. Supplier Issue

Suddenly your factory in China tells you that the large order they’re manufacturing for you has had major cost increases – past the amount even where you can sell the units at. This happens.  If only you could make it up on volume.

5. Legal Problems

Maybe your patent gets rejected, or your trademark gets opposed, or someone sues you for breach of contract. You might not be able to withstand the distraction from your business, much less a full-blown lawsuit.

6. A Big Deal Falls Through

Most of us have spent months working on a killer deal, putting most or all of our eggs in the basket, only to have it go south at the worst possible time. Life happens. Many businesses can’t hold on after their hopes are dashed, and the sales pipeline has emptied out while everyone concentrated on the big “done deal.”

7. A Big Deal Comes Together

Let’s say you do get that huge deal. But sometimes a huge deal between a small company and a monster company wind up being next to impossible for the little company to successfully implement.  Customer service, compatibility, shipping deadlines, returns – you can wind up making some money on the deal, but spending all your time so that you can’t make money anywhere else.

8. Profitable, but not Profitable Enough

You’re in the black, not perhaps you can’t “scale” up enough to really make the business worthwhile. Profitability, as many have seen, can be a low benchmark. You’re not in business for yourself to eke by, after all. Hey, you can always make more money with someone else dealing with most of the stress. It’s what they call a “job.”

9. Obsoleted

Sure, you probably could have made money selling buggies and carriages in 1907, but for how long? The world is moving faster and faster, and so are customers’ tastes. If you’re an under-funded tech company in 2010, you have to be fast.

10. General Cash Flow

Although many start-ups go under because of some dramatic overnight event, more often, it’s a mundane combination of some of the above factors. It doesn’t take much to strap a small business’ resources, and if you combine debt payments with uncollectable receivables and a deal that falls apart, it could be curtains for you, with them all happening at the same time.

So while being profitable definitely beats the alternative, think more about cash flow.  Do cash flow forecasts all the time. Get on a first name basis with your cash flow if you can.

Good luck out there.

How to Get Contracts Agreed to Faster

There are few things worse in business than waiting, waiting, waiting on a contract that should be a formality, but that drags on for weeks, and sometimes months or even years. Good relationships can sour, conditions can change, your key contact can leave the other company, or momentum can simply be lost. For want of a signature on a dadburn contract, businesses have gone under.

I’ve had more situations than I care to remember where a potential partner told me on the phone “I’ll send you a contract, it’s all just standard stuff” and then realize with chagrin that there were important terms in the contract that we had never discussed. Nothing like feeling a bit of bait and switch, and staring at it in full-blown legalese. Best way I know to tank a deal. Sometimes people feel awkward bringing up the terms before sending out a contract, sometimes they may actually think they can sneak them through.

One really effective way to speed up the contractual time table is to first agree on a simple bullet point list of basic terms. Include price / fees, term, territory, conditions, payment terms – anything that could cause disagreement. Get everything out in the open on the concept level. That way the contract really is about formalities, what happens if something goes wrong, etc.

Have the basic terms agreed by the business people in a bullet point term sheet. You’ll not only save on legal costs, you’ll likely get your deal signed sooner, and you’ll keep your important relationships in good shape.

A Superfabtastic Free File Management Tool

Every now and then, along comes a new thingamajig. Actually, “thingamajig” is such a great word, but it’s just so dang encarcassed with old school analogness. We need a new digital equivalent for it – how about “pixemabit.” One part pixel, a dash of data, and a soupcon of “e.”

So my new favorite pixemabit is Dropbox.

Dropbox is a freemium service that allows for online file storage and easy peasy lemon squeezy synchronization. You get, as I write this, 2 GB of free storage. It’s seamless, your “My Dropbox” folder appears in your “My Documents” folder for you PC users. (Mac folk, I’m sure it’s similar.) When you work on a file, save it to a folder in your Dropbox, and never worry about it again. Then you can access the file from any computer whether you’ve downloaded the simple Dropbox program or not.

For me, developing EZ Numbers, it’s been a lifesaver. I no longer e-mail myself the latest version, which was a pain the best of times, and then when I would forget which was really the most recent version, it was, well, not the best of times. And I no longer have to worry about my hard drive crashing and losing crucial data.

When you’re working on your EZ Numbers file, this could be really helpful in making sure that your file is always available to anyone who needs it.

I have no stock in Dropbox, wish I did.

These guys are the first to really tame the online file storage beast.

Entrepreneurs: Release Early, Release Often

In my experience, entrepreneurs do startups according to their overall personality.

If someone is a perfectionist, then their product or service will almost certainly be in the same vein. This doesn’t mean that the offering itself it will be of high quality, but that the processes and means of delivery will be well-thought out. Think McDonalds. It’s hardly gourmet dining, but you know what you’re getting, and within 10 seconds, usually when you’re getting it.

“Release early, release often” is a software development philosophy coined by Eric Raymond in his seminal 1997 essay “The Cathedral and the Bazaar.”  Definitely worth reading, and you can find it here: (www.catb.org/~esr/writings/cathedral-bazaar/cathedral-bazaar/).

The general thinking, which can be applied to startups of any kind, is to not wait until you have things perfect – get something out, test the market, learn, iterate – then rinse and repeat until you stop making the product or supplying the service.

You’ll never really be ready for primetime. Don’t get venture money while perfecting whatever you’re working on.

Just get it into the hands of customers, now.

Whatever you’re making or providing will need to be changed, and the more time and money you put into it before you learn just how off the mark you are, the more expensive and closer to fatal you get.

By far the best money to come into your company is revenue (as opposed to investment, debt, or grants) and the best revenue is the earliest, as it brings along with it invaluable early stage information.

When I started EZ Numbers I was scared silly about releasing it to the world at large. (”Oh, I’d like to make a new Sales module. And if I could put NPV in Investment, that would be great.” Etc. etc.) Finally I just released the damn thing, and quickly discovered all of the following:

-In many aspects, it was less than what I needed
-In some aspects, it was more than what I needed
-In almost every aspect, it was different than what I needed
-In no case did I correctly predict which was which

When I got to the point, several years ago, that it was a tool I’d pay for, that’s when I released it. I should have made it available for free months earlier – that kind of beta input is priceless. Another of Eric’s phrases is “All bugs are shallow with enough eyes.” Let the market pay you, but even before that, if possible, let the market teach you.

The Three Second Rule for Entrepreneurs

When I worked in the home office of a large insurance company out of college, they would tell the salesman to always obey “The Three Foot Rule.” Anyone within three feet of wherever a salesperson found himself was a prospect. Pure and simple. A stranger (there are no strangers for long!), your friend, heck, your family. Everyone needs insurance, almost everyone needs better (meaning more) insurance, and most people will buy from you if you just sell them the right way.

As an entrepreneur (unless you’re an insurance salesman) you’re not selling insurance to people 24/7. But you are selling yourself, just the same. Just like insurance salesmen were taught that they had no downtime (there’s no reason, after all, that other people at the bowling alley won’t appreciate hearing about a compelling universal whole life policy) you as an entrepreneur need to always keep the lights on. Not of your physical business, as many entrepreneurs don’t have an office or store per se. But your mindset. You never know who you’ll meet on the street, and how they can be of help to your new business – either as a customer, vendor, partner, advisor, investor, etc. Or they personally aren’t any of these things – but the people who they know could be.

It doesn’t matter if you’re on a cruise ship to Alaska or in the car wash waiting area. People will ask what you do, and if you say that you’re “Off duty” or don’t have a quick and precise answer, you never know what opportunity you may have missed. You need to go from relaxing and drinking a daiquiri to a passionate pitch about your business in about three seconds. When you master this, you know you’re a real entrepreneur. Shouldn’t be hard, most entrepreneurs have a much bigger problem turning the lights off than they do on.

Apple’s iPad – Jumping the Shark?

I loves me some Apple.

The iPod and iPhone are honest to goodness game changers.

The iPod was the main course to Napster’s appetizer in the last meal for the traditional music industry business as a whole. Similar in spirit to the genesis of United Artists – it was a transformational, and legal, way to unbundle cool things from clunkers, and let consumers cherry pick only what they wanted.

With the iPhone, they went even further.

Apple now makes more money on iPhone than they do on Macs. Two reasons for this are:

a. They get a piece of the subscriber’s AT&T payment pie.
b. They own the software distribution, and make 30% of each app sold.

So in two significant ways, they’ve found the fountain of quarterly report youth for hardware manufacturers – recurring revenues.

And here’s something that would have seemed altogether unbelievable ten years ago. Apple’s more powerful than Microsoft.

Over the last ten years (Jan. 1000 – Jan. 2010), Apple’s stock has gone up 830%, while Microsoft’s has gone down 57%.  As of the latest quarterly reports, Microsoft has $36 billion in cash, and Apple has $25 billion. They’re catching up. Doesn’t seem like all that long ago when Microsoft gave Apple a critical cash infusion.

Now look at their businesses. Microsoft is largely protecting an increasingly archaic business model – proprietary client software.  The world is moving to open source and clouds. (EZ Numbers is too, slowly but surely.) Apple is innovating entirely new businesses and distribution models.

The App Store on the iPhone has been phenomenally successful. It has led to well over a hundred thousand third party apps – which is mind blowing.  But now Apple may have stumbled.

As many have remarked, the iPad, at least Gen. 1, is basically a large iTouch. The problems are that the totalitarian and what many see as arbitrary decision-making process on what apps get accepted worked on the iPhone due to just how hot it has been, but is wearing thin in the development community. Add what’s perceived as important iPad platform deficiencies such as the lack of Flash, a camera, and a friggin’ USB port, and toss in the fact that if developers just increase the size of the graphics on their iPhone apps they’re going to have pixelated messes. Apple and Adobe, not exactly best friends, are now in an increasingly bitter and public war of words over Flash.

Look at a recent salvo from Adobe about Apple:

“It’s about a disturbing trend where Apple is starting to inhibit broad categories of innovation on their platforms. On the iPad, it looks like developers won’t be able to write applications in Java, .net, Python, Ruby, Perl, or any number of other languages (including Flash). And users won’t be able to install Firefox, Opera,IE, or any third party browser. There are countless other examples of applications and technologies that Apple doesn’t allow. Why? Apple won’t say.

And innovation isn’t just about technology, it’s also about business models. Developers on this new platform aren’t able to innovate there either. At best, developers targeting the iPad are subject to a 30% Apple Tax in the App Store. And at worst, developers invest time and money building a product that can never be brought to market, because the only channel is one that is centrally controlled and entirely opaque. In every case, Apple is a gatekeeper on how developers are able to deliver content to their consumers.

Over time, restrictions on technology and business opportunity have a chilling effect on innovation on closed platforms.”

This isn’t your father’s Apple, or even your big sister’s.

Because Apple has eschewed focus groups and analysis and just gone for insanely great products, they’ve gone from a minor computer player to a major media titan. But now that they’ve gotten so big, they’re starting to act like Microsoft, wanting to control everything and protect what they already have. Future success in technology won’t come from more intellectual property and hair trigger attorneys, it will come from disruptive efforts that nobody saw coming. Apple’s getting too big to want to be disrupted, and the first glimpse of this is the iPad.

Once you shift from not caring how 1984 style Orwellian corporate lemmings do things, to instead wanting to control and protect what you have, you’ve become what you’ve been fighting against. In the immortal words of Pogo, “We have met the enemy and he is us.”

Watch out Apple – in this topsy turvy world, it’s not hard to foresee Microsoft coming up with a truly innovative endeavor. With them minting less and less millionaires, and their stock going down, they have less and less to lose. Nowadays, the rebel just might be in Redmond.

How to Pick a Co-Founder

Venture Hacks has a good article on how to pick a co-founder.  As you may see in another post,  the best co-founder in my opinion is nobody.  But if you do absolutely need a co-founder, go check out the entry, a few tips from which I’ve included here:

Three co-founders is too many

Think of Wozniak & Jobs, Gates and Allen, Page and Brin. Quick, now think of a trio…..See?

One person builds, one person sells

Don’t step on each other’s toes. And if you both do the same thing, do you need each other?

Don’t use the wrong shorthand to judge your tech or business partner

Titles or degrees don’t mean diddly in the start-up world. Have another tech person (or people) evaluate the coder, and likewise have some razor sharp business folks assess the business person.

Don’t settle

Sure, the process of finding your co-founder will be over, but you’ll regret it more with each passing day.

And perhaps their best tip:

Don’t hesitate to get someone who’s already committed to work on something else part time

Once yours takes off, they’ll drop the other one.

Article: http://venturehacks.com/articles/pick-cofounder

Worm Eating and Investing – It’s All About Leverage

There’s a Calvin and Hobbes cartoon in which Calvin asks Susie if she’ll give him a nickel for eating a worm. When she quickly says yes, Calvin realizes that he could have gotten more, and asks for a dime. Susie says no. Calvin complains “Man, you’d think that a guy eating a worm could get a dime.” Unmoved, Susie replies “I got news for you. Guys eating worms aren’t the ones calling the shots.” (Apologies if I don’t have the quotes exactly right.)

How true it is.

It’s easy as someone starting the hottest new company to get carried away, and think that this opportunity is unlike than any other opportunity out there. Hey, this is the best process in the world to make flawless synthetic diamonds / teach people Mandarin Chinese in three weeks / increase fuel efficiency 50% – how could any investor pass it up?

Easy.

Really easy.

Easy peasy lemon squeezy.

Investors aren’t investing to make diamonds or teach people Mandarin. They’re investing to make money. Even if you have something really cool, there’s no guarantee you’ll actually make money, day in day out, from it. And then even if you do make money, how and when will the investors get their money out?

It’s a bit like that joke about the two campers in a tent. They have their shoes off, and they suddenly see a bear running right at them. One guy starts running, but looks back and sees his buddy lacing up his shoes. “What are you doing,” he asks. “You can’t outrun a bear!” His friend smiles, and replies “I don’t have to outrun the beat. I just have to outrun you.”

Investors don’t have to do better than your technology, they just have to do better than your return on investment, and there are lots of worm eaters out there.

Copyright Caveats

Let’s take a quick quiz on copyrights.

Question 1

You write a rhyming recipe book, indicate your copyright with ©, and register it with the Copyright Office. Someone then clearly takes one of your recipes and puts them in their own recipe book.

Has your copyright been infringed?

Answer

No. Copyrights, and patents and trademarks, for that matter,  don’t protect ideas. In fact, there’s not a law in the country that protects ideas, only discoveries, techniques, and in the case of copyrights, artistic expressions. Your Avocado Meringue recipe has no legal protection as an idea. Assuming that the person who took your ideas didn’t also put them in a rhyming book, the format is now different, so they have not copied your expression. You have no case. It would be a different matter if they copied a whole collection or also copied your explanatory notes.

Question 2

You write a poem, and tuck it away. You don’t put © on it, and you don’t register it, you don’t even need to publish it. A year later, somehow your exact poem is published in a poetry book under someone else’s name.

Has your copyright been infringed?

Answer

Yes. Copyright protection exists the moment the moment you write your poem, song, story, etc. You don’t need to register it, you don’t need to put ©, you don’t need to do anything. So sending it to yourself in a sealed envelope (aka “Poor Man’s Copyright”) also doesn’t do much good.

The bottom line is that you’re covered for your artistic expression the very second you create something, and you don’t have to do anything at all. Copyrights registered after 1978 last for the author’s lifetime plus seventy years.  Not bad for something that’s free, immediate, and for which you don’t have to do anything.

Fair Use

“Fair Use” is an interesting copyright concept. As a kind of exception to copyright, others have the legally defensible position of using parts of your copyright, with these factors considered:

1. The purpose and character of the use, including whether such use is of commercial nature or is for nonprofit educational purposes
2. The nature of the copyrighted work
3. The amount and substantiality of the portion used in relation to the copyrighted work as a whole
4. The effect of the use upon the potential market for, or value of, the copyrighted work

Thus if you’re using a small part of a copyright for an educational or parody usage, and you haven’t damaged the financial standing of the original copyright, you should be ok.

Here’s an amazing example of fair use. It’s a compilation taken from various animated Disney movies of the characters themselves voicing a script about fair use. Disney was a great choice because of their notoriously extraordinarily aggressive prosecution of intellectual property infringement,and their role in actually changing the copyright law to keep Mickey Mouse out of the public domain.

www.youtube.com/watch?v=CJn_jC4FNDo

Summing Up

Registering your copyright (www.copyright.gov) is still a good idea, though, as you can claim statutory damages and legal fees in a lawsuit. Of course you also have clear evidence of your creation and the date. The best news about registering copyrights is that it’s easy and only costs $35.

So go ahead and slap © on anything you want, and register the really important stuff.

The Truth About Trademarks

A trademark is one of the most important things any company can own, and yet many people with new businesses know next to nothing about them.

Here’s what I’ve learned for my part, some of it painfully, but thankfully not fatally.

Trademarks are for phrases, names, and logos. The most important thing to trademark is usually your company name. If you haven’t already, do it immediately, it only costs a few hundred dollars to do it yourself. You can check to see if there are likely conflicts by searching the Patent and Trademark Office’s website at: www.uspto.gov.  An an entrepreneur, this is a site you’re going to get to know quite well over time, believe me.

File the trademark for your company name alone. If you have a great logo, you can file for that too – but if you wind up changing your logo, then it’s no good anymore, which is why I always file for the name itself without a particular logo.

Also file of course on your tag line if it’s good and important, and major product names that you have. Several hundred dollars now can save you millions or bankruptcy later.

I like to do trademark filings myself and save on the legal fees, but I’ve been at this for a while.

TM vs. ®

Most people don’t know exactly what TM and ® signify.  TM simply means that you claim rights in the mark. You don’t have to file with the Trademark Office to use TM. If and when your mark is officially registered with the Trademark Office, you can then use the federal registration symbol – ®. There’s no reason to not start using TM immediately without having filed anything or researched availability. Many people think TM means you have the mark, so it makes you look good to them, and to those who do know the difference, it still looks like you know what you’re doing.

Here’s the Trademark Office’s FAQ:

www.uspto.gov/web/offices/tac/tmfaq.htm

My Close Call with EZ Numbers

I got the EZNumbers.com domain name back in 2005, and didn’t file for the trademark since I didn’t think anyone else would. Last year I finally got around to it. My application was rejected in an “Office Action.” Ouch!  The examiner cited the likelihood of confusion with another mark “Easy Number,” which had been filed after I got my domain name. Doh!

At this point, I had three choices:

1. Appeal the rejection.
2. Abandon the trademark and continue selling without it.
3. Change the name and try again with a new filing.

Changing the name would mean coming up with a new name, domain name, logo, new artwork in the application, etc. etc.  I’d also lose the brand awareness I’d built up, and then for Google I’d lose the four years of history. Because Google relies in part on how old your site is, the newer the site the less likely you are to be found by someone doing a search related to your site. Plus I’m just too ornery to change the name, so this option was out.

I could forget the trademark and just keep using the name EZ Numbers, and hope nobody came after me. But what if a couple years from now, I got a letter from some lawyer stating that I had willfully infringed on their client’s trademark? I couldn’t plead ignorance since I’d filed and been rejected. This could easily drive me out of business.

I figured I had no choice but to appeal the rejection. I found a great consultant, who although not a lawyer, knows trademarks in and out. He had his own horror story from which he learned everything you could possibly know about trademarks. I hired him, and over a couple of months (you have six months to appeal) we worked together on the response.

I felt pretty good when I submitted the response. I submitted the appeal on a Tuesday, and on Wednesday morning the examiner called to say that if I’d accept a slight change in the description of the mark, one I had proposed in my appeal hoping that she would ok it. I was ecstatic! She had previously mentioned to me “multiple grounds for refusal” so I was surprised to get it overturned overnight.

I wasn’t out of the woods just yet, though. My trademark was now “Approved for Publication.” This meant that three weeks from now, the potential mark would be published for opposition in the Official Gazette. Then anyone who felt that the mark would infringe on an existing one would have thirty days to either oppose it or ask for an extension of time to oppose it.

If someone does oppose your mark, it’s basically a federal law suit in which you are the defendant, and this is the big leagues. You’re in it for tens of thousands of dollars at the very least, and easily millions.

Oppositions aren’t all that rare, so every day during the thirty day opposition window I checked my mail and uspto.gov to see if I had been opposed. Thankfully I wasn’t, and now EZ Numbers has ® following it. However, trademarks aren’t forever. Just like anyone can sue anyone anytime, your registered mark can still be challenged, but you’re far better off having it registered.

Trademarks are much easier and cheaper than patents to file yourself, so don’t put it off.