PHL SKL

A lot of people I know are focused on the web 2.0 start-up world; I am too. But I don’t discriminate. I don’t playa hate. Entrepreneurship is not limited to web apps with ‘hockey stick’ sales forecasts. I’m writing this post to make sense of some of the opportunities presented to me through family, friends, and contacts. Without structured thought to begin with (comparing the risk/reward ratios and evaluating my potential impact on the businesses), these opportunities would quickly become distant, fuzzy memories. But since I’m going back to school soon and won’t have any time to commit, this is more like an academic exercise rather than an honest analysis of whether to throw myself into something 110%, again.  

To start off my analysis, I’m going to fill out 3 spreadsheets based on the SequoiaCap template entitled “Elements of Sustainable Companies”. It’ll be interesting to see if the ‘tech industry-focused’ template can also be used to evaluate traditional brick and mortar companies.

Wings Up! looks like an attractive business if one is ready to get their hands dirty in the unglamorous world of fried poultry. I definitely want to forever banish the stress-induced nightmares I had as a 16 yr-old cook slaving away in the Pizza Hut kitchen. On the other hand, Wings Up! is a cash business and there’s nothing quite like it in Quebec (including KFC). At a conference for Les Anges de Quebec, I listened to an entrepreneur tell his story about how he opened up 35 Wendy’s in Quebec. I was impressed and wish I had his business card.

The things I would like to do at Wings Up! are…

1)       help standardize the processes to make the franchise more copy/paste-able

2)       help  upgrade the website so customers can order online

3)      help recruit and supervise 2-3 franchisees during the growth stage

4)      open a new test location targeting University students

Monster Gym is my gym, and I believe that being conveniently available and open 24/7 is its key competitive advantage. The brand is good, too. Pictures of professional body builders decorate the walls. Half the members sport Monster Gym t-shirts or even MG leather jackets. I almost bought a t-shirt myself. Given its industry, brand, and prime location by a major intersection and highway, MG has decided to diversify. It sells nutrients, apparel, has a milkshake bar, has independent contractors hawking personal training sessions, offers aerobic dance lessons, and even sells ad space. There’s a lot of traffic at the gym and who can blame MG for trying to monetize it. Well, who except Sequoia, who believes that companies should be focused on a singular value proposition.

The things I would like to do at Monster Gym are…

1)      Increase the amount of corporate membership subscriptions

2)      Compare the profitability of each business line (memberships, nutrients, apparel, etc)

3)      Raise capital to open a new location in the East end of Montreal

4)      Recruit an industry knowledgeable staff

5)      Maintain the brand and culture of Monster Gym West Island but add an East end twist to it

Beyond the immediate family ties, I have an emotional attachment to Kim Chrun Distribution. After all, packaging and delivering rice was my first job J. The company has a truck, inventory, warehouse, brand name, regular customers, and cash flow. What it lacks is solid processes like demand forecasting, real-time inventory management, and automated collections. And a dedicated sales team to drum up business. This is a project where I would be the sales rep and the IT consultant.  

The things I would like to do at Kim Chrun Distribution are…

1)      Spend 3 days a week as a door-to-door sales rep.

2)      Spend 3 days a week strategizing, digitizing (scanning old documents, promoting web-based invoicing and collections), and streamlining (new website with shopping cart functionality, new demand forecasting system, better inventory management, etc)  

Conclusion

It’s important to note that there are a lot of assumptions in the previous tables, such as market size (does anyone know where I can find good, free secondary market research?) and measures of profitability. At no point did I ever have access to any of these 3 companies’ financial statements.

But, if we base ourselves on the criterion outlined in Sequoia’s template, Wings Up! is the most likely out of the 3 to become a sustainable company. This is because the market is huge, the focus is clear, and the traction is great. But this does not necessarily mean that it’s the best opportunity for me personally. For example, the owners of Wings Up! may be interested in having me run a franchise long term in a very hands-on sort of way, while my aunt at Kim Chrun Distribution has already offered me to slowly but surely take control of her company.

Regarding the template itself, I think that its primary focus on technology start-ups resulted in the omission of 2 key criteria in the brick and mortar businesses: location and cross-selling. In the case of Monster Gym specifically, the company lives or dies based on location, and once customers walk through the door, it makes business sense to sell them related products such as nutrients that they would be buying somewhere else anyway.

On a final note, what is the main difference between these 3 opportunities and MyCarpoolStation.com? A proven product/market fit.

“I sit back, with this pack of zig zags, and this bag of this weed that gives me the shit needed to be the most meanest MC on this sea, on this earth and since birth I been cursed with this curse to just curse and just blurt this berserk and bizarre shit that works, and it sells and in itself it helps to relieve all this stress that’s been eating me up…”

I love this track. Sexy beat, sexy video. Siiickk… 

My name is Philippe and I’m the co-founder and CEO of My Carpool Station International Corp. I believe it’s time to share the story of our struggling start-up with the blogosphere. You see, things are not going as planed. I’m not a millionaire lounging in my umpteenth apartment, downtown Bangkok. I’m not mingling with fellow captains of industry, preparing to launch my own venture fund on the side. Instead, I am quietly distancing myself from my pet project, my baby which I poured my heart and soul and mind into. Why would I do such a thing to something I hold (or held) so dear?

No more money (and none coming in).

We invested 30,000 US$ of our own capital, excluding an estimated 50,000 US$ of sweat equity. With that, we built a working prototype but did not manage to get a customer-ready product out the door. No customers equals no revenues, and since we have not yet secured additional funding, we are officially stuck.  Clearly, we needed to present a better pitch deck to VCs, network our way into governmental grants, or come up with some creative financing strategy such as a tax shelter.  Emailing 700 VCs our poorly written 12-page business plan was probably not a good idea.

Our market research was not convincing.

What are customers actually willing to pay for? How many customers are out there? What is the cost of customer acquisition and retention? It’s hard to raise capital when you can’t answer those 3 questions with confidence. “We’ll figure it out later once we get traction” is an answer, but a weak one, all things remaining equal. We did do market research, to a certain extent. We used secondary demographic data: 14 million people carpooled to work in 2004 in the U.S. We used primary data: about 33% of our survey of 50 people said they were willing to pay 1-5$ monthly for a carpooling service. We highlighted the trends of high gas prices, environmental sensitivity, web-based social networking, pop culture relevancy, etc. We thought we had done our homework until one of the partners at InnoCentre suggested to me that we would have no repeat customers. He said that when people find a carpool partner, they usually stick to the same person and call them directly, and in doing so they effectively bypass our website (unless they really want us to tabulate how much GHG they reduced). Of course, I argued that university students, part-timers, and random travellers change schedules often enough to qualify as repeat customers. But our research was not as comprehensive as it could have been; I was caught off guard by this plus other questions regarding security and legal liability. In the end, they offered to work with us but we turned them down because we thought a 25% equity stake + fees payable was a bit steep for consulting. Maybe we were wrong. The bigger problem though, is that we were (and are) still unsure whether our customers should be ad-supported end-users (students, travellers, etc) or organizations paying us a software licensing fee (governments, companies, etc), or both.

We did not find the perfect product/market fit.

My original vision, circa 2005, was “to supply web-based, community-run carpool stations to schools, workplaces, and regions in the U.S. and Canada” (i.e. to build a Facebook clone but for carpooling). We would make money off ads exclusively. By the time we finished building our Alpha in 2007, we ran out of resources and realized that we needed to build something different to execute my 2005 vision in 2007/2008: we needed to build a Facebook app, an OpenSocial app, a stand-alone website, and offer enterprise-branded carpool stations with an API. Of course, if you’re bootstrapping you’re going to have to build traction and release these one at a time. The business model would probably change as well. It would be ad-based for app users and membership-based (with no ads) for website users and enterprise users. There’s also the possibility of a token-based economy.

On the web, the product/market fit we were chasing is usually achieved through multiple, rapid Beta releases, but we never got there due to lack of skills and resources. Web products basically consists of features, user interface, and customer benefits. The features list we have is quite extensive: carpooler search, carpooler ratings, MapQuest maps, carpool fare calculator, green house gas (GHG) calculator, savings calculator, privacy controls.., upload text, pics, songs, videos, invite friends, create groups, create organization-branded carpool stations with news feeds, etc. The user interface however, did not win rave reviews from the Montreal tech community. And unfortunately, there are still a few outstanding bugs in our PHP code which makes the website difficult to use at the web 2.0 consumer level.

The other way a product/market fit is achieved is when you talk to customers during the development process. Customers will tell you what benefits they are looking for (eg. reliability, privacy, etc).

Marketing to early adopters is easier than selling to big organizations.

We didn’t meet with big account customers, big organizations to which we could sell software licenses too, and we failed to develop a product and business model around their needs. That was a mistake. You see, big organizations have money to pay for memberships. They have an environmental reputation to uphold. They have a community of users which travel to the same place on a regular basis. Their users are usually accustomed to using web apps. They are the perfect customer. Since launching our Alpha, over 40 organizations have requested carpool stations, including The University of South Florida, University of Waterloo, CGI, Wachovia, GMTMA, kindergartens, hospitals and more. Our next step should have been to get these organizations to sign letters of intent to purchase memberships from us for our upcoming Beta product, built around their needs. Evidently, it’s easier to approach VCs with a few orders on hand. Our lack of a sales strategy didn’t help our capital raising efforts.

On the other hand, it’s our belief that general marketing and buzz building in North America is nothing more than signing a check. The only exception is opportunity-based PR stunts, such as promoting carpooling to all local radio stations and newspapers during a public transportation strike. Otherwise, ads can be outsourced to Google, Federated Media, Spot Runner, etc. Direct marketing can be outsourced to Campaign Monitor, Quantum Mail, etc. SEO can be outsourced to ACS SEO. PR can be outsourced to The Comotion Group, Social Poster, E*Releases, etc. Everything is measured these days, making it easier to determine the ROI. Plus, when you market to the web 2.0 early adopter crowd and you have a killer app, word spreads virally. So I don’t think we had a problem with our marketing strategy. We just didn’t get there because we lacked the skills and resources to build the killer app in the first place. 

We were missing key business relationships with partners.

I’ve got friends and acquaintances in the Montreal web community. I’ve met with angels, incubators, and VCs. But we didn’t meet with big strategic partners like the gas companies, car companies, transportation authorities, car navigation companies, and map companies that we originally envisioned as our partners. This excludes an extremely awkward Q4 2006 phone call to MapQuest director Jeff Greenwald, when I stumbled while trying to convince him to give us an extension on our MapQuest API free trial and partner with us for the long term.

The competitive environment was, and still is, manageable.

Partners give you the competitive advantage you’re looking for, but competition itself did not kill MyCarpoolStation.com. I used Competitious to track over 80+ carpooling websites in the U.S. and Canada across a feature matrix of over 75 features. The competition is getting its act together (NuRide, Goloco, ZimRide, Amigo Express, etc) but it’s fair to say that the carpooling industry does not exist yet. No one has figured out the perfect combination of user interface, features, and business model to pierce through the market and gain significant traction. Yes, there is a low barrier to entry in building a web-based product. Generally though, you can say that we have been lucky since no major competitors are dominating the space with a killer app. The other way of looking at it is “the market sucks ‘cuz no one’s making sustainable money”.

Core team of outsourcees and part-timers were lead by an extremely driven, although inexperienced, non-tech-savvy CEO.

This project began as a “coup-de-coeur”; a project sparked by pure passion to build something great for people to use. We were also “driven to drive away pollution”, or so our slogan went. Me and my father thought we’d grow a business out of the transportation needs of Western students such as myself who travelled back home for the summer or holidays. Why use Greyhound, VIA Rail, or Air Canada when you can split the gas with a buddy and ride shotgun instead? So we began recruiting friends of mine who were “good with computers”. One was a software engineer and the other was a web designer, but neither could commit full-time or buy in 110% into the vision we had. So we decided to outsource our coding to India. In our subjective experience, Indian web design shops are intelligent and cost-effective, but are not creative nor are they on the leading edge of web 2.0. Most importantly though, they are contractors by nature and therefore build websites for their clients, not for the end-user. In hindsight, I realize the obvious: one must build a strong team of entrepreneurial web developers as co-founders before launching into a new web venture. We failed to follow Jim Collin’s Level 5 leadership tenet: “First Who [core team]… then What [product strategy]”, and as a result we have a Alpha website with outstanding bugs, boasting a features list and UI developed solely by me, the non-tech-savvy CEO and co-founder. This is not to say that our outsourcees didn’t go beyond the call of duty- they did. Or that because I was in charge of product strategy I knew how to manage a software project- I did not. At least on the positive side, I am now 3X more knowledgeable about business and technology than I used to be in 2005. I’d also like to thank TechCrunch and AskTheVC for their contribution.

Currently, we are 10 team members/shareholders. This includes myself, my father, my mother, my brother, an accountant, a software engineer, a electrical engineer, a web designer, an IT/business consultant, and a programmer. Currently, 3 are active (but not very active) and 7 are passive (read: hello?). We do not have any full-time web developer/software engineer staff. That’s a problem.

Our process was/is entrepreneurial, which is good. However, without any resources it is difficult to maintain operational momentum. When we were going through the most difficult stages, negotiating with our outsourcees over payment terms and source code ownership, I shed a tear. That was a learning experience. But there has been numerous setbacks (albeit less dramatic) which have contributed to our loss of strategic and sales momentum as well. At this moment, we’re tired and we need a breath of fresh air.  

Growth strategy?

We’ll probably throw up a new landing page and re-brand ourselves while we try to figure things out. We’re currently facing the classic chicken-and-egg problem. What comes first: the financial and technical resources or the product and market traction? We score low on both at this stage, even though we’ve got an Alpha product stimulating demand, a decent amount of industry knowledge stored on our BaseCamp account, and local buzz. With resources, we could figure out exactly what our big customers want in a Beta product and are willing to pay for. With resources, we could launch an ad-supported Facebook app and OpenSocial app to generate buzz and learn about end-user habits. We’re always recruiting, even though we only offered stock-based compensation. If you’re extremely resourceful, note that the CEO post… is also open.

46 billion USD and change. That’s what VMware’s market capitalization was 10 days ago when I began writing this post. Now, it’s down to 33 billion and change.  My post is going to go online too late for me to claim “I told you so”. Lesson learned: post quick or become irrelevant. I should have known this given that I’ve stopped reading the monthly Fortune magazine and rely only on BusinessWeek for time-relevant information (I’m a big fan of TechCrunch, of course). But since this is my first blog post ever, perhaps some slack can be cut in my honour.

The Good.

The market is huge and it’s growing in the short term. The amount of information needed to be stored digitally is growing. The BRIC countries are becoming more sophisticated and their companies/governments will need virtualization software for their in-house server farms.

The product has value to customers, it sells well, and it’s priced at a premium. VMware’s core product allows you to “run multiple operating systems at the same time on the same PC without rebooting or partitioning your disk.” This enables companies to maximize the use of their in-house servers. The classic example is a call centre. A traditional call centre has a bunch of in-house servers which host a bunch of legacy software applications for their employees. A product like VMware enables them to purchase less computers, less servers, and obtain substantial cost savings.

The company’s headquarters is in Palo Alto, California. Silicon Valley, baby. This enables VMware to recruit from a highly qualified labour pool of engineers. Being close to A-level VCs and entrepreneurs keeps them honest in their financial projections. And working in the valley encourages them to mingle with the world’s top technology execs. Relationships matter in business, even in the ‘cut out the middle man’ tech industry.

The co-founder and CEO of VMware Diane Greene is smart. She has a master’s degree in naval architecture from MIT and has been involved with a few successful start-ups. VMware’s market cap is still 33 billion. You gotta give her props for that. That’s a lot of spare change to invest in R&D, spend on marketing, or sprinkle on diversification.

The Bad.

It’s a one-trick pony. A company with this big a market capitalization must pursue aggressive growth or watch its stock market valuation go into free fall. If the virtualization products are copied and become commoditized, can VMware diversify?

The future of enterprise software belongs to web apps hosted with the provider, not to software apps hosted locally with the business customer. Some leaders such as SalesForce CEO Marc Benioff believe that big companies are being emotional when they cite data security as the main reason they buy their own internal servers to host their ERP systems; they are not being rational. In his view, small businesses are definitely more rational in terms of adopting web apps for their ERP systems. They recognize the advantages of low maintenance, automatic updates, and portability and accept the level of data security/privacy. When Global 500 companies come to this realization and start using software as a service, they will need less servers, and in turn buy less virtualization products.

And the Ugly.

Microsoft plans to incorporate basic virtualization for free into its latest software for servers. That will hurt because nothing beats free, except free authentic Microsoft products. Other competitors include Sun Microsystems, IBM, Virtual Iron, and Intel, to name a few. Competition is what makes VMware’s initial market cap look stupid, in hindsight, and that is probably why it is being corrected as we speak.

Perhaps I’m just jealous. Hopefully I’m not just misinformed. But, I believe VMware will crash. Unfortunately, I don’t have the time nor the inclination to dig in deep and provide professional consulting so we’ll have to leave it at that for now. Still, if I had any capital to my own name, I would become a full-time VMware short-seller on E*Trade. Yea speculation!

So there you have it, my first post on enterprise software. I won’t pretend that I know the field, I don’t. But I am pursuing an MBA, possibly in Management Information Systems, come January ’08, so I thought I’d start early.