What are your 3 magic numbers?

Today's entrepreneurs need to be more focused than ever.  Brad Feld has coached and mentored hundreds of technical startups, and is firmly convinced that to run a successful startup he can take their business model and summarize success using 3 magic numbers - and the metric must have EXACTLY that number of measurements.  Why?  Because more than that and you're submitting to what he calls "data porn" - an overload of stimulus that doesn't let you concentrate on what's important to business success.  The three numbers won't be the same for every business, but every business can be distilled down into 3 measurements.

I strongly suggest you read Brad Feld's article, then come back here and tell us - what are YOUR 3 magic numbers?  Or do you need help finding them?  How do you work on a daily, weekly, monthly, and quarterly basis to improve your metrics with each of those measurements?

Small business gets some respect from the White House

In today's address by President Obama, we finally got to hear about incentives and help for small business. For weeks we've been hearing of the wasteful spending of the big banks that are being helped, the auto makers, other big businesses and the scandalous behavior of some of these investment banks and brokers, including fraudulent stock schemes that finally failed when the markets went Bear. Finaly we get to hear from the administration what they are going to do for those of us struggling to build entrepreneurial and start-up companies using bank loans, our own sweat equity, and sometimes venture or angel investments.

It turns out that his heart is in the right place, and though he many not be completely on the side of small business, many of his latest pronouncements are a boon and a ray of hope for those of us who employ 70% of Americans.

The basic tenets that he laid out were:

• Guarantee by the government of SBA loans up to 90%, and purchasing using some of the TARP money already allocated some of the toxic SBA loans. This will loosen credit which has recently been tightened by banks across America for small businesses looking to expand, grow, or just finance their survival.
• Elimination of costly fees for both borrowers and lenders in SBA loan arrangements.
• An immediate reduction in capital gains taxes on investments in small business by 75% if they hold their investment for 5 years. A proposal to permanently reduce to zero the capital gains tax on investments in small or startup businesses. This will greatly encourage investment in the Angel and Venture world since gains would be essentially tax-free. Making angel and venture dollars a tax free investment greatly increases the value of this vehicle over the traditional stock market investment. While still quite risky you don't also have to account for capital gains when you do cash out your investment. Small companies would be encouraged to go independent sooner as this capital gains bonus would be limited to companies with under $15M in revenue - truly rewarding the SMALL company and not the big one.
• By eliminating capital gains on small business investments, he would also (I believe) solve the problem of having to pay capital gains when a business transfers ownership either inside or outside a family. One of the great tragedies of current tax law is the number of companies that never get passed on to a family member because they can't raise the cash to pay off the capital gains on the transfer.
• Small businesses can write off addtional capital investments this year in an attempt to re-stimulate buying in this important B2B environment.
• Small businesses can write off losses from this year against taxes paid up to 5 years ago. This effectively will give companies that paid taxes in past years a rebate of those taxes if they lost money this year.
• Small businesses can pay 90% of the last year's taxes, rather than 110% when they pay estimated taxes. This increases available cash and it is realistic considering the current economy for many businesses.

In all, I believe this presents a balanced approach to the small business dilemma - freeing up loan money, reducing the tax impact of venture and angel investing and transfers of ownership, and providing immediate tax relief and cash flow to distressed small businesses are all excellent steps in the right direction. If he could go on to solve the health care dilemma, reduce business income taxation, and finalize the elimination of capital gains that would be a long way towards a small business success.

What does it really cost....

One of the most frequent enquiries we get from web and software entrepreneurs is "how much would it take to build something just like X". Leaving aside the implication that you could penetrate a market someone else has already occupied with a "me-too" product, in most cases the would-be entrepreneur can answer this question themselves! It's actually really easy in today's world. Let's say you wanted to build a product just like the popular restaurant reservation system Opentable.com. (Or just like it with some difference or tweak you think will make it better). Here's how you find out what kind of investment you'd need to make to build it:

• Fire up Google.
• Now put the following phrase into the search box: Opentable venture funding. You can also try Opentable angel funding.
• The first article that comes up is a press release from Open Table indicating that they received in 2000 a $10M venture capital infusion, after a $2M initial angel and VC round.
• The $2M was probably pretty close to the cost to build out their initial demo/proof of concept and implement it in a small controllable beta (probably by region), and some portion of the $10M was used to make that scalable, fully featured, and to build the sales, marketing and business arm of the company to make it huge. There was probably an additional initial investment in Friends, Families and Acquaintances dollars (typically under $1M).

You can use this same methodology to find out the initial venture funding of most of the companies out there that have received venture dollars in the past. Sometimes you have to dig a little deeper, or you might have to go through a few articles to find either the actual or estimated dollar amount (except for public companies they're not required to report it). Alternatively you could look at other similarly scaled apps and check their funding.

The mix of how they spent their venture might be a little trickier, but most start-ups are spending the bulk of their initial cash on initially building software, and the bulk of their second round on infrastructure, scalability, marketing and sales. A me-too product would probably have to spend even more money on marketing and sales to be successful, since they'd have to fight off competition the first company into the space didn't have.

So what does that mean for the would-be entrepreneur? It means you'd better have something so interesting, new and revolutionary that no one else has thought of it if you expect to get funded and bring the product to fruition. Google took over the search market from Yahoo by presenting a simple semantic search interface instead of yahoo's structured/categorized search. It changed the world, but most of the success stories today are for new ideas no one ever thought of before.

Assuming you do have that revolutionary idea, be prepared to invest some serious dollars into making the thing a world-wide success. Treat the development effort and the business model development as the serious task that it is. Do some due diligence, market research, business planning, and specifications work before you jump into the development process feet first. Be sure you're prepared to stay the course and hear NO a lot before you dive into the Venture and Angel Capital fray - there are a very few applications that get funded, and the better prepared you are the more likely you'll be to be one of them.