Our Startup Story

One of the most difficult decisions a startup company will face is how to price their product or service.  Price it too low, and your business may become unsustainable.  It also may be seen as having little value if your price point is too low.  Price it too high and you could drive away potential customers.

The first thing to realize when pricing your product or service is that there is no such thing as an “actual” value of a product or service.  Everything deals with perceived value.  As a vendor, you have a perception of the value of your good or service.  The customer will also have a perception of the value of the product that plays a role in whether they buy or not.

Before moving on, let’s take a step back and talk about the US system of ethical capitalism.  Capitalism is by far the best system we have going on the planet for improving the quality of life for people on earth.  Unfortunately, capitalism in its purest form will not work if unethical people are involved.  In a capitalistic transaction, each party brings to the table something the other one wants.  In modern society, where we no longer have a barter system, one party brings money, and the other brings a good or service.  The beauty of this system is that the game is set up so that BOTH the buyer and the seller win in the transaction. The seller receives money which they want, and the buyer receives the good or service that they want.  If one of the parties starts to act in an unethical manner, both will end up losing in the end.  The seller will lose because people will stop buying from him if he’s perceived to have “cheated” people in the past.  The buyer will lose because he’s either been cheated, or because the good or service is no longer available.  Any business transaction is built upon the trust between the buyer and seller.  In the US, we don’t have a capitalistic economy, but rather a mixed economy.  We take the priciples of capitalism we like, but also add some government regulations such as anti-trust, and price-gouging laws to the mix because we inherently know that not everybody will behave in a purely ethical manner.

So, how does a seller make the decision of where to price a product?  In the seller’s mind, the thing they’re selling has some set value to them.  In the buyer’s mind, they also have a perceived value.

Some startups make the mistake of pricing their product at the level of customer perceived value.  They put themselves in the customer’s shoes and say something like… Ok, if the customer uses my product, they’ll save 4 days of effort on their side as opposed to doing it themselves.  Therefore, I should price my product at 4 days of the buyer’s salary.  This approach completely misses the subtle fact that a buyer will not buy a product unless the price is somewhere BELOW their perceived value.  The buyer NEEDS to feel like they’re getting a deal.  This also misses the fact that the buyer may not care about buying additional days.  They might be buying “cool” or “useful”, not necessarily something practical like “days of effort”.  They also might be buying something intangible like “prestige” as is the case when you buy a Ferrari, BMW, or Lexus.

Assume you’re the buyer for a second.  If the price of something is exactly at or above what your perceived value is, you won’t buy because you don’t win in the transaction.  You either come out behind or exactly where you started out.  The default position for a buyer is to do nothing.  A buyer won’t be moved to act unless there is a strong feeling that they win in the transaction.  A buyer will perceive value in a product when they feel like they’re getting a deal.

While we’re pretending, let’s say that I’m in the market for a basejumping wingsuit.  I have some perceived value in my head of the fun I’m going to have while basejumping with that wingsuit and what amount of money that is worth to me.  Let’s say that the experience is worth about $2000 to me.  What’s important to note is that I won’t buy anything at or over $2000.  If I were, then my perceived value is actually higher than $2000.  In this scenario, the basejumping wingsuit store first looks at their hard costs for time, materials, and labor.  Let’s say they can build a nice wingsuit for around $500.  Their perceived value for the wingsuit is actually a bit higher than that, since they wouldn’t have undertaken the effort to begin with if it wasn’t worthwhile for them. The seller then has some flexibility in pricing their product from $500 up to $2000.  I probably won’t buy at the low end because the product will feel too “cheap” for me.  Since I’m taking my own life in my hands, I don’t want to buy a “cheap” wingsuit. I also probably won’t buy at the high end because I’m not getting a good enough deal.  In the end, I go with a $1500 wingsuit because I feel like I got a deal and I got a higher-end wingsuit so there’s some intangible prestige value to me there.  The seller also walks away happy from the deal since they just made a nice profit of $1000 from me.

This principle of buyer perceived value vs. seller perceived value can be seen starkly on display when you watch a TV infomercial.  In an infomercial, they usually try to tell the buyer what their perceived value should be.  They say something like, “All of these items…A $60 value, all for $19.95″.  They try to put a perceived value of $60 into the head of the buyer, but sell the items for their own perceived value of $19.95.  The buyer may or may not actually perceive the value to be $60 dollars, but that doesn’t stop the infomercial people from trying to put that idea into the buyer’s head.

I’ll leave you with a little bit of inspiration:
http://www.youtube.com/watch?v=6xlQdx9nCeM&feature=fvsr

This post is in response to a recent article on Businessweek, entitled “A Wrench in Silicon Valley’s Wealth Machine“.  It’s our first panel style post where we ask our startup contributors to give their views on a certain topic.  Let’s hope it works out. :)

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John’s Thoughts:

VC’s seem to be largely morons and most startups seem to be the perfect match.

Only a startup would exist and not have a plan to make money. Only a VC would give money (large, large sums of money) to a startup that would “Make money in the future”, if everything goes according to plan.

That’s not to say startups have to be profitable or even bringing in money when they start, but Digg is what? 2? 3 years old? And not making money still.

From Businessweek

Jay Adelson, Digg’s chief executive, says it’s clear the environment has changed for all startups. With venture money harder to come by, entrepreneurs have to concentrate on building their businesses. He says Digg is dialing back some expansion plans and trying to reach profitability as soon as possible. “All I care about is making sure the business foundation is solid,” Adelson says.

Really? Now the focus is on profitability? Now that they’re being seen for what they are? Just another over hyped startup with no clue how to make a dime, hoping that profitability will find them on its own.

What really amazes me is that all the Digg fanboys and gamers of the system singing Digg’s praise etc. are simply filling Digg’s DB with data that they [Digg] intends to sell. Sell for a retardedly over valuated price of 300m! Holy crap! Smooth move guys, give your meta data and attention to Digg so they can hope to sell it. NICE!

One reason may be that Digg’s public profile is much larger than its financial might. Last year the company lost $2.8 million on $4.8 million in revenue, according to Digg financial statements reviewed by BusinessWeek. In the first three quarters of 2008, Digg lost $4 million on $6.4 million in revenue. Adelson declined to comment on the figures.

Those better be some damn good Christmas parties, and some 70 and 80’s style whoring and coke snorting, I’m talking Studio 54 here. Lost 4 million? On what? It’s a site that people give content too, they don’t pay for it! Oh wait, Diggnation probably isn’t cheap to produce, that explains it.

As some one who runs a business completely in boot strap mode, it’s insane to imagine how some of these businesses can exist. Tom and I started ‘08 owing 15k on our line of credit and were contemplating closing up shop rather than continue moving into debt. Startups seem to have mastered the art of spending money that isn’t theirs in exchange for retarded amounts of their company and probably a sizable chunk of soul.

Is it worth it guys? You couldn’t have done with out millions of someone else’s money?

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Tom’s Thoughts:

I wouldn’t say all VCs are morons, just the dumb ones.  :)  Perhaps that should read the greedy ones.  I understand VCs provide more than just capital.  Take a look at eBay.  It was successful, but Pierre realized that he didn’t have the knowledge needed to take the company to the next level.  VC investment helped him get Meg.  Then there are visionairies that have expensive visions but the visions have profits in mind ala Bezos.  Amazon took what, 4 years to reach profitability?  But Bezos had the system worked out in his head to reach profitability.  Heck, at least it was a goal for those 4 years.

Article Snippet 1: With venture money harder to come by, entrepreneurs have to concentrate on building their businesses.

Now, that could just be poor writing on the author vs something dumb Jay Adelson said, but that line just blows me away.  What the heck kind of statement is that?  What entrepreneur doesn’t concentrate on building a business?  And what kind of people give that entrepreneur millions of dollars?

I’ll be honest.  I thought about approaching investors to help us grow 360|Conferences in the early days.  However, I realized we had no street cred. We had never ran a conference before, much less a conference business.  Even now, John and I are contemplating approaching angel investors, but I still tell John, “We’re profitable, but I don’t think anyone will care.  We’re not trying to take on the world and we’re definitely not sexy.”  John and I have spent a lot of time making our business what it is.  Sure it’s been tough, but we went from no money investment on either of our parts to making some money in less than 2 years, part-time.  People think we put on the best conference they’ve ever been to and are shocked to find out it’s just John and I doing the biz, part time.

The reason I think we make money and why people love our events is because from day one, we’ve always concentrated on building our business.  John asked during year 1 of our biz,  “Why didn’t you quit this idea like you did many others in the past?”  My answer came swift and still rings true to this day, “Someone trusted me with their hard earned money and it is my duty to live up to that trust by providing them the very best service.”  The only way you can provide a great service is by building your business.

Article Snippet 2: [Adelson] says Digg is dialing back some expansion plans and trying to reach profitability as soon as possible. “All I care about is making sure the business foundation is solid.”

Here’s where millions of someone else’s dollars makes you delusional.  Whereas Digg is now gonna focus on profitability vs expansion, John and I have been focused on profitabilty and are now looking at expansion.  I didn’t go to business school, so maybe that’s why I’m lost.  But don’t you usually test an idea out first to make sure it makes money?  Then once you’re profitable, you move on to expansion?  Like I’ve always told John, “Our profit model depends on x number of attendees per show.  If we don’t get those numbers, that means people don’t like our show.  We either need to change to get those numbers or leave the biz as our ideas obviously are all wrong.”  Now x is not in the millions or billions, we’re talkin roughly a few hundred.  But if there is no profit in sight, then you may have a good idea, but you surely don’t have a good business.

Article Snippet 3: In the first three quarters of 2008, Digg lost $4 million on $6.4 million in revenue.

Now, I won’t make accusations about what Digg did with that money.   John could be right, but I’m sure there’s some costs we’re just not seeing.  Some people accused us of throwing an “orgy” when we spent $90K on food, but after you realize a 6 oz soda costs $4.  You can see how fast things add up.  One thing companies should do is be more transparent.

I’m not saying throw your quickbooks file on the net. (Yes, I know they don’t use Quickboooks, just work with me will ya.)  But lay out what gets spent where.  Show people what you’re doing with the money.  If nothing else, your customers will tell you what your spending too much on.  Though I’m not sure that would work for Digg.  They have users and not customers, i.e. no one pays them to do a service.  Maybe that’s the problem then.

Can you be defined as a business if you don’t have customers?  Or more importantly can you be called a business if you don’t focus on profits?

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Andrew’s Thoughts:

My preference in starting a new business would be the conservative approach.  Save up money from a standard W2 job until you have a nice emergency fund before going for it.  Focus on those projects that get you to profitability the quickest.  Anytime you take money that you haven’t earned whether from a bank or from a VC, you’re giving up some control of how your business runs.  Unless the idea is truly revolutionary and needs to explode quickly, I’d stay away from taking VC or bank funds and doing it the old-fashioned way.  Having excess VC funds around is just plain distracting and a false sense of security.  It doesn’t make sense to have all those parties if you haven’t earned a dime.  Having a tight budget early on also forces you to find unique and cheaper ways of doing things.  One example would be a VC-funded startup throwing servers at a scalability problem whereas a self-funded startup would be forced to re-factor and optimize their code for maximum scalability.

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Jeffry’s Thoughts:

Are VCs Morons?  I don’t think so, but I do get the impression they only expect 1 in 10 of their ventures to be succesful; kind of like the traditional record company model.  That 1 success makes up for the 9 failures many times over.  With that in mind, I may consider factors other than the business plan when investing in companies such as enthusiasm and adaptability of the owners.

Cash flow is king, especially in a down economy.  Generating profit should always be a much higher focus than expansion.  Build your profit model right into the business from the start.  Think it through before you start coding or building the service.  Controlled growth is the best way to build.

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Ben’s Thoughts:

I have to say, I think this is a trick question. Let’s look at it this way, “What should a baby focus on: feeding itself or growing up?”. I guess the answer would be “yes”. Startups, like babies, require further growth by definition; otherwise you’re just running a business. So if a startup focuses solely on profit, it may never take the risks that are required to grow. By the same token if a startup focuses only on expansion fueled by VC money, it may not have legs to stand on when it needs to back up those extravagant claims it made (a la Digg). I’m not saying that VC is invalid or that projects with big ambitions (like mine) are dead, but I do think that inflated egos, hot-air pitches, and over-valued stocks are being market-corrected in short order. Hopefully that’s a good thing.

Everybody is an Entrepreneur.  Just sit down and ask your family the next gathering what great ideas they have and you’ll collect at least 10.  For most people, the disconnect is in the actual implementation…the follow-through…the actual doing.  Having an entrepreneurial spirit is easy.  Having the guts to actually implement something is hard.

I wrote my first program when I was 9 years old.  The computer was an IBM 286 screaming along at 12 mHz with an entire megabyte of RAM.  I coded up a screensaver in MS-DOS 3.x using the GW-Basic programming language and a manual that came with the computer.  It didn’t do much.  It just flashed my name in random colors over the entire screen.  Somewhere in the midst of that ego-stroking exercise my love for writing software was born.

My first foray into starting a business came a few years later in 8th grade.  My school had just started a Wee Deliver program.  This was a USPS program where your school does a post-office simulation at the school.  Kids can write letters to their classmates and have them delivered the next day.  What most saw as a school-sanctioned way to pass notes, I saw as an opportunity.  I printed out order forms for “Andy’s Candies” and mailed them out to quite a few people in the school.  It wasn’t long before my mail-order candy service was in full swing.  I’d go to the candy store in the mall and stock up on the 10-cent items and turn around and sell them for 25.  It would have worked out great, but unfortunately I didn’t have much willpower and kept eating into my profits…literally.

In highschool, I had a really great teacher for my programming classes.  Tom Deters.  Sophomore year, I learned to code BASIC really well and Junior year I learned PASCAL from him.  He had a very structured approach to each programming assignment where we would take time to plan stuff on paper before sitting down at the computers.  Most of my classmates would sit down at the computers the first day of the two-day assignment and then fill in the planning worksheet later.  I found that if I followed his technique and planned really well, I could get the worksheet done the first day and still finish coding before everybody else on day two.  Even though my development tools have gotten better (whiteboarding, mindmapping, mockups, etc…) the basic techniques have stuck with me.

Now that I knew some PASCAL I partnered with my dad and his Westberg Consulting business to write two computer programs called Phasor Professional and Diplex Professional.  A Phasor is an electronic circuit that sits between an AM Radio transmitter and the radio towers.  It allows a signal to be directionalized.  A Diplexer circuit allows two radio stations to share the same tower.  By selling this software to AM Radio engineers and consultants, it helped pay my way through college.

I busted my hump during college and managed to get out in 3 years.  During this time, I learned C++ Windows development.  I re-wrote both Phasor and Diplex as C++ MFC applications.

After school, I went to work at Caterpillar for 7 years.  I learned Java during this time and was even awarded a patent for one application I wrote.

While still working at Caterpillar, I started a partnership along with my cousin called Midwest Helicam.  We used a large RC helicopter to snap aerial digital photography.  We gave it our best shot, but in the end the idea crashed and burned…literally.  The business plan probably wasn’t very realistic.  We severely under budgeted the amount of maintenance we’d have to do to keep ourselves in the air.  We also overestimated our ability to bring in paying customers without doing much marketing.  The idea was fairly solid, but I think we lacked on the implementation side.  I learned quite a bit about starting and running a business through this endeavor.

I really appreciated the stability that a large company like Caterpillar offered my growing family, but the corporate bureaucracy and red-tape really started to get to me.  I did some job interviews, and turned in my notice thinking I’d take the offer.  I didn’t feel like spending a ton of time writing an elegant resignation so I cheated and used a template from i-resign.com .

As I was finishing out my time at Cat and telling one of our software suppliers that I wouldn’t be able to work with him anymore because I was taking another job, he looked me straight in the eye and said…why didn’t you send me a resume?

The man was Dave Bigelow from Simplified Logic.  He has a soft spot for entrepreneurial type of people and mentoring them to success.  Long story short, we worked it out where I could start my own company, but still have fairly consistent consulting work.

Since starting Swift Mako software, I’ve consulted on a number of Simplified Logic projects as well as new development for Westberg Consulting on a project called WCAP.

I think there is a large number of entrepreneurial type of people out there who love the “startup” phase, but lose interest in seeing things through to the end.  They move on to the next big thing instead of plugging away and doing the difficult and sometimes boring things to make a project or business successful.  I like to push myself to be more than this type of entrepreneur.  I like to be the implementer.  The one who gets things done and sees things through to the end.

What will the future of Swift Mako Software bring?  Not quite sure yet.  I have one idea in the pipeline involving both some embedded hardware device design along with the software to make it work.  We’ll just have to see where the future takes us.