Small Business Labs

The Rise of Co-ops

In case you missed the announcement, 2012 is the United Nations International Year of Cooperatives. The UN defines cooperatives as:

"Cooperatives are business enterprises owned and controlled by the very members that they serve. Their member-driven nature is one of the most clearly differentiating factors of cooperative enterprises. This fact means that decisions made in cooperatives are balanced by the pursuit of profit, and the needs and interests of members and their communities."

According to The International Co-operative Alliance (a co-op trade association) there are over 1 billion global co-op members.  In the U.S., credit unions are a prominent example of co-ops.  Other highly visible U.S. co-operatives include Ace Hardware and Sun Maid Raisins.  

Co-ops are not new.  They started as grassroots organizations in Europe, the U.S. and Japan in the early to mid 1800's.  As a former midwestern farm boy my favorite early co-op is The National Grange of the Order of Patrons of Husbandry.  For obvious reasons, it's more commonly known as The Grange.  

The Grange started a secret fraternity, but took off in the late 1800s as a way for farmers to organize in the face of low agricultural prices and the power of railroads.  It's still around today.

One of the drivers in the growth of cooperatives is their values and principles. Cooperative "are based on the values of self-help, self-responsibility, democracy, equality, equity and solidarity. In the tradition of their founders, co-operative members believe in the ethical values of honesty, openness, social responsibility and caring for others."

There are also 7 principles of cooperatives:

1. Voluntary and Open Membership
2. Democratic Member Control
3. Member Economic Participation
4. Autonomy and Independence
5. Education, Training and Information
6. Co-operation Among Co-operatives
7. Concern for Community

These sound a whole lot like the core values of coworking.  Like coworking, the co-op field even seems to have their own hyphen issue, with some hyphenating co-operative while others don't.  

We believe the use of the co-op model will continue to expand.  The co-op model provides a lot of business flexibility, but also allows for member control.  It fits well with the shift towards values-based business.

The Return of Intercity Bus Service

After almost disappearing - when was the last time you were on a intercity bus? - the bus is now the fastest growing way to travel.

Innovative bus companies like Megabus and Bolt Bus offer convenient service, comfortable seats with power outlets, WiFi access and super cheap fares purchased online.

The buses don't use a bus station, they pickup curbside at locations listed on their websites.  This makes it very easy to quickly add or reduce service. 

The sweet spot for the service appears to be in mid-range trips of around 200-300 miles.  These are too short for air travel but too long to easily drive. 

The new intercity bus lines are a great example of using business model innovation to reinvent an industry.  With gas prices increasing and more focus on reducing green house gases, the outlook for intercity bus travel is quite positive. 

There's been a flurry of articles on this topic, including:

• Business Week - good overall coverage of the buses
• Switchboard - looks at the buses from a public policy point of view
• New Geography - detailed look from a policy and environmental standpoint
• The Economist - likes the buses but aren't sure if they will thrive long term

Ultralight Versus Lean Startups

The phrase "lean startup" was coined by software entrepreneur Eric Reis a few years ago. 

A lean startup uses open source technologies and other low cost products to keep their burn rate low.  At the same time, lean startups also make continual and rapid revisions to their products based on feedback from customers. 

The term and methods have been widely adopted in Silicon Valley and his blog, Lessons Learned, has become a Mecca for software and web entrepreneurs.   

So if the term "lean startup" is so successful, why do we need the term "ultralight startup?" 

The reason is simple.  The term "lean startup" is tightly linked to software and web startups.  If you read articles on lean startups, you will learn about agile programming methods, open source tools and rapid code development. 

Also, as Tim Berry points out in his Entrepreneur article Is Your Next Startup an Ultralight, lean startups tend to be "high-powered firms."  They're run and backed by people with a high-growth, swing for the fences mentality. 

We use the term "ultralight" to describe more traditional small business startups and even solopreneurs that focus on bootstrapping and keeping their capital costs extremely low.  The online shirt company ooshirts.com, for example, spent only $2,200 to start the company.  They now gross over $1 million per year. 

Ultralights are mostly outside of the technology industry and while they all hope to be successful, very few are looking to be the next Google or Facebook. 

Or as Tim says, ultralight "... sounds to me like an extremely small and economical startup."  We agree with Tim and he should know.  He was doing both lean and ultralight startups well before the advent of either term. 

We cover the trends enabling ultralight startups in more detail in the Intuit 2020 Report.  You No Longer Need Cash to Start a Business, in particular, focuses on this topic. 

Disruption and the Analyst Industry

I signed up for GigaOm Pro recently.  It is a analyst service that provides research reports and analysis on emerging technology.  It costs $79 a year to subscribe.

GigaOm is trying to fill a need for timely, high-quality yet low cost data and commentary on emerging technology.  The traditional players in this space - Gartner, Forrester, etc. - charge many thousands of dollars for their research. 

I haven't been a subscriber long enough to know if I will get my money's worth, but it is hard to imagine I won't.  First off, this is a business expense so my after tax cost is quite low.  Second, the GigaOm folks know their stuff.  Third, they simply don't have to provide much value for me to cover my costs. 

And for those not willing to risk the $79, there is a free trial.   

Low cost business models have disrupted a number of content industries, with music, newspapers and magazines getting hit very hard.  It will be interesting to see if a new wave of low cost analyst services are able to disrupt this high cost content industry. 

Why Aren't Newspapers Doing Social Shopping?

We've been researching social shopping and have done a few recent posts on the topic.  The leader in this space is the start-up Groupon, which just raised $125 million and is valued at over $1 billion. 

Groupon is an online collective buying service.  Groupon subscribers get emails with deal offers from local businesses.  The deals are generally discounted.  For example, a recent San Francisco Groupon offer was $50 for a child photography session normally costing $295.

Groupon's business is exploding and they are in 30 cities today, with plans to expand to 80 by the end of the year. 

The question this begs is why aren't local newspapers doing this?  It seems to me they are ideally positioned for this business.   They have a large base of subscribers.  They have existing relationships with local advertisers.  Most have trusted brands, or at least trusted enough to be in this business. 

When local newspapers did not respond to Craigslist I disagreed with their decision making but understood it.  They didn't want to cannibalize their existing classified ad business.

In the case of social shopping, I have no idea why they aren't aggressively pursuing it.

Anyone know, or have ideas or theories?

In Silicon Valley it is The Best of Times, it is the Worst of Times

There is a growing view that Silicon Valley is in a steep decline.  The Valley's unemployment rate is well above the national level.  Salaries are down. VC investments are in a slump.  Manufacturing is moving to cheaper locations, and other regions - both in the U.S. and overseas - are increasingly competitive. 

The New York Times even recently described Silicon Valley as in "what a latter-day Wagner might call the Techiedämmerung."  I have no idea what this means, but it sure sounds bad. 

But at the same time many Silicon Valley companies are thriving.  Apple just reported blockbuster earnings. Google's profitability and growth is staggering, and the next 18 months will see a raft of new Silicon Vally tech millionaires as companies like Facebook, LinkedIn, Zynga and others go public. 

Even Valley companies declared dead or severely wounded, liked Yahoo and eBay, are showing signs of life.   

Silicon Valley, and the broader Bay Area, is also the home of many thriving tech companies outside of traditional IT spaces.  Biotech and health related companies are rapidly expanding.  A wide range of clean tech and clean energy companies call Silicon Valley home, and Silicon Valley is becoming a growing power in the increasingly tech-driven advertising, entertainment and publishing industries. 

Silicon Valley may be in decline.  But it seems more likely to us Silicon Valley is moving through a period of Shumpeterian creative destruction, with new technologies, companies, industries and business models emerging. 

Free isn't a Business Model, But it is a Business Strategy

I saw Chris Anderson, the author of the book Free, speak at the Network Solutions GrowSmartBiz conference.  I also got a free copy of his book, which I read on the airplane coming home. 

After reading the book, I'm quite surprised at the controversy it's generated.  It is being actively debated on the Internet. Malcolm Gladwell ripped the book in a New Yorker article.  And according to the bMighty.com (one of my favorite small business tech sites) article Free vs Not Free, the very smart folks at 37signals consider it a sham.

I don't get it. 

Free has been used effectively as a business strategy and marketing tactic for pretty much as long as businesses have existed.  Given how widespread and successful free is and has been, I don't see how you challenge the concept. 

The only place I see room for criticism is if you think Anderson is suggesting that free is a complete business model.  Obviously, if free means no source of revenue then it is destined for failure.  But I don't think this is what Anderson is suggesting. 

I think the point of the book is free can be very effective as a marketing tactic, business strategy and/or part of business model. 

This blog, for example, is free.  And despite the fact that we will never monetize the vast majority of our readers in any meaningful way (we do get pizza and beer money from advertising), it is an important part of our business strategy and an effective marketing program. 

Freemium business models - giving goods or services away to a lot of people in hopes that a subset to pay for something - have also proved to be effective.  Software companies like Evernote, Intuit and others have had success with this approach.  Free samples fall into this category and have obviously been successful. 

And third party payer business models are common.  This is what advertising uses.  We get TV for free - the advertisers pay for us. 

The reality is free has been around a long time and is here to stay.   And as the digitization of our economy continues, there will be many more opportunities to use free as a strategy or tactic because of lower marginal production costs.  This, I think, is the point of Free. 

***Update*** When I wrote this post I had not seen Steve Balmer's comments on free.  He also said Free is not a business model, but as TechDirt points out Microsoft uses free as a business strategy on a regular basis.

The Role of Stories in Raising Venture Capital

Tim Berry has a great article on the importance of stories as part of a business plan.  From Tim's post:

A good business plan is a collection of stories. Your vision is a story about the future. Even financial projections are stories, told in numbers. If we sell this many units at that price, we have this much in sales; but we also have to spend this much in rent, and so on.

There has been a lot of debate about the role of the business plan in the fund raising process.  Tim's post helped me clarify my view on this topic. 

I've always considered the business plan process as a key way to prepare for VC meetings and the questions they ask.  While the VCs don't read business plans, they do ask probing questions and expect quick and well thought out responses.  Developing a business plan equips an entrepreneur with the knowledge needed to handle these sessions. 

But even more important that plan details, VCs want to hear the founders vision for the company and their enthusiasm for building the company.  In other words, they want a good story delivered with passion. 

I've always been aware of the importance of stories, but it is useful to include story telling in the business planning framework.   

Variable Cost Business Models and The Growth of Niche Markets

Early in the 20th century Henry Ford was among the first to understand the power of large scale industrial infrastructure. 

Ford's implementation of mass production methods to build economies of scale resulted in the rapid growth of Ford Motor Company.

Others embraced mass production techniques and soon most industries were dominated by large, vertically integrated corporations. 

After all, only big corporations could afford the large fixed cost investments required to build mass production facilities.

But by the beginning of the 21st century, controlling large scale infrastructures with high fixed costs was no longer required for business success in a a growing number of markets.  And in many cases, fixed costs had become a business liability.

New technologies had reduced the costs of starting and operating a business.  And outsourcing, partnering and business infrastructure service companies (UPS for logistics, contract manufacturers for production, Amazon on others for IT and web services, etc.) created the ability to start and operate businesses using a high degree of variable costs. 

Variable cost business models are having a major impact on the small business sector by greatly increasing the number and viability of niche markets.  Variable cost business models:

1.  Lower the capital costs required to enter and serve niche markets.  Lower capital costs also reduce the risk of serving niche markets.

2.  Provide niche producers cost advantages relative to their larger competitors. 

The chart above shows the classic cost accounting model for both fixed cost and variable cost business models.  Below the volume where economies of scale kick-in, variable cost business models enjoy a substantial cost and pricing advantage. 

The increasing use of variable cost business models is not the only trend driving the growth of niche markets. 

Customer are increasingly looking for good and services that meet their specific needs.  The Internet is allowing niche producers and customers to find one another more easily.  And technology is lowering the costs of serving niche markets.

Combined, these trends are making more and more niche markets economically viable. 

And we are seeing more and more examples of small businesses using innovative variable cost business models to exploit niche markets and out maneuver larger competitors.