Startup-CEO.com (Eli Portnoy)

I recently received a question regarding the breakdown of start-up costs, specifically technology development versus marketing. This obviously varies business to business, but the topic is interesting nonetheless.

I am pretty young so I feel foolish talking about the way it was, but from what I understand the most significant cost that a technology start-up faced as recently as five years ago was the development of a proof-of-concept application. However, thanks to the “flat world” we live in today, the proliferation of open source development tools, and the commoditization of hardware, creating software or web-based applications is cheap.

At the same time, the cost of marketing has not dropped. I might go so far as to say it has increased. There are so many more messages being transmitted to the average consumer, that to get the same effectiveness as $1,000 delivered 5 years ago, one would have spend significantly more. Google has added accountability to the industry, but it hasn’t made it cheaper.

And just to clarify, because I know some of you will ask, the internet does lubricate the wheels of viral marketing, but please read my thoughts on the subject to understand why I don’t think this lowers the marketing cost for most businesses.

So the cost of development has gone down and the cost of marketing has gone up. Why is this important? Because it means that the larger expenses no longer come at the beginning of the start-up cycle but towards the later part. This means that entrepreneurs don’t have to take money up-front and can wait to have a fully working service before launching. It means entrepreneurs can build value for less and keep more equity. It also means that more and more seed stage funds will emerge providing smaller sums of money than they used to. All of this is happening not because starting a business is cheaper, but because the cycle of costs has changed.

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The first company I started was an advertising based business. My partner and I bought/licensed/rented advertising inventory from minor league baseball stadiums and repackaged it into regional networks. We figured that teams that were averaging a few thousand fans a game couldn’t afford the type of sales force necessary to sell-out their advertising, but if we could roll-up their inventory into a network we could find a way to sell it. 

What we quickly found out is that advertising is incredibly difficult to sell. It’s not that it isn’t effective, or that it isn’t needed, but selling is all about benefits and it is very hard to quantify the benefits of traditional advertising.

I think the reason everyone is drooling over web advertising is because they are confusing who measurability is good for. Web-advertising is great because it is so easy to sell and because it makes a marketer’s job easier, but does it really do a better job at delivering a message than TV or Radio or Print? 

The other mediums are figuring out that measurability is good for business and are developing the tools to measure the ROI of their inventory. When this happens, web advertising will be just another advertising tool in a marketer’s repertoire and the allure of web advertising will be gone.

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Yesterday I was looking for an old article about my first business that I wanted to link to. In the process I came across a fantastic blog about marketing and brand creation written by another Eli Portnoy. Aside from the fact that we share a name, I think he writes a great blog and I encourage you to check it out. 

There really aren’t too many Eli Portnoy’s around that I know off. The name Portnoy is not very common, though thanks to Phillip Roth, it isn’t easily forgettable.

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Firstly, I want to apologize for the long delay in my postings. Things have been pretty busy over the last few weeks. We are working on a complete re-launch of the site and will be unveiling some very cool new features.

One of the hardest things for me as a young entrepreneur is to understand when an initiative needs more time and when it is just not working. The business cycle has been dramatically cut short and now more than ever companies need to be innovating and pushing forward new features at a dizzying speed. That means throwing a lot of things at the wall and seeing what sticks and what doesn’t. That being said, you sometimes need to try throwing the same thing a couple of different times before it sticks, and sometimes you need to try different angles, but mostly you just need to cut your losses and move on. 

As the months go on I feel more comfortable reading the subtle hints that tell you if a feature needs more work and time, of it is just not going to work. But no matter how much experience I accumulate, and no matter how good I get, I will never be good enough.

So if you will allow me, I would like to occasionally blog about features we are considering or are about to roll-out. I would be forever grateful if you share your opinions and comments and let me know if you think the feature will work or if you think we should can it.

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I bought a Sony laptop for my mom 4 months ago. I went all out and got her a great system. I made sure it was light, but had a big screen. I gave her tons of RAM and a big hard drive. I spent a tony of money and went with Sony because I had my own Viao about 3 years ago and it was a thing of beauty.

To make a long story short, it was the worst purchase I have ever made. The thing broke down 3 weeks after I got it, and since I had bought my mom a full warranty, we sent it back. The thing is Sony doesn’t sell its own warranty, but rather re-sells some third party crap. So, after 3 weeks get the computer back and though the initial problem was fixed a new one had emerged.

I sent the Viao back again and it took them 5 weeks to send it back. My mom got it back yesterday and the problem wasn’t fixed. What could they possibly have done for 5 weeks with a computer? They sure as hell didn’t fix it. 

I spent about 4 hours on the phone with Sony today, with the warranty company and I have had zero luck. It doesn’t matter what I do Sony keeps pushing me back to the warranty people and the warranty guys send me back to Sony. Needless to say I am frustrated and I will never buy or recommend another Sony product…

How did such a great company fall so hard (see PS3 for additional examples)?

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Charles River Ventures just launched a program to fund companies with small loans of $250,000 instead of through equity investment. I thought I would weigh in with my two cents from the perspective of an entrepreneur. 

There are two main stages companies go through, product development and business execution. 

Product development is not capital intensive. We started with a development team in the Ukraine, a freelance designer in Romania and a research team in
India. The software and hardware we needed to launch were cheap. Getting our prototype to the market was inexpensive.  

Business execution in most cases is capital intensive. You need US based resources to handle Marketing, Sales, Business Development, Financials, and these don’t come cheap. You need to lease an office. You need to have scalable infrastructure. You need money. 

The issue many entrepreneurs face is that taking VC money during the product development cycle makes little sense, because 2-3 million dollars is about 10x more than is needed. This completely dilutes the founder’s equity position and does little to actually help the company. Further adding conflict to the situation, many web-based products are being bought as features by the internet heavyweights. This makes it even harder to justify giving up more equity for more cash than is needed. 

On the other hand, if entrepreneurs don’t take the money during product development they end up having to beg, borrow and starve to launch their businesses. 

So getting back the Charles River Ventures program, I really like it. It allows entrepreneurs to take money and build a product without diluting their equity. No reason to take 3mill if only 250k is needed. If the company is acquired before they raise venture money they still maintain 100% of the equity. If they do raise money later, CRV only asks for a small discount on the terms they negotiate with the lead investor.  

From the VC’s perspective it works equally as well, letting them get in on the ground floor with a minimal investment, but with the right to take a significant equity percentage if the company does decide it needs to raise money. 

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I love my gadgets, maybe even a little too much. My wife hasn’t said anything yet, but every time I get a new one she rolls her eyes at me. She is right; they usually have absolutely no real use 

This one is different. The new Bluetooth watch by Ericsson and Fossil is exactly what I have always needed (or is it wanted?). 

The feature I love is that the watch displays caller id and the first line of an email/txt msg. There have been so many times when I am in a meeting and someone calls me or sends me an email. There is no way to discreetly check if the message is an emergency, a really important call, or just a wrong number. This watch makes it so easy to discreetly screen calls and messages, that I can already envision it changing my business life.  

Though we all know the truth: I really just want it so I can change songs on my MP3 player…

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I was on a conference call last night with a couple of friends who are trying to start a new business. Their idea is fantastic and if they execute well they will have an incredible product that many, many people will want. I was very enthusiastic and I really thought they would have a good chance to pull it off, until I asked them about their distribution plan.

Nothing! They told me about getting referrals and doing a bit of PPC. They said advertising and telemarketing…They really had not thought hard about how to get their product out into the marketplace. 

For some reason, most first time entrepreneurs figure that the hardest part about selling is having a good product. It is exactly the opposite, a good sale strategy and a good distribution platform can sell just about anything. Think about it, who is more likely to sell; a great salesman peddling an inferior product or an adequate salesman selling a fantastic product? History is full of examples of bad products that prevailed because they were sold well.

When I started Emerging Demographics I approached the situation the same way, I focused most of my energies on developing the product. I had some ideas about how to distribute and sell, but I spent a lot less time thinking about that then I did making sure that our product was truly “special.” Boy did I learn my lesson. When we launched, we generated a lot less traction than I anticipated, and even though our customers were really happy, we just didn’t have enough of them. I spent the next three months devising and putting in place a strong distribution and sales strategy and it seems to be paying off. 

From now on, anytime someone talks to me about a business idea, my first question will be how they plan on selling their product and if they don’t have a good answer – ill tell them about my experience with a great product and a bad marketing strategy.

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Why is it that there is nothing worse than business travel? For all of the advancements we have made in the past 50 years, air travel has continually deteriorated. And no, I am not just talking about taking off our shoes, or checking in liquids, I mean the entire flight experience.

Last night I flew to Mexico City to visit our customer service office. I have never had such a horrible experience. My flight left at 1:50am and was supposed to arrive at 6am. Not only was the flight delayed, but everything about the flight experience was terrible.

One hour and fifteen minutes into a redeye flight, as you can imagine most passengers were sleeping, yet that is exactly when the flight crew decided to turn on all of the lights to serve drinks. This was incredibly insensitive to the needs of the passengers, and completely unnecessary. It would have been just as easy to serve with the lights dimmed or even off. There was no need to wake up the entire plane.

This might be a unique and extreme example, but it points to a deeper issue; flying comfortably is no longer a concern of the airline. They want to get you from point A to point B, much like they would any other type of cargo.

This is not just a rant against the airlines – there are great business lessons to learn about customer service and customer satisfaction. I believe that the problem’s the airlines are having with customer satisfaction doesn’t stem from the reduction in services (food, blankets, pillows), but from a change in the airline’s culture and attitude towards the customer. When Delta or American Airlines stopped providing pillows, they sent a message to all of their employees that customer service was secondary to cost cutting. The message they should have worked very hard to communicate was that everyone in the company will now have to work especially hard to satisfy its customers to make up for the lost perks and benefits of flying. Think about JetBlue or Southwest, by far two of the most beloved companies in the sky, and neither of them ever served meals. The difference? Their culture and attitude towards the customer.

So as a CEO, whenever you think of your customer don’t automatically think of adding extras and perks to keep them happy, but perhaps consider working on the culture of your business, and making it as customer friendly as possible. The customer knows when a company is trying to serve them because it loves them, or when they are throwing in perks because they want to get more out of each customer.

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