Two Interesting Perspectives on the Current Financial Crisis
A lot of things are being thrown out there right now about the current financial meltdown. I have heard a lot of talk on the various news programs that if the U.S. taxpayer doesn't bailout Wall Street then we are headed for another Great Depression.
Jeffrey A. Miron had an interesting piece at CNN.com. He is definitely a contrarian when compared to what seems to be the current conventional wisdom. But a lot of it sounds right to me.
Another great resource is this video from Darden School of Business at the University of Virginia. It is about an hour long but very informative. A couple points that I thought were interesting:
- One of the professors pointed out that the government would be buying these bad loans on very favorable terms and thus there was a lot of potential upside.
- About 2/3 of the way through they start discussing how business school education needs to change. Companies should be focussed on building "good businesses" and not "maximizing shareholder value" at any cost - exactly!
Though I am currently opposed to the bailout proposals I must admit that I have my doubts as to whether my position is correct or not. A new great depression is a pretty scary thing. But it seems that everyone who is pushing the bailout has a strong vested interest in this thing not blowing up. The business correspondents are most likely heavily invested in the stock market which will take a big hit if this happens. Lawmakers are going to get a lot of the blame if this doesn't get fixed. So, who do you trust? This people that are proposing the "fix" are the very ones who created the problem.
I guess now it is just a game of chicken. Will the lawmakers opposed to this bailout be willing to chance a new great depression? And, if we avoid it now are we just delaying the inevitable?
TonchiDot Sekai Camera
Check out this video of the Sekai Camera shown at TechCrunch 50. The possibilities for this type of thing are incredible. We have always wanted to do some sort of virtual history tours. This would be a very cool way of doing it.
The Business of Software Conference (Part 2)
I decided that trying to go through every presentation was going to be more than I was capable of. So, to finish off my review of the conference, I am just going to talk about the presenters that were most pertinent to me an my business at our current stage of development. That is not to say that the presenters I don't mention were bad, it is just that their topics weren't directly applicable to my situation.
Day 1 (Continued)
The overall highlight of the conference for me was Dharmesh Shah from OnStartups.com and the founder of HubSpot. The guy is brilliant. It was clear he didn't have a set presentation but instead just some guidelines that he meandered through. It was all fascinating.
A lot of the presentation had to do with metrics. How much does it cost to acquire a customer? How much is that customer worth once you have acquired them? What is the typical lifespan of a customer? To all of these questions my answer was a solid, "I have no idea" so obviously I have some work to do.
He also talked about the Customer Happiness Index (CHI). The basic idea is to measure actions that tell you how much a customer is using your product and figure out what actions are likely to prompt them to upgrade or cancel your service. By doing this you can develop some very good financial projections and hopefully see what is/isn't working before it is too late turn that information into useful actions. Once again, we aren't doing much in this area so it is something that we want to start looking at right away.
Another great tip was to test the advertising of the product using Adwords before you develop/launch it. A little too late for our current product, but something to keep in mind for future ventures.
Another one I really liked was Jessica Livingston, author of "Founders At Work". In the book she interviews a bunch of founders. I read it last year and it was one of the best books on entrepreneurism I have ever read. The stories were all fascinating and contained the types of anecdotes that every founder craves. She mentioned that she might start looking at founders who weren't successful, maybe a book titled "Founders Who Failed" (my term, not hers)? I hope she does something along those lines. Information about failed startups would probably be more valuable than the stories of the successes. It is great hear about those who won the battle, but sometimes you want to talk to the guys who found the mines before your cross the field.
Finishing of the first day was Paul Kenny from Ocean Learning. He is a sales consultant from the UK. A lot of what he talked about was similar to stuff I had read in Jeff Thull's book "Exceptional Selling". He had some great tips but it all boiled down to, "Care about your customer and do what is best for them." If your solution isn't the right thing for them, tell them so. It will build credibility for the future. Don't talk to them about what your product does. See if you can sell them solutions to their problems. Great stuff that I really already know but don't always practice. He mentioned that there is a salesman in the UK that is quite a bit older than him but still comes to his conference twice a year. The guy says it is to keep his skills fresh because it is so easy to slip into bad habits. So true.
Day 2
Day 2 had more presentations that weren't directly applicable to our business right than day 1, but there was still some excellent stuff in there.
Tom Jennings from Summit Partners gave a great rundown of how venture capitalists work with founders and how they make money. He seemed like a very straight shooter and probably a great guy to do business with. I learned a ton. Don't know if I will ever be in the position to take venture funding but, if I am, I will definitely refer back to a lot of what he said.
Key takeaways for me were:
The Business of Software Conference (Part 1)
On my way back from the Business of Software Conference in Boston. I debated hard about coming to this one, not because I didn't think it would be good, it was just an inconvenient date. I am so glad that I went though. I left with so many ideas.
There really was a large cross section of attendees, from small startups (like me) to large, established companies. Because of that there was really a wide range of topics. Not all of them were applicable to my situation but enough were to make it well worth it.
Seth Godin started off the conference with a great presentation on marketing. I have seen/read quite a bit of his stuff before but he always gets you thinking about new ways to reach out to people. We have been struggling with some marketing decisions lately and his presentation really helped me realize where we need to focus our efforts.
Next was Jason Fried from 37Signals. I had pretty much seen this presentation before online but it was still valuable. Jason obviously has some strong opinions. My only suggestion for the presentation would be that he start out by stating that a lot of the principles he espouses are only possible if you have a certain type of business model. He talks about avoiding feature creep and maintaining a 4-day workweek. But, if you are selling single license software you have to implement new features in order to sell upgrades. And, if you are a consulting company who bills hourly you may or may not be able to take Fridays off. I guess that the real message is that you need to move your business model to a SaaS structure, then you can do a lot of the things that he talks about.
All that being said, he has a lot of good points and listening to him always makes me think about how we can simplify things. Our product, ScreenSteps was developed right after reading their book, Getting Real.
Eric Sink was next with a comparison of a product manager to a parent. In some ways it was geared towards a company that is larger than we are but there was still quite a bit of good information there. The basic idea was to imagine your product as a child. At different stages of its development it will need different things.
After lunch (which was quite good) came the Pecha Kucha presentations. In case you don't know Pecha Kucha means (at least at this conference) that each presenter gets to go through 20 slides in 20 seconds. The slides advance automatically so it can be a bit tricky. Some did better than others but there was actually quite a bit of good information here. My favorites were:
- Jason Cohen who had some great marketing ideas.
- Lou Franco who had some great insights into how to use funneling techniques outside of your website, and
- Alexis Ohanian was flat out hilarious with with Web 2.0 parody.
That is all I have for now. I will post more about the conference later.
My Tax Plan: The Employee Payroll Savings Account
There has been a lot of talk about tax plans lately over which plan would be best to move the economy forward and generate job growth. Here are what the two candidates are proposing:
Obama
McCain
The Issues With Each Plan
First off, let us assume that tax policy needs to strike a balance between raising revenue for the government and allowing the economy to grow and thrive. You have to find the proper balance or you will run into trouble. If taxes are too high then the economy stagnates. If they are too low then the government doesn't have enough revenue to fund its operation (how much revenue the government should need and how they should use it is not within the scope of this post).
With that assumption, lets look at each plan. McCain would like to lower taxes on corporations. The real question is, would this lead to an increase in job growth? If the government lets businesses keep more of their money will they use it to:
If the money is solely used to increase income for their principle owners and executives then many will say, "Hey, they are getting a tax break just so that they can keep more and more money. That isn't fair. They should pay more in taxes since they have more excess income." John McCain is going to claim that they will use that money to pay for new jobs and grow the economy, but there is no guarantee that will happen.
Obama's policy assumes that all business profits will be used to enrich the owners and executives, and since they have more than they actually need, they should shoulder a higher tax burden, thus "paying their fair share". But by taking their profits at a higher rate you are also preventing small businesses from using that excess money to hire new employees or reinvest in their business.
Small businesses account for 60-80% of new job growth (this is taken from the SBA) so how tax policy affects small businesses is very important (FYI - a small business in this case is any business with less than 500 employees). What if we could set up a tax policy that actually encouraged small businesses to use their profits to hire new employees? I believe there is a way to do this that would be a compromise between the two candidate's plans and would produce dramatic job growth. I am going to call it the "Employee Payroll Savings Account". Essentially it would let businesses pay for employees much like they would a computer. Let me explain.
Tax Time
To understand how this would work you need to understand how small businesses make decisions around tax time. I am only speaking for small businesses. I have no experience with large entities.
At the end of the year, every slightly sophisticated small business looks at their Profit and Loss statement. The business will be taxed on whatever profit remains after Dec. 31. This is why you see many business owners making purchases during the month of December. It isn't because they are buying Christmas gifts for themselves. They are trying to decrease their taxable income. If they can buy something and count it as an expense they will decrease the profit from their business that will be taxed.
The math is actually pretty simple. Say for example, I have $10,000 in profit that is going to be taxed at a 30% rate (these are just random numbers).
If I buy a $4,000 computer in December, and I can count that computer as an expense:
If I do nothing:
If I but a $4,000 computer in January (worse case scenario):
So to sum it up, here is how it looks:
If I buy the computer in January it actually costs me $1,200 more. I am essentially deciding between a $4,000 computer and $5,200 computer. If I think that I am going to need that computer at all then I am going to buy it in December!
Raise that tax rate to 50%, which is pretty close to what it will be for many small businesses making over $250,000 a year, and the difference is even bigger. At a 50% tax rate the difference in the computer cost from Dec. to Jan. is $4,000 and $6,000.
Why do you care? Why does it matter to you how much money a business has at the end of the year? Because the left over money is what is used to create new jobs. When a company is deciding whether or not they can hire someone they have to make sure they have a sufficient cash reserve to cover that person's salary and benefits.
Let's take a business that had $300,000 in profit. What if they want to hire two new people making $70,000 a year each. Say they feel they want to have a 6-month cash reserve to make sure they can cover the cost of the new employees. That means, when they factor in benefits and payroll taxes they will want to have something like $100,000 on hand.
Well, with $300,000 in profits that should be easy, right? Wrong. At a 50% rate, half of that will disappear. The business is only going to have $150,000 left in January after the taxes are paid. Now the decision becomes a little tougher and the business may put off hiring the new employees until they are sure that they really need them.
The problem is that the business can't deduct the employees' salaries as an expense before their taxes are due. If they were to buy a $100,000 worth of computers then they could decrease their tax liability immediately (Accountants: I know there are certain rules around this but this is just an example so say with me here). If they want to use the money for employees they essentially have to buy the employees in January with their post-tax dollars.
This is why you see businesses buying crazy things at the end of December, and not making crazy hiring decisions.
** The Employee Payroll Savings Account
But what if they could buy employees at the end of the year? What if businesses could set aside a certain amount of money that could only be used for employee salaries over the next year. This money would be shielded from taxes, thus decreasing the taxable income of the business (just like the computer purchase). In the example above, if the company had $300,000 in profit, they could maybe set aside $100,000 into this Employee Payroll Savings Account. They would then only be taxed on $200,000 of profit, saving them $50,000 in taxes.
Over the next year they would have $100,000 to use in salaries for employees (new or existing, but owners or their family members would be excluded). If, at the end of the year they haven't used the $100,000, it would be taxed like normal income. If they try to take the money out before the end of the year for something besides employee salaries they would have to pay the tax on the money at that time.
But essentially, you have decreased by $50,000 the cost of hiring new employees for the business. This would be a huge incentive for small businesses to hire new employees or to increase salaries for existing employees. In essence, at the end of the year, instead of buying a computer that they may not even need, they can set aside money that will be used to grow their business through new hires over the coming year. There is already a precedent for this. They are called Health Savings Accounts and they work essentially the same way.
Seems like something we might want to consider if job growth is really what we are worried about.