How a job offer tests your Entrepreneurial beliefs

Sometimes, it’s very hard to choose between an entrepreneurial career and a corporate career.

We tend to think that choosing the one precludes the other, and we tend to think that this choice is permanent. I can see how someone leaves university and enters the job market, perhaps working his or her way up over time from a clerk to CEO. I have friends who’ve done this and its not only paid them very well but they’ve learned lots and had fun along the way. I can also see how one starts a business, grows it, sells it and starts another, and how this pattern can repeat over the years into a successful entrepreneurial career, where you also make good money, have fun, learn lots and perhaps even manage a passable work to life balance. The reality is that there are many people who flirt with both choices, moving between entrepreneurial states and corporate states depending on their outlook and challenges at the time.

Bob Dylan said “you have to serve somebody” – whether this is a client or your boss if you’re doing this with the energy that success requires then any notion of reasonable working hours is quickly lost, and suddenly being an entrepreneur seems to come with less freedom than being a corporate.

Then there is the risk: entrepreneurs take on a lot more of it. This point was made to me years ago when I worked with an international strategy consultancy: a friend and I compared what we earned as employees (paid in USD) to what our entrepreneurial friends earned and we made substantially more. When we adjusted for risk, it was clear immediately that we were streets ahead – we’d have to really screw up to get fired and there would be plenty of places willing to have us if we decided to leave, while our entrepreneurial friends could lose it all in an instant.

It’s useful to think of entrepreneurs in 2 categories: (a) ‘real’ entrepreneurs who build businesses where they employ others in a corporate structure and build up an ‘asset of value’ which they can sell later on, and (b) those who call themselves entrepreneurs but in reality are just self-employed. For someone who wants to grow a business, they have to transition from being self-employed to being an entrepreneur. It’s a huge shift and while in this state they are very vulnerable to corporate offers.

Recent events got me thinking about this again: a supplier of mine provides excellent service around online marketing, particularly SEO and SEM. There are many such providers in the market – it’s a field where you can quickly become reasonable but expertise still takes your 10,000 hours. My supplier is in the latter category, but over the past 3 years she has constantly struggled with the choice of whether to grow her business. She does excellent work and has earned well. Over the last few years she’s done a lot of work for a large corporate client who’ve paid her well and given her more business. Having stepped back from the decision to grow her business a year ago, she’s got to the position where she has to grow in order to service the demand from her other clients.

Of course, no sooner does she make that decision than her large corporate client makes her a very attractive offer to join them full-time.

So there is a period of extreme angst where she continues to work with this client who continues to hound her. Each time she definitively turns them down they respond with a bigger offer. (This is a nice position to be in). The offer isn’t quite as much as they pay her as a consultant now, but she’d work fewer hours (it would also be easier work) and of course she could have a paid holiday. Like many entrepreneurs she hasn’t taken leave for over 2 years, so the idea of being paid to be on leave becomes attractive. Then there are a whole bunch of benefits they throw in, and then we she finds a way of handing over her current clients so to someone whose work she trusts. She is still undecided.

The turning point comes when she realises that joining a big corporate means that she is going to gain all the perspective of the needs of that market from being within it. In other words, if she ever wants to go back to being an entrepreneur she’ll have the credibility to service bigger clients at a higher rate, which is the core of what she needed to do to grow her business as it stood. In the meantime she gets paid to learn, can manage a team that someone else pays for, and doesn’t have to worry about where the next client is coming from.

The result: a few months in and she misses entrepreneurship, but not nearly as much as she expected…now she just needs to get her head around driving to the same office each day…

Saving money by negotiating your cellular contract

When a market is growing, competing firms can all make money as long as their customer acquisition cost is lower than the lifetime value of each customer. The bigger the gap the more money they make and the faster they can invest money back into the marketing cycle. However, when the market saturates then the only way you get a new customer is if that customer leaves a competitor. So you want to lock your customers into your service while also making it extremely attractive for other customers to join yours. This is exactly what’s happening in our mobile market, where handset penetration is now over 100% of the market (yes, plenty people have 2 phones).

For a while it’s been interesting to watch how this played out, even more so now that my mobile contract has come up for renewal and I’ve had a bit of time to consider my options and do some maths. The results have shown some pretty major cost savings that may easily apply to you:

The situation: I’ve been a loyal customer of a big operator for a while (let’s call them “Yellow”). As someone who is mobile and likes tech I’ve used an iPhone4 for 2 years, which I’ve run with an external battery cover to give me more ‘on the road’ time and also save the internal battery. I pay on contract, which runs 24 months together with my wife’s phone and a tablet costs me around R2.3K per month, or R55K over 2 years, which suddenly seems like a lot. I can upgrade to new phones and tablets and a new 24-month contract immediately. I’ll even save a bit of money because device prices seem to have come down a bit (the call charges haven’t – at least not on Yellow). So, by rolling to a new contract I can get 3 shiny new devices and my bill will drop to about R48K for the 24-month period, i.e. R2K per month. Not how saving R300 per month suddenly added up to R7K over 2 years.

Here’s the catch: our phones work fine and there’s really no need for an upgrade. I don’t particularly have any use for near field communication, eyeball tracking or Siri. Thanks to the battery cover I use, my iPhone is effectively brand new. I know from a friend who dropped their iPhone and got it fixed, that a new battery, home button and screen will cost about R2K from a reputable agent. In other words, I don’t need a new device, and thus I don’t really need to upgrade or renew my contract, and thus is starts to become very important to see what I’m actually paying for my calls. What’s very interesting is that Yellow doesn’t offer packages that allow me to ‘bring my own device’. So, they immediately become unappealing and I’ve started to look elsewhere.

In the meantime, a smaller operator (let’s call them ‘Black’) has new leadership who seem to have nothing to lose and have introduced some very innovative pricing: a flat rate of R0.99 per minute. The simplicity appeals to me (despite the maths we sometimes show in this column!). If I look at what I actually pay on my contract with Yellow per call then it’s nearly twice as much as Black will offer me, and even more than this ‘out of bundle’. If my wife is on the same network then most of the calls between each other (on Black) will be free. Most importantly, Black will offer you a contract with a device included or one where you can bring your own device. Since I really don’t need a new device, suddenly we’re talking business.

Now Yellow have figured out that I’m considering switching so they’ve offered me R3K of cash credits if I stay, but they still don’t offer a ‘bring your own device’ option. Even with this retention incentive, moving to Black is still R6K cheaper (over 2 years) if a get brand-new shiny devices on both networks – the ‘apples for apples’ comparison.

However if I bring my own device then suddenly things are very different. I can go from a 24-month contract on Yellow that costs me R55K to a month-by-month contract on Black that costs me only R821 (for exactly the same use as current – although Black offer more data and free SMS/MMS with each minute, Yellow don’t). Over a 24-month period this is a saving of R35K on an original price of R55K. That’s a truckload.

If my phone breaks, I’ll fix it or upgrade to a 24-month contract at the time, but for now the logical, obvious rational thing to do is to drop Yellow and switch to Black and save myself a lot of money. Number porting will take a day and I can do it myself. I know from friends that it works fine.

If you think about it in terms of Yellow and Black, my switch will remove R55K of revenue (less device charges) from Yellow and will add only R20K of revenue to Black. The saving is all mine. What if 100 people did this? Or 1 Million people? How would Yellow like to lose R55 Billion of revenue over 2 years? How much would Black like to gain R20 Billion of revenue over the same period.

The question to ask yourself is whether you really need a new phone too? Why? What if your whole household or even your whole business took this approach? How much would you save over 24 months? Over 48 months? Over the rest of your life? Blacks’ call rates of R0.99 are a compelling value proposition, but you’ll have to see for yourself. :)

Entrepreneurial lessons from Elon Musk

Elon Musk is an amazing entrepreneur. In last weeks article we looked at how he’s tackled capital-intensive industries successfully and how his understanding of finance has been core to his success, right from how he finances his ventures to how he offers attractive financing to his customers so they can buy his products.

What are the other lessons we can learn from Musk?

  1. He started early and taught himself the skills he needed: Musk taught himself to program computers at age 10 and sold a game that he developed to others when he was only 12 years old. I see this pattern all over the place – the successful entrepreneurs I know today all started around the age of 12, if not earlier. Entrepreneurs who start early typically are doing so because they are finding a creative way to solve a problem they face. Solving problems is the key skill of an entrepreneur – it’s the nature of the problem and the size of the opportunity that defines the potential and the measure of success.
  2. Musk moved to the place where the potential to do great things was greatest:  He left South Africa for the United States and Canada at 17. This wasn’t so much as to avoid conscription (the Apartheid South African government enforced a two-year period of military service for all white male school leavers at the time), but because he believed that America was the place where great things happen. He would never have achieved what he did from within South Africa.
  3. Musk is smart. He achieved two undergrad degrees, one in business and one in physics. Then he went on to start his PhD in Applied Physics at Stanford. This intellect and scientific background is essential in working with top scientists, as he’s ended up doing. He can directly relate to the incredibly smart people he needs to hire, and they respect his intellectual ability. Less smart people would have far more problems trying to lead a team of internet computer scientists or rocket scientist and would never achieve the same.
  4. He takes the gap: he left his PhD studies to dive into the Internet game, eventually founding Zip2. Zip2 helped big publishing companies get their content onto the Internet, which was a major challenge for them at the time. Zip2 was sold to a division of Compaq for $347M in 1999. Musk got $22M out of this deal.
  5. He works with family: Zip2 was started with his brother and later he started SolarCity (see below) with his cousin.
  6. He sells at the right time: 1999 was the peak of the Internet boom. If he’d sold 6 months later he probably would have got less than 10% of the price.
  7. He backs himself: he founded with $10M of his own money and no VC backing. Bear in mind it was very easy to get VC backing in 1999, especially if you’d already proven your success as he had. More on this below.
  8. He moves to buy what he can’t build: was started as an online bank but then bought another company, Confinity (which allowed people to send payments from device to device), and rebranded itself as PayPal.
  9. He surrounds himself with exceptional people: It’s well known that PayPal had a rare core of talent, even for Silicon Valley. Some 14 years later this team are still referred to as the PayPal mafia because of the way they have successfully started so many firms since. Some of the names here include Max Levchin, Peter Thiel, David O Sacks, Roelof Botha, Keith Rabois, etc.
  10. He builds real business value: eBay bought PayPal for $1.5Bn in 2002. Musk made $165M from the deal. What’s significant about this is that 2002 was a bad year for tech businesses – post the dotcom crash and valuations were down. PayPal got such a price because they had real users, real transactions and were growing fast. The processed a significant proportion of eBay’s sales at the time and eBay viewed them as a strategic purchase. The lesson: Musk built a real business at a time when others flipped ideas. He sold in a down market for a significant price.
  11. Musk keeps on moving: Rather than retire or take a year off, Musk started on the next major project that appealed to him: making man inter-planetary. Space-X was started in 2002.
  12. He really backs himself: Space-X was founded with $100M of his own money.
  13. He can’t do it all: He gave the idea for Solar City to his cousin, who started it and is CEO. Solar City and Tesla collaborate on battery technology and providing a network of vehicle charging stations.
  14. He tackles big problems with other smart people who are tackling that problem: Tesla motors were founded when two teams (one of which included Musk) working on commercialising a T-Zero prototype electric car joined forces.
  15. He backs himself (again): Musk provided the initial $7.5M capital for Tesla motors and has invested over $70M of his own money to the company to date.
  16. He addresses big existential problems: clean energy (Solar City), green transport (Tesla motors) and space-travel (Space X). The core theme is around the survival of the human race.
  17. He has no work/life balance and this has come at a personal cost for himself and his family: He has 5 children through two failed marriages, works 7 days a week, travels extensively and doesn’t take leave.
  18. He’s data driven: he’s tackling big problems and betting on himself because he’s done the sums and has the data to prove that things can work. He understands root cause of problems, looks way past what is obvious, and records everything. He uses this data extensively and proactively e.g. to tackle negative reviews of the Tesla (forcing an apology from the New York times).
  19. He solves the affordability problem for customers: Want to buy an electric car? Here’s a structured deal with a put-option where the ownership costs are lower than what you pay now. Want solar power for your house? He’ll sell it to you for less than you pay now. Want to re-supply the International Space Station? He’ll take all the risk and deliver your goods for a fraction of what you can do it for.
  20. He understands why smart people are critical: “Rocket engineering is not like ditch digging. With ditch digging you can get 100 people and dig a ditch and you will dig it a 100x faster than with one. With rockets you have to solve a problem of a particular level of difficulty; one person who can solve the problem is worth an infinite number of people who can’t.”
  21. Musk tolerates failure, but not critical failure: He encourages experimentation and failure in all his companies, but will abort a launch in SpaceX with seconds to go, then spend months reviewing things before attempting again. There is a very big difference in failure during learning vs. a rocket and its cargo blowing up.
  22. He doesn’t spend until there’s a customer: “In the absence of having NASA as a customer the amount of money that we’ll spend on manned space craft is relatively small”.

I’ll leave you with one of his quotes: “I think its very important to have a feedback loop where you constantly think about what you’ve done how you could be doing things better”.

How Elon Musk and Tesla use finance to make their cars more attractive

South African born entrepreneur Elon Musk is renowned for his visionary innovation and ability to transform industries. For the few that don’t know he’s founded and profitably exited from Zip2 and PayPal. He’s currently founder/CEO of both SpaceX (the first private company to re-supply the International Space Station), and Tesla Motors (which makes world-leading electric automobiles). The bottom line is that he’s a large global thinker who tackles problems that are truly massive and also inspirational, and he’s happy to tackle more than one at a time.

What makes Musk standout is that he tackles industries where private capital historically hasn’t stood a chance. Think of SpaceX: even today, some 40+ years after the USA put a man on the moon there are only a few countries who have the ability to reliably deliver rockets into space. Space exploration is incredibly capital intensive and incredibly risky – a single tiny point of failure can literally destroy the rocket, its cargo, its crew and all the capital invested, which until now has been government money only. Yet Musk has proved that a privately owned and funded company cannot only build rocket-ships, but can also win a major contract from NASA to repeatedly supply the International Space.

Tesla Motors is another example: starting a new company to produce an electric car (with all the associated R&D costs of new technologies), then setting up a production line to reliably manufacture them in mass is requires deep pockets. Yet he’s done it again and at the same time as setting up SpaceX! It’s widely known that he’s used government grants/loans and other incentives along the way, but the fact remains that he’s tackled a highly competitive and capital-intensive industry as a brand-new entrant and so far he looks to be successfully on his way. For Musk to have succeeded in these industries he’s not only had to have a clear understanding of the technological advantages in his re-usable rocket components (SpaceX) or Battery technologies (Tesla) but he’s also used finance as a strategic tool; I’d argue that his true ability has been to successfully raise the capital to fund the technologies (a trait which Richard Branson also shares – both are exceptional story tellers).

Musks’ ability to use finance as a tool to extend his competitive advantage goes further than that, as shown by their recent announcement of the financing scheme they provide with the Tesla Model S. Here are the core ideas:

  • US Bank and Wells Fargo have agreed to provide 10% down financing for purchase of a Model S (on approved credit). These are big-name trusted banks putting their weight behind a new technology.
  • The 10% down payment is covered or more than covered by US Federal and state tax credits ranging from $7,500 to $15,000. New Jersey, Washington and DC also have no sales tax for electric vehicles. (These advantages are not available when leasing, so it’s NB that the contract is clearly a sale).
  • When considering the savings from using electricity instead of gasoline, depreciation benefits and other factors, then Tesla claims that the true net out of pocket cost to own a mid-range Model S drops to less than $500 per month. In other words, he makes a strong case that its not a very expensive purchase, actually.
  • After 36 months, you have the right, but not the obligation to sell your Model S to Tesla for the same residual value percentage as the iconic Mercedes S Class, one of the finest premium sedans in the world, made by Daimler (also a Tesla partner and investor). Here Musk does 2 clever things – he anchors the new Tesla brand to the well-established premium brand of Mercedes, and he justifies a similar pricing range by linking the resale value directly to the S Class.
  • Not only is Tesla guaranteeing that resale value, but Tesla CEO Elon Musk is personally standing behind that guarantee to give customers absolute peace of mind about the value of the asset they are purchasing.

In other words, you own the car, but you have the option to sell it back to Tesla. You’re basically getting the benefits of both leasing and owning a car. In the world of finance, this is called a put option. The holder of a put has “the right, but not the obligation” to sell back an asset at a certain price. Of course, options aren’t free – Investors buy options for a premium, which in Tesla will be priced into the upfront cost of the car.

Any risk that you don’t like the product shifts towards Tesla and ultimately Musk. In effect, Musk is gambling that you’ll like the car so much that you’ll keep it, but he’s also set up a financing scheme that gets the benefits of a lease while retaining the tax credits from the sale, and he’s pulled of a great marketing ‘anchor’ by linking the resale value of the car to a great, established brand.

How can you structure your offering to customers to best take financial incentives into place?