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When Writing a Business Plan Is a Waste of Time

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Spending months writing a business plan can make you feel like you’re being productive, but what you really need is market data and some experience.

John Warrillow is the author of Built To Sell: Creating a Business That Can Thrive Without You. He has started and exited four companies and in 2008 was recognized by BtoB Magazine’s “Who’s Who” list as one of America’s most influential business-to-business marketers.

John Warrillow is the author of Built To Sell: Creating a Business That Can Thrive Without You. He has started and exited four companies and in 2008 was recognized by BtoB Magazine’s “Who’s Who” list as one of America’s most influential business-to-business marketers.

Walk into any bank in the country and ask for a loan to start a business and the knee jerk reaction of the banker behind the desk will be to ask you to write a business plan—even though they themselves have likely never written one and will not base their lending decision on its content.

The problem with writing a business plan as a start-up is that it will be based on one assumption on top of another. If your first assumption is flawed, then the whole thing is useless.

Way back in 1996, I wrote a business plan for an audiotape magazine. My idea was, each month, to give subscribers a new audio recording of an interview I had conducted with a well-known entrepreneur (sort of like today’s model of podcasting). I decided to charge $99 for an annual subscription.

My business plan called for 10,000 subscribers in the first year, which amounted to a run rate of a cool $1 million in annual revenue. I had no idea what it would cost to acquire a new subscriber but figured $10, or about 10 percent of what I was charging them, seemed about right, so I calculated that it would cost $100,000 to get to my 10,000-subscriber base. With only $17,000 saved up to start the business, I assumed I would finance the acquisition of subscribers through the $99 prepayments of my new customers. I calculated the cost of mass producing 10,000 cassettes (this was long before iPods) and the cost of mailing the cassettes to my 10,000 subscribers each month.

I invested months in writing my business plan, and when it was complete, I felt ready to start running my million-dollar business.

My first step was to put together a top-notch first edition befitting of a million-dollar company. I rented studio time at a professional facility and hired an announcer from a popular morning show in Toronto and a producer from a local radio station. By the time I had my first edition finished, I had invested roughly $5,000 of the $17,000 I had saved up to start the business.

Next, I went to a printing company and had a four-color logo and package designed for my tape series. Each color added a little bit more to the cost of the tapes, but I justified the fancy graphics to myself because, spread across the 10,000 subscribers my business plan called for, the cost of each extra color was negligible.

I then created a fax-back subscription form (yes, this is well before ecommerce-enabled websites) and set up a fax machine in my parents’ basement.

To get my 10,000 subscribers, I printed brochures and started handing them out anywhere entrepreneurial people gathered: trade shows, small-business development centers and so on.

The first morning after handing out the brochures at a small-business trade show, I rushed downstairs to see how many orders I had received.

None.

I checked the paper cartridge—it was full. I picked up the receiver to ensure there was a dial tone, and sure enough, the fax machine was working. I tried to remain optimistic, figuring people were still returning to their offices from the trade show, and told myself I’d have orders the next day.

The next morning I went downstairs again in anticipation of the floodgates opening. Still no orders.

The next day, again, I was shut out. I became increasingly depressed with each passing day of not selling a single subscription.

By the time I ran out of money and had to shut the business down, I had sold just 82 subscriptions in three months.

As I think back on the experience, the business plan I had spent months on was useless. It didn’t matter how much time I spent modeling out a million-dollar company because the house of cards was all based on one wobbly assumption: my guess that it would cost $10 to acquire a subscriber.

I had no basis for this assumption. I just made it up—which, of course, is the problem with the business plan of most start-ups: it’s all fiction until you get into the market and start selling. While it is true you can find comparable data from some sources, oftentimes start-ups are bringing a new concept to market making it impossible to find an apples-to-apples comparison.

What you really need to plan your business is some market data, which only comes from—you guessed it—the market. My advice for starting a business is to develop your product or service as cheaply as you can (or even develop just a description of what you plan to offer) and try to start selling it.

Skip wasting time on writing a traditional plan, and instead invest that energy in establishing a benchmark for what it costs in time, money and prospects to close a sale. Once you have a baseline, try to improve your efficiency over time.

Let’s say, for example, it costs you $16.60 to get a prospect (or a website visitor, person to visit your booth or shopper to come into your store). If you have to pitch 15 prospects before one says yes, your cost per customer acquired is $249 (15 x $16.60).

Now let’s imagine you charge only $200 for your product. With a marketing cost of $249, you’re underwater and need either to raise your price or to get more efficient at selling.

Start by getting more efficient. Let’s say you tweak your pitch and, over time, get your cost per customer down to $135.

Now start nudging up the price and see if you can keep acquiring customers at $135 each. Imagine you’re able to get your price to $250 without compromising your ability to get a customer.

You’re now clearing $115 per sale, and assuming you’re making your product for less than that, you’re in business.

Spending months writing a business plan can make you feel like you’re being productive, but it’s really just busywork. No bank in the country is going to lend you money based on your business plan (they only lend to start-ups based on your personal creditworthiness). Hiding behind a spreadsheet won’t help you get a business off the ground. What you need first is some real-world data, and you won’t get that from sitting in front of Excel. It comes when someone says “yes” to what you’re selling.

With some real data, you can start to write a business plan for scaling up your company. I think too many of us make the mistake—often encouraged by well-meaning bankers and advisers—of writing a business plan before you start. The problem is, until you have some real-world data, your business plan will be pure fiction.

John Warrillow is the author of Built To Sell: Creating a Business That Can Thrive Without You, which will be released by Portfolio/Penguin on April 28, 2011.

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GOOGLE HOME HUB SAYS NO TO SMART-HOME CAMERAS IN YOUR BEDROOM

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The new Google Home Hub sports a 7-inch touchscreen, a fabric-encased full-range speaker, a light sensor and two far-field microphones. But even more interesting is a hardware feature it doesn’t have.

The $149 device has no camera, so you can’t use it for video calls or taking photos.

While that omission at first blush may not seem like a big deal, it raises a handful of thorny questions about how many cameras and microphones people want to have in their connected homes and how much they trust giant tech companies to protect their data and privacy in their most intimate spaces.

The Home Hub, which Google introduced at its Made By Google product launch event Tuesday in Manhattan, is a mashup of a smart speaker and a tablet that’s often called a smart display. It uses the voice-powered Google Assistant to let you play YouTube videos, check your home security camera feeds and control connected smart-home devices like lights.

The device will go up against a growing list of competing smart displays, including the Amazon’s Alexa-powered Echo Show and Echo Spot, the new Facebook Portal, and the Google Assistant-powered JBL Link View and Lenovo Smart Display. All five of those devices include cameras for video chats.

The Hub comes out at time when tech companies are facing greater scrutiny for how they manage users’ data and how much of that information they keep. Just this week, Google shut down its unpopular Google+ social network after the company was forced to disclose a bug that put users’ data at risk. Earlier this year, Facebook sustained a torrent of criticism after the data of millions of people landed in the hands of consultancy Cambridge Analytica, which exploited the information for targeted election ads.

Simultaneously, many of these same companies are asking consumers to add more and more cameras, mics and sensors to control their homes.

So far, smart-home customers haven’t raised persistent concerns about these devices tracking them, instead focusing more on the convenience they can offer. But that dynamic has the potential to quickly change if there’s ever a major breach related to the audio, video and shopping data these electronics can track.

When the Hub comes out on Oct. 22, consumers will get to decide whether they want to make the Hub a bigger success than its many rival camera-toting smart displays. Whether they side more with the privacy of having no camera or the convenience of video features may signal what direction smart home technology will go in the future.

“It’s kind of less is more,” said GlobalData analyst Avi Greengart, who attended the Google event. “They’re omitting a piece of hardware that costs money and does raise some privacy implications.”

Google’s view on going camera-free

While Amazon in particular has pushed full-force into offering smart speakers with cameras, including those marketed for the bedroom, Google took a decidedly different approach with the Hub.

“For us, in general, it’s not about one product or another, just the word camera — hey, put a camera in your bedroom,” Mark Spates, Google’s product lead for smart speakers, said at Tuesday’s event. “It’s a comfort thing. For us, we wanted to make sure that you could use this anywhere in the home.”

Google wanted to give customers that option after finding that people put the Google Home Mini — its most popular smart speaker — in hallways, washrooms, bedrooms and everywhere else in their homes, he said. Looking to build on the Mini’s success and avoid limiting where the Hub can go, he said, Google opted to leave out a camera.

Diya Jolly, Google’s vice president of product management, added that the company saw an opportunity to offer a different kind of smart display, after several competing devices already offered a camera. She said Google was willing to explore adding a camera to a later version, but “we wanted to see how consumers reacted and how they liked” the new Hub.

“We wanted to give users a choice of not having a camera,” she said. “There are many other devices out there that have a camera, but none that doesn’t have a camera.”

amazon-echo-spot
A marketing picture from Amazon of the Echo Spot as a bedroom nightstand clock.Amazon

In stark contrast with the Hub, competing smart displays are heavily promoting their video capabilities. The new Facebook Portal was created especially for Facebook Messenger video calls, and Amazon’s Echo Show and Spot have been marketed for their video call functions. Amazon even included a “drop in” feature that lets people connect automatically with a Show or Spot if they’ve been approved to do so by the device’s owner.

Amazon also created another product called the Echo Look that’s marketed for your bedroom or closet. It uses a camera to take pictures of your outfit choices to give you AI-powered fashion advice. The Spot, too, is marketed as a replacement for your bedroom nightstand clock.

Privacy in focus

In a nod to privacy concerns, Facebook, JBL and Lenovo offer physical privacy shutters for their smart displays’ cameras. Amazon doesn’t, instead offering a button to disable the mic and camera on the Show and Spot.

“Customers have made millions of video calls this year alone, and they tell us that they love the ability to drop in from room to room within their homes or take a photo on our devices, which is why we believe the camera is important,” an Amazon spokeswoman said.

“We also built these devices with privacy in mind from the beginning,” she added, mentioning that when you press the microphone/camera off button, it cuts off power to both pieces of hardware. Also, a red light on the device is used to reinforce the fact that the mic and camera are off. “We will continue to learn from our customers and adapt our products to best meet their needs.”

facebook-portal-plus-messenger-chat-2306
Say hi to the Facebook Portal.James Martin/CNET

Following Facebook’s privacy blunders, the company took pains to emphasize the Portal’s privacy features, including the ability to turn off the mic and camera with one tap and the use of a passcode to unlock the screen.

Both Amazon and Facebook said they don’t record, store or listen to your calls through Facebook’s Portal or Amazon’s Alexa-powered devices.

JBL and Lenovo didn’t respond to requests for comment for this story.

By leaving out a camera Google avoids the privacy concerns raised by Amazon’s rival products and prevents a potentially messy video breach from ever happening. Amazon faced criticism for the Look, with one writer for Forbes suggesting its camera may someday be able to identify skin cancer or depression. Amazon strongly denied these claims.

“Amazon is trying something completely different,” Greengart said. “I don’t think it hurts Google to omit it, and for people that do want a camera, there are those options from Amazon and Google’s partners.”

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MICROSOFT HAS KILLED MINECRAFT FOR APPLE TV

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Microsoft is no longer supporting the Apple TV version of Minecraft. The app has has been pulled from the App Store, and an in-game message notes that it won’t receive any further updates, though it’ll continue to be playable. Refunds will be issued for any purchases made up to 90 days before the announcement comes into effect. And it actually went into effect on September 24th, so it’s even more of an indictment of the state of Apple TV gaming that no-one really seemed to notice until this week.

Minecraft is one of the biggest games in history and has managed to find an audience on virtually every console, phone, and computer out there — including the iPhone, from which the Apple TV version was derived. But the Apple TV has been hampered as a games platform ever since Apple bungled the launch by unexpectedly requiring developers to support the Siri Remote. The company backtracked the following year, but the damage was done.

Apple hasn’t entirely given up on Apple TV gaming. Last year’s iPhone keynote saw Sky, the next game from Journey and Flower studio Thatgamecompany, shown off for the first time on the Apple TV 4K. But even that game is yet to see release, and it’s clear that Apple’s focus is elsewhere.

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UBER’S NEXT CONQUEST: YOUR DATA

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After replacing Travis Kalanick in August 2017, Uber CEO Dara Khosrowshahi is shifting the company’s focus. Though the company has always sought to become a world-class transportation platform, it has recently begun to describe itself as “Amazon for transportation” — an ambition which indicates the company is making a monopolistic data play.

Amazon has always been an inspiration for Uber’s leadership, but the form of that inspiration has shifted over the course of the company’s growth. Kalanick wanted to emulate Amazon’s strategy of pursuing market share and growth at the expense of profits — or, more accurately, with massive losses before using scale to reduce the marginal cost of expansion to turn a profit. Unfortunately for Kalanick, that strategy didn’t translate to Uber’s ride-hailing business.

Scale economies work for companies like Google, Facebook, and Amazon because the digital nature of their operations allows growth at little marginal cost in many aspects of their businesses. This is why many of these digital companies have so few employees compared to traditional auto companies. However, as transportation expert Hubert Horan explained: “Drivers, vehicles and fuel account for 85% of urban car service costs,” making scale economies very difficult for Uber’s ride-hailing service to achieve even as it outsources the ownership and maintenance of vehicles to its drivers.

Uber’s leadership is inspired by Amazon’s platform and the power and dominance that has come with it.

Uber’s margin improvements have typically come from cutting driver pay, not scale economies, and Kalanick’s plan to reach profitability relied on further reducing the share of revenue going to drivers. In the last few years that Kalanick served as CEO, the company became focused not just on developing autonomous vehicles, but on winning the self-driving race. We now know that autonomous vehicles will not be able to replace drivers nearly to the degree Kalanick had hoped, nor on the accelerated timeline he was relying on. This necessitates a new plan for the company’s future.

We don’t know whether Kalanick was in the process of formulating a new strategy, but over the past few months Khosrowshahi’s vision has become increasingly clear. He wants to make Uber into the “Amazon for transportation.” This time, instead of taking the wrong lessons from Amazon on scale economies, Uber’s leadership is inspired by Amazon’s platform and the power and dominance that has come with it.

From Ride-Hailing to Transportation Platform

Though Uber’s ride-hailing service has always been the center of its business, Khosrowshahi’s plan shifts the focus to its app — or, rather, its platform. He’s no longer just talking about the ride-hailing business, but about existing food delivery and freight services along with it, new scooters and bike offerings from Lime, car rentals from Getaround, public transit ticketing through Masabi, and the prospect of flying cars. Basically, the more services available, the more people the platform can serve.

Uber’s approach to autonomous vehicles has also shifted. Rather than trying to win the race to develop self-driving tech, Khosrowshahi has said his ultimate goal is to have “access” to the technology. He opened the door for Google’s Waymo and GM’s Cruise to offer their autonomous vehicle services on Uber’s platform, and Ford AV CEO Sherif Marakby recently told the Vergecast that they’d be open to offering their autonomous service on the platform as well.

Khosrowshahi predicts the traditional ride-hailing service to be only 50 percent of its future business, as scooters and bikes cannibalize the short trips currently made in vehicles. It’s hard to imagine Kalanick making a similar statement, but that doesn’t mean Khosrowshahi’s ultimate goal is any less inspired by monopolistic ideals.

Uber Wants to Control Urban Transportation Data

Uber is a private company with plans to go public in 2019. It has yet to turn a profit. Khosrowshahi has encouraged investors to commit for the long haul, as his plans to diversifying the company’s transportation options will not deliver short-term profits. At the same time, his value proposition to investors has changed: Now, they have access to Amazon-like power exerted on urban transportation networks.

In his book on these new digital monopolies, Platform Capitalism, Nick Srnicek identifies the importance of network effects in increasing a platform’s value. For platforms, data is raw material that can “be extracted, refined, and used in a variety of ways. The more data one has, the more uses one can make of them.”

Uber will not only use data on its own services, but data from every third-party service offered through its platform.

Uber already has a large, global user base (and dataset). The expansion of transportation options on its platform — both its own and those of other companies — adds value for existing users while attracting new ones interested in getting around by anything other than a car. New modes of transport and a growing user base will produce more data, showing the company where more people are going and how additional transport modes are used. Uber will not only use data on its own services, but data from every third-party service offered through its platform. All of this data feeds a flywheel that will improve Uber’s service exponentially over time.

In a recent interview with TechCrunch, Khosrowshahi was asked why he was allowing other services onto Uber’s platform. He likened it to Amazon offering branded products while letting other businesses sell their products through the Amazon marketplace. He left out how Amazon uses its sales data to see which third-party products are selling well and make cheaper versions of its own, undercutting the original product and leaving its seller with no means of challenging Amazon. Will Uber eventually do the same to Lime’s scooters or Getaround’s car rentals? It’s not impossible to imagine.

Cities Need to Act Now

City governments around the globe have struggled to effectively regulate ride-hailing apps, but there’s been some recent progress. In August, New York City passed new regulations limiting the number of ride-hailing vehicles, at least for a 12-month period as it further studies the issue. It will also ensure that drivers are paid the minimum wage of $15 per hour with a bit extra to cover vehicle costs.

Another regulatory bright spot: bikes and scooters. Having learned their lesson from letting ride-hailing companies evade regulation, city governments were quick to develop policies for new micromobility services. Mayors make it known that they, not tech companies, had ultimate authority over what happened on city streets.

As Uber sets out to capture a significant chunk of urban transportation data with its new Amazon-inspired platform model, city governments need to make clear that data from activities occurring on the street is not proprietary information. This data belongs to the people as represented by their government. Uber should not have a better idea of how different transportation data modes are operating than governments themselves.

Under Khosrowshahi’s leadership, Uber’s tone has undoubtedly changed — probably for the better. Bikes and scooters will likely capture a significant portion of the ride-hailing service’s current users. However, Uber’s push to become the world’s dominant transportation platform is cause for concern. City officials must establish their right to transportation data. At the very least, they should build publicly owned alternatives that serve the interests of residents — not multinational companies.

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