|Musings from Jay Weintraub, Customer Acquisition Strategist. Currently, Founder of Grow.co. Previously Founder of LeadsCon.
As conversation around the tech correction heats up, many of the conversations have focused on "burn rates."
What Is A Burn Rate And Is A Burn Rate Bad?
Those in startups (especially venture funded ones) with exposure to the p&l, will be very familiar with the notion of a burn rate. The term is a euphemism for how much a company loses (generally expressed as a monthly amount). Along with their burn rate, you will also hear companies refer to how many months or years of cash they have remaining at their "current burn rate."
A high burn rate is not necessarily a sign of a bad company. Many companies today and in the past would have run out of money had they not sold, had investors continuing to write checks, or exited to the public markets. This includes Amazon, YouTube, and Twitter. The vast majority of companies, though, won't be as fortunate to have seemingly never ending funding to see the vision out to profitability as Google did with YouTube.
A seemingly never-ending supply of money is nice when it happens, but it is a very precarious position in which to put yourself. And it is simply not a realistic position for the vast majority of stratups, even though many are essentially binary bets for their investors. That is, the investors either expect it be a big winner or go to zero.
The burn rate conversation is focused not on the odds of a successful outcome but changes to their spending habits that keep the company at bat longer and less likely to need to go back to the till, which if predictions hold true, will be drier than it has been and as such a rude awakening for many.
Moving Away from the Burn Rate Conversation
While I run a startup and have invested in more than two dozen (don't tell that number to my wife!), as I'm not a professional investor, I am in no position to offer guidance on what one's burn rate should be. Instead, I would like to reframe this conversation in a way that almost anyone could identify. And that is by focusing on revenue, specifically customer concentration.
Although obvious, I think it is still essential for every company, especially young ones to understand their customers as much, if not more than their expenses. A simply way to do this is to say, what happens if we lose our top two? Our top five? It is important for a company to know how many companies make up 10% of its revenue, 20%, 50% and so on.
The next step beyond having a grasp on one's revenue concentration is to understand the companies that are spending with you. This is what many didn't understand or see coming during the 2000 internet crash. They might have had many customers. The problem, though, was that all of the customers were the same. It is equivalent of owning many stocks but all in the same sector, such that any sector changes will impact your entire portfolio more than the market as a whole.
A commonly referenced statistic is that 75% of venture funded companies fail. If one's clients are all venture funded, you might be in a position to lose 75% of your business. Even if your clients beat the odds, they might still view you as non-core to their spend. That was certainly the case in the early 2000's. Seeing the carnage pile up, traditional brands and agencies pulled back on all digital spending, hurting all digital companies. That could very well happen again. If big brands decide that spending on social should be tweaked (i.e., cut), even if they cut budgets by 5%, it will mean billions in lost revenue for the ecosystem.
We have seen huge investments - both by investors and companies as clients. There is clear value and amazing things happening, but it doesn't mean that there aren't potential points of exposure. Understanding those points of exposure - both expenses and income - is a first step to being ready as a company for any changes.
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My wife and I have 14-month-old fraternal twins, son Ryan and his younger sister by 11 minutes Madeline.
Other parents have shared with me how awe inspiring and impossible to understand the development process is. I find it doubly so with two kids who share 50% of their DNA but seemingly nothing else, excluding my wife and I as parents.
Most people who see them remark on the obvious external differences, Ryan with his curly hair and brown eyes, Maddie (as we call her) with straight hair, fairer skin, and bright blue eyes. From the shape of the ears to the structure of their toes, looking at them is like looking at a game of Mr. Potato head where two siblings managed to pull their parts from two different parts bins.
Their internal differences, those that my ninth grade biology class cannot help understand, fascinate me as much, if not more than any external difference. We see behaviors common to both because of their age, but I am amazed at the differences in how they process and express what they learn.
My son reminds me of me – sensitive, silly, linear, and determined. My daughter must take after her mother given that her problem solving that already tops mine and as my mom tells me, has patience and calmness not seen in my unless cartoons were playing. Maddie just figures things out without having to try and understand each of the components. I love my son, but I’m often in awe of our daughter. She doesn’t sit there and do what makes sense because it is the obvious way to do so, nor does she hit a wall and keep trying the same thing again and again until deciding to take a different tact.
According to my mother, I was indeed a lot like my son as a child. I suspect then that he too might develop into being an idea guy; whereas his sister, is more like the hacker. He will wonder why things are the way they are, and she will figure out how to use what exists to get things done faster, cheaper, and better.
Like other idea people, no topic seems unexplored, from a better bathroom experience to those inline with my current efforts, such as ideas for new conferences or event technology. Some I will share; others, I still think are so good they deserve to be locked up in my head waiting for that moment when someone else does it, but where I at least get to say – I had that idea.
Those ideas that we don’t share, are they really the best ideas; or, are the best ideas those that you could share because no one else can pull it off as well as you? As much as I’d like to say it has to be the former, the truth is probably closer to the latter, at least for the ideas that matter. If it’s an idea you can’t share because you don’t want someone else to do it, there is probably a chance you aren’t the only person with the idea or even the best person to pull off the idea.
That notion, that the best ideas might be those that you could share, is what has taken me far longer than I hope it will take my kids to understand. The true value of any idea only comes when it gets executed. Similarly, the success of the idea rests not in the idea but how well it gets executed.
In “Idea Versus Execution A Tale of Two Founders,” I wrote:
In thinking through ideas versus execution, there are three things I've had to come to terms with personally. The first is that I'm an idea guy through and through. The second is that a large number of my ideas exceed my ability to execute, and the most difficult is that almost all of my ideas have been thought of first by others. The ONLY thing that matters is who executes best - not even first but best. For idea guys, this principal can be painful, because it means learning to let go of ideas and realizing that ideas aren't where the value is.
So, why are we still so hesitant to hang on to our ideas? Is it because we truly think that we are the best person for the job, or could it also be something else, i.e., the power of hope the way buying a lottery ticket fills you with promise despite the near-impossible odds? Only in this case, the idea is a perpetual lottery ticket that you can hang onto without having to hear multiple-times per week that you have not won. And even if you lose, i.e., someone else does it, you still get to feel as though you accomplished something by its clearly having been a good idea.
Speaking of hope, this (finally?) brings us to Angry Anthony. Granted, talking about Anthony as an example of an idea guy is slightly extreme and/or depressing, but it does help illustrate the value (or lack of inherent value) in the idea. I call him “Angry Anthony” (well, not to his face), because he is a rather vitriolic sort. He is white, in his forties, and an ex-con. If he finished high school, it does not show in the spelling or grammar of his signs.
Anthony was born and raised in Upstate New York, which like the parts of California not within 75 miles of the Ocean or major metro, resembles a completely different world – one that typically has less transparency about how to escape a world of seemingly limited opportunities. So, it is an unfortunate cliché that Anthony was drawn to the glamour of crime, which in the short-term provided greater excitement and access than the slower, less certain paths. His path though meant at least eight years in prison for a non-violent crime and forever carrying around a felony conviction. Not that he seems all that remorseful, more nostalgic for the days when he had things and experiences worth remembering.
I have already dedicated more cycles than I should to thinking about Anthony, be from a marketing perspective of wanting to A/B test his signs to the cadre of classic curiosities around ways to break the cycle. It’s his ideas that are the most interesting, because like so many ideas, they don’t actually suck. His signs clearly do, as “If I were illegal, I would be working,” is not the sympathy inducing fare likely to win wallet share when up the street sits a man with 1.5 legs, even though his use of funds has some very suspect applications. Add to that Anthony’s views on homosexuality and gender equality, and it whittles down the pool of sympathizers in the form of money. He is though truly homeless, and I’ve not seen him drunk or on any form of drug other than nicotine.
The first idea I heard from Anthony was his wanting to see a KISS themed hotel. He believed that certain brands had enough pull that people would rather stay at a hotel with that brand’s likeness than the one-size fits all approaches of today’s hotels. Would True Blood fans want to? Why not? Maybe this is called Universal Studios, but clearly there is something not completely idiotic about the concept. Anthony even had met someone that was a developer and another person that worked for the KISS brand.
His most recent idea is almost an ad-tech one. It’s essentially an offline ad network leveraging building real estate that in NYC is currently overlooked/underused. If there exists a business painting the sides of buildings with ads, this one can surely work too. He event knows one of the companies that could facilitate (think ad server) were the two sides of the network put together.
Would you pay for this idea? Would you work on it and give some percent of the profits to the idea? It’s arguably not patentable, and even were it patentable, he couldn’t afford to do so. It’s an interesting conundrum that helps illustrate when ideas have value and when they don’t.
In the past, I’ve proposed an Idea Marketplace. With Angel List, Quirky, Kickstarter, etc. we are getting close, but we aren’t quite in a place where an idea can lift someone up from the streets. Hopefully, for Anthony, the “I’m sweating my balls off” sign will perform better than usual.
My treatise of all treatises has been interrupted this morning by something much more mundane, a customer service call with United Airlines.
Fliers like me fall into a funny category. We are the hard to measure incremental dollars. It is exactly what a loyalty program should capture, but it's not easy to track what that actually gets the program provider. My back of the envelope math suggests that United made $2,000+ incremental revenue of me each year. That's the amount I could have saved by flying the better route and the better price on a different carrier. Instead, in the aim of maintaining my status, I flew on United.
For the past twelve years, I have hit Gold, which on most airlines entails 50,000 miles. The big difference for me is that most of the miles were spent as though it was my money. A good 70% were business travel, but it was for my business, so each trip was evaluated and each dollar mattered. The extra dollars I could have saved would have been felt, versus the more coveted travelers whose companies pay or the most coveted travelers, consultants, who get other companies to pay but keep the perks of flying the most expensive class of tickets.
No Status for You!
On my customer service call looking into two fees that I had never had in the past, what I found out is that I have no status for 2014. I flew 24,497 miles in 2013, which is 503 miles short of the lowest level, Silver. There was a site that allowed travelers to pay for miles to get them to the next status level if they came within a certain number of miles. I feel like I saw a piece of direct mail about it to my wife.
My error? I assumed. I assumed that my loyalty was automatically worth something. That it would be recognized and rewarded by at the very least a bump to Silver. How foolish ultimately, as the rules are the rules. All I can think is how nice to be so spoiled and entitled as consumers to find this strict adherence to clearly marked rules unacceptable. But that's the new customer service reality. It is no longer about adhering to your rules. It is about performing up to the new global standard.
Now that I have zero status, I have zero incentive to stay loyal. I might has well see what is the best return for not only the $2,000+ incremental dollars but the annual travel budget. It's one thing if the company offers the best of the best, but in United's case they are lacking in so many ways, for example:
As it's easy to my ego protective state of assuming I mattered, I'll bypass a few more woe is me comments and skip to what I'd do if I were them.
1. Know Your Customers
A) Look for people who have obviously shown loyalty and bucket them, e.g., 2 or more years, 5 or more years, 10 or more years. Have a few basic criteria for each bucket, e.g.., minimum status level, maximum status level, and average status level. Goal: simple but meaningful segments
B) Their customer service history - number of times called, issues unresolved or escalated, refunds processed, etc. Goal: how resources intensive are they and are they introvert customers or extrovert customers.
C) Get some sense of their digital self - are they connected, public, chronic complainers, able to offer real insight. Goal:
D) Assign a score or have multiple scores based on miles, dollars, consistency, service, digital; make the data simple to read and intuitive. Goal: a universal way for anyone to understand a customer in one quick look.
E) See What They've Received And Score It- when was the last upgrade? Average number of perks (e.g., upgrades) last year, in the last x years. Goal: have they been rewarded and are they feeling loyal. Create an index of perks to x (trips or miles) so you know their sentiment.
F) What What Has Changed in Their Life - Are they buying for different people? Did they go from one ticket on non-business trips to two or three or four (like us with twins)? Maybe they didn't get an upgrade because they started flying with their wife and didn't want to be separate? Maybe they have had a kid or kids. What has the data said about their flying change. Did they relocate? A lot of this data is easy and inexpensive to append. Goal: Combine other relevant data to act as triggers and ways that let you take action in a way that feels more personal than messaging by status level.
2. Look for Deviations
Set alerts for any changes or the possibility of change. The data will tell you what a person's typical frequency is. Are they not taking certain habitual trips? Have they started to trend differently? Goal: Know almost before they do what may be happening so that you can take action.
3. Take Action And Proactive Acts of Kindness
Let's take someone like myself who has given 10 years of loyalty for what used to involve an upgrade or two (until the program changed and my route no longer qualified for free upgrades) and earlier boarding (now available for $300/yr via a credit card). In my case, they could have, in an ideal world, given me a year free of status in recognition of past loyalty and life events. Or, they could have sent me a note about my status and instead of saying click here to pay, they could have just given me Silver. Finally, they could have actually been proactive about communicating my shortage instead of assuming that I knew exactly where I stood. Just as I shouldn't have assumed, I don't think they should have either. With data aggregation and triggers, they could help create loyalty - timed discounts along with unexpected but appreciated rewards - from status to lounge visits.
It's easy for me to suggest what should be done, but United is a huge corporation, that despite the pretty pre-flight videos, has to operate on the lowest common denominator. That means individual employees are not empowered to help individual customers. Empowered is a culture change, it's a management change, and it means an incentive structure where service matters. Is it possible? Absolutely. Just look at Chase Bank or Best Buy. I actually have loyalty to a bank, and why? No special program but an intense culture change that has saved me some money, some time, but more than anything makes you not loathe a commodity business.
If a 20 year pilot whose airline goes under must start from zero at a new airline, do I really expect less mission critical pieces to be better run?
In 2002, if you took a look at the lead generation landscape, it would have consisted of one main vertical - mortgage and one up and coming vertical, for-profit education. A dozen years later, the lead generation has undergone some radical transformations, from sector diversification to smart uses of technology to connect users with companies more efficiently.
Both mortgage and education exist, each, though looks very different today than before. On the former, we can argue that the recent financial crisis set the industry back. Consumer demand remains strong, but the legislation changes along with interest rate sensitivity, mean that companies cannot come close to fulfilling the consumer demand.
The changes that have taken place in the education space are equally fascinating, and the issues equally charged. It's a topic that I certainly have thought about since going from first-hand marketer to industry organizer. As the operator, I understand the marketer's maniacal focus on demand generation. As a semiofficial liaison for the industry, I understand the macroeconomic and political factors that have translated into not just increased scrutiny but inappropriate labeling of the industry.
I'll admit the slight stretch, but in many ways the business of education is not dissimilar from medicine. At their core, they are helping people live better lives. Like any large, complex, and emotionally charged sector, it is very easy for those on the inside and on the outside to form divergent opinions. And, it is possible for both to be correct. We are seeing it in medicine and certainly within the education sector.
For the uninitiated, the for-profit education sector contains both degree granting institutions and non-degree granting institutions. Of the two, the degree granting institutions are the ones that have garnered the most attention. They include institutions with no central campus, like University of Phoenix, that began with a specific focus on underserved students (working adults) to partnerships between your traditional schools and companies who help them leverage the brand to create an online, profit generating division of the "non-profit" school.
As I've learned by being around education industry, once you attach for-profit to something, it becomes charged, and even more so in education. The term is really a misnomer, and it's unfortunate. Currently, though, the discussion surrounding education has become so embroiled in partisanship that having a meaningful discussion about it can be difficult.
The government loan issue is a tricky one, and for better and worse, it makes innovation trickier because the degrees must conform to accreditation guidelines. It's the same issue surrounding all traditional education and the debate whether what is taught at traditional higher education institutions prepares people for the jobs.
Flying under the radar in some respects are the non-degree granting institutions - the scammy ones being mail-order fraud but the real ones providing skills training, e.g., truck driving. It's a segment of the market that has escaped debate primarily because it is typically private pay, that is, students do not qualify for government backed loans.
The under the radar area is anything but under the radar with respect to their impact, not just on the traditional jobs but some of the most in demand fields, programming and user design for example. Getting a job here does not require a full degree. It requires very specific skills, ones that are able be distilled and taught in a condensed period of time.
Programming was and is taught at degree institutions. With the volume of shared data online - most importantly libraries allowing programmers to quickly use pre-written code - the timeframe for learning has decreased and ability to do things with that training has taken a leap forward. Instead of four years, a person can spend three months of intensive training and be qualified enough to be the equivalent of a paralegal or better depending on the student.
These programs, referred to as immersives/intensives, seemingly have sprung up from nowhere. The first was General Assembly in New York, and today the field contains 70+ institutions, more than half of whom have formed in the past twelve months. Like any new education discipline, it just sort of happened, but the more business savvy realized that they were on to something.
The course fees are anything but trivial, averaging $10,000 or more for the three months. But, the current market demand for the skill and subsequent placement rate means that the $10,000 becomes a pretty calculable ROI for students, many of whom upon getting placed will earn back the money in the first year. Even if they earn back the money in three year's, that far exceeds the ROI of most other education.
What I saw watching the space was something akin to the education industry in the 90's and early 2000's. I had a scratch pad of a site that would compare the schools and aggregate the information to assist with the student discovery process. Two years later, not having actually done anything with that paper, I decided instead to back a startup that had the same idea. It is called CourseReport.com, and for hard core lead gen folks, it's directly approach will appear familiar, but instead of just aspiring to be a discovery platform, they want to help be an end to end play for the student.
It will be fun to see where this space goes. No doubt the "big guys" of for-profit education are already hard at work at looking into this space. More than anything, I hope this space will continue to do what it has started to - providing education that is actionable and employable.