Let’s say you’re driving when you come to a fork in the road and don’t know which way to go. So you pick one and drive on. An hour later you realize you’re going in the wrong direction. What do you do?

Like most people, you turn around. You don’t say “Well I’ve invested an hour in this road, I’m going to make it work. Commitment to my goal will get me there.”

Let’s say you paid for tickets to the theater and the afternoon of the show an old friend from out of town shows up and wants to buy you dinner. You’d rather spend the time with your friend than at the theater. What will be the financial difference to spending time with your friend vs going to the show?

It makes no financial difference at all.

Yet, most people find it emotionally easier to give up the wrong road than to give up the money spent on tickets. Why? because emotionally we don’t understand sunk costs. It gets worse.

Let’s say you invested $20,000 in a machine to make widgets because you want to add a line of widgets to the framuses you already sell. Then you find out that people who buy framuses don’t want widgets. And you realize you might have to spend another $50,000 to find widget customers – and maybe more. Besides that, even if you find them, widgets aren’t as profitable as framuses. What should you do?

Don’t Succumb to the Sunk Cost Fallacy

That’s the voice in your head that says “I can’t stop now or everything I’ve invested so far will be lost.” The truth is it’s already lost. Losing more won’t bring it back. You spent an hour going down the wrong road. Going further won’t get it back. You spent the money on the theater tickets. Depriving yourself of time with your friend won’t put the money in your pocket. Same way with the widget machine.

It’s hard to do emotionally but consider this. Only future costs are relevant to an investment decision. This includes investment in time as well as money. Only future costs. Past costs are sunk. Don’t let them become an anchor.

It takes commitment to build a business – or for that matter, to build anything. But what exactly does that word mean? I’ve been thinking about it lately and I’ve come up with this short cut.

Commitment is not measured by how strongly you feel about something, but by what you are willing to give up.

At one extreme there are causes and beliefs and people that folks are willing to give up their life for. At the other extreme sometimes you’re not willing to give up your seat on the couch for something. We often hear talk of pursuing your dream relentlessly as if commitment is the only thing you need for success. But I’ve pointed out before that crazy people are committed too (pun intended). If you’re old enough (or a long time reader) you’ll know where this picture is from and why I chose it.

I believe the problem is not the level of commitment, but the mis-match of commitment. The relative (rather than absolute) level of commitment.

Some businesses require more commitment than others. It’s often a function of context. If you’re in startup mode, or if there’s a lot of uncertainty in your market, then the level of commitment needed to succeed is likely to be high. If you’re executing on a plan that’s been working well for a while, then maybe you don’t need to give up so many weekends to keep things going – it requires less commitment.

What you give up may be more important than how much.

We’ve all heard about successful companies that get complacent – their plan has been working so well they’re no longer willing to give up the old ways of doing things. Then another company comes along and eats their lunch. In these cases the successful company maybe more willing to give money and even time to the problem. It’s just that what’s needed is to give up something else: old habits. Here you can measure commitment by willingness to give up old ideas and practices; not by willingness to give up money or nights and weekends.

This is why we say to startups when getting out there with an MVP, “Find those early adopters.” They are more willing to give up some of the niceties and features that less committed (more mainstream) customers will require. You can deal with them later: after you’ve found a business model that can scale.

Business partners and especially co-founders need to match their level of commitment: to each other and to the requirements of the company. If they assume a willingness to give up equivalent  levels of money or time and that proves not to be the case, it’s a recipe for trouble. This is why investors encourage founders to  have a vesting schedule. If things change and someone’s level of commitment to the company wanes, then their compensation (in the form of stock) should as well.

Takeaways:

• Commitment is measured by what you’re willing to give up.
• You have to match the level of commitment to what’s required by the situation
• Make sure there’s an appropriate level of commitment among all business partners – over time.

Mark Suster just posted a great piece on taking time to THINK as an Entrepreneur.

Here’s the money quote (paraphrased)

 1. I think the best leaders are Thinkers. They often need teams of people to help them Plan how to turn their ideas into realities.

 2. The best managers are Planners. They are really good at creating lists of actions and monitoring performance of those actions. Manager isn’t a bad word. They are the absolute lifeblood of any organization.

 3. And the best individual contributors are Doers. This can be … your star salesperson who doesn’t want to have to manage a team because he simply wants to earn his paycheck and get on with his life.

 But read the whole thing. There’s a lot more where that came from.

And then THINK if you have enough of the right people on your team.

People who are not seasoned in sales often think discounts are more powerful than they are. As a result they end up giving away things they don’t need to. Here are some tips on using discounts.

Rules for Giving Discounts

1. In a negotiation, never lead with a discount or offer one without a quid pro quo.
2.  An unexpected discount is a great thing to give as a surprise (not a negotiation) especially when someone has done something nice for you, or you’ve fixed a problem for them. This engenders loyalty.
3.  Again, in a negotiation, if someone asks for a discount, you can always say no and see what happens. Many people (myself included) routinely ask just to see if they get one. It doesn’t always mean they won’t buy without it. There’s a hint for what to do when you’re on the buying side.
4.  If you say no, and they back off, be prepared to offer a discount but in exchange for some concession from them: higher volume, slower turn around, referrals – something. Otherwise it gives the impression that your discounted price is the real price and the higher price is a rip-off.
5.  Whenever you do give a discount (even when it’s 100% – you’re giving something for free) invoice at full price and put the discount on a separate line item. It reinforces the fact that your discounted price is not the real price and it reminds people what you’re doing for them.

CEO and Policy

As CEO, you should have a policy about discounts so that they are applied consistently in your organization. It should mention who can give discounts and under what conditions. This doesn’t mean you shouldn’t let individuals use their judgment – you should. But the limits of that judgement should be spelled out. For example, you might say “If a sales person feels a discount will help close a sale faster they can give a discount of up to 5%”

The benefit of stating a policy that way is now you can run some tests. Do deals really close faster with a discount? Do larger discounts result in deals closing faster than smaller discounts? If so, by how much? When is it better for the company to not give a discount and have a deal take longer? These are the things you think about as CEO.

If you are pitching a startup or business idea to me please use this format:

I / We are

Selling / Designing / Making /Thinking about

[use a verb that indicates what stage you’re at]

A Device / App / Consumer Product / Medical instrument

[use a noun that indicates what your product is and don't say SOLUTION]

That will allow

Sales VPs of Fortune 500 / Women over 40 / Left handed First Basemen

[use a noun that defines your customer]

To

Drive Faster / Clean up their email faster / Kill bugs cheaper / Travel through time

[use a phrase that explains what the customer can DO with your product that they couldn’t do before.]

That’s IT. No Buzzwords, no jargon. If your 8th grader can’t figure out what you do then don’t waste my time with it.

[UPDATE] After reading Brad Feld, I’m willing concede you may need 2 or 3 sentences to do this well, but not more than a paragraph. If it takes longer than that, you haven’t put enough prep time into it. And if you haven’t done that, why should I spend my time listening to you?

The answer to that question is an opinion. Yours, mine or someone else’s.  It’s been said that opinions are like rear ends – we all have one and they all stink.

Here are some facts about Obamacare.

I didn’t write this post. Everything beyond this paragraph came from Reddit. But I did serve on a working group for the Connecticut State Legislature on the topic and I believe it to be factually accurate.

What people call “Obamacare” is actually the Patient Protection and Affordable Care Act. However, people were calling it “Obamacare” before everyone even hammered out what it would be. It’s a term mostly used by people who don’t like the PPaACA, and it’s become popularized in part because PPaACA is a really long and awkward name, even when you turn it into an acronym like that.

Anyway, the PPaACA made a bunch of new rules regarding health care, with the purpose of making health care more affordable for everyone. Opponents of the PPaACA, on the other hand, feel that the rules it makes take away too many freedoms and force people (both individuals and businesses) to do things they shouldn’t have to.

So what does it do? Well, here is everything, in the order of when it goes into effect (because some of it happens later than other parts of it):

Already in effect:

• It allows the Food and Drug Administration to approve more generic drugs (making for more competition in the market to drive down prices)
• It increases the rebates on drugs people get through Medicare (so drugs cost less)
• It establishes a non-profit group, that the government doesn’t directly control, to study different kinds of treatments to see what works better and is the best use of money.
• It makes chain restaurants like McDonalds display how many calories are in all of their foods, so people can have an easier time making choices to eat healthy.
• It makes a “high-risk pool” for people with pre-existing conditions. Basically, this is a way to slowly ease into getting rid of “pre-existing conditions” altogether. For now, people who already have health issues that would be considered “pre-existing conditions” can still get insurance, but at different rates than people without them.
• It renews some old policies, and calls for the appointment of various positions.
• It creates a new 10% tax on indoor tanning booths.
• It says that health insurance companies can no longer tell customers that they won’t get any more coverage because they have hit a “lifetime limit”. Basically, if someone has paid for life insurance, that company can’t tell that person that he’s used that insurance too much throughout his life so they won’t cover him any more. They can’t do this for lifetime spending, and they’re limited in how much they can do this for yearly spending.
• Kids can continue to be covered by their parents’ health insurance until they’re 26.
• No more “pre-existing conditions” for kids under the age of 19.
• Insurers have less ability to change the amount customers have to pay for their plans.
• People in a “Medicare Gap” get a rebate to make up for the extra money they would otherwise have to spend.
• Insurers can’t just drop customers once they get sick.
• Insurers have to tell customers what they’re spending money on. (Instead of just “administrative fee”, they have to be more specific).
• Insurers need to have an appeals process for when they turn down a claim, so customers have some manner of recourse other than a lawsuit when they’re turned down.
• New ways to stop fraud are created.
• Medicare extends to smaller hospitals.
• Medicare patients with chronic illnesses must be monitored more thoroughly.
• Reduces the costs for some companies that handle benefits for the elderly.
• A new website is made to give people insurance and health information.
• A credit program is made that will make it easier for business to invest in new ways to treat illness.
• A limit is placed on just how much of a percentage of the money an insurer makes can be profit, to make sure they’re not price-gouging customers.
• A limit is placed on what type of insurance accounts can be used to pay for over-the-counter drugs without a prescription. Basically, your insurer isn’t paying for the Aspirin you bought for that hangover.
• Employers need to list the benefits they provided to employees on their tax forms.

8/1/2012

• Any health plans sold after this date must provide preventative care (mammograms, colonoscopies, etc.) without requiring any sort of co-pay or charge.

1/1/2013

• If you make over $200,000 a year, your taxes go up a tiny bit (0.9%)

1/1/2014

This is when a lot of the really big changes happen.

• No more “pre-existing conditions”. At all. People will be charged the same regardless of their medical history.
• If you can afford insurance but do not get it, you will be charged a fee. This is the “mandate” that people are talking about. Basically, it’s a trade-off for the “pre-existing conditions” bit, saying that since insurers now have to cover you regardless of what you have, you can’t just wait to buy insurance until you get sick. Otherwise no one would buy insurance until they needed it. You can opt not to get insurance, but you’ll have to pay the fee instead, unless of course you’re not buying insurance because you just can’t afford it.
• Insurer’s now can’t do annual spending caps. Their customers can get as much health care in a given year as they need.
• Make it so more poor people can get Medicare by making the low-income cut-off higher.
• Small businesses get some tax credits for two years.
• Businesses with over 50 employees must offer health insurance to full-time employees, or pay a penalty.
• Limits how high of an annual deductible insurers can charge customers.
• Cut some Medicare spending
• Place a $2500 limit on tax-free spending on FSAs (accounts for medical spending). Basically, people using these accounts now have to pay taxes on any money over $2500 they put into them.
• Establish health insurance exchanges and rebates for the lower-class, basically making it so poor people can get some medical coverage.
• Congress and Congressional staff will only be offered the same insurance offered to people in the insurance exchanges, rather than Federal Insurance. Basically, we won’t be footing their health care bills any more than any other American citizen.
• A new tax on pharmaceutical companies.
• A new tax on the purchase of medical devices.
• A new tax on insurance companies based on their market share. Basically, the more of the market they control, the more they’ll get taxed.
• The amount you can deduct from your taxes for medical expenses increases.

1/1/2015

• Doctors’ pay will be determined by the quality of their care, not how many people they treat.

1/1/2017

• If any state can come up with their own plan, one which gives citizens the same level of care at the same price as the PPaACA, they can ask the Secretary of Health and Human Resources for permission to do their plan instead of the PPaACA. So if they can get the same results without, say, the mandate, they can be allowed to do so. Vermont, for example, has expressed a desire to just go straight to single-payer (in simple terms, everyone is covered, and medical expenses are paid by taxpayers).

2018

• All health care plans must now cover preventative care (not just the new ones).
• A new tax on “Cadillac” health care plans (more expensive plans for rich people who want fancier coverage).

2020

• The elimination of the “Medicare gap”

One of the things business owners struggle with is the short term vs long term dilemma. Do we do something that will be better for our company in the long run even if it will lower our profit or capacity or increase our risk in the short term?

Politicians face this dilemma in a slightly different form. Can they take a stand for something that most of their constituents want, even if it means alienating the few who contribute funds that get them elected? You can see by the declining approval ratings and by polls on individual issues that congress is often acting against the views of the majority in favor of the views of the money.

Lawrence Lessig calls this corruption – though as he notes – not in the sense of illegal bribery. But in the sense that it forces legislators to be dependent not on “the people alone” as the framers of the constitution intended but to depend also (or perhaps even more so) on funders not just voters.

He has a very interesting solution. Fund congressional campaigns with public money, in the form of vouchers that you could spend for which ever candidate you want. Make that money big enough, he says, and couple it with a restriction that candidates can’t take cash contributions of more than $100 and you’ve got a real incentive for Senators and Representatives to work for “the people alone”.

I think he’s got a point. That’s why I’ve taken the anti-corruption pledge. You can take the pledge too.

Here’s an interesting graphic of how much it cost to run for congress and who pays.

And the best explanation of Lessig’s solution and why transparency of donations won’t solve the problem is in this video and this one (14 minutes total) of Lessig talking with Jon Stewart.

Long time readers know I don’t talk much about politics in this blog and when I do it’s to point out the connection between politics and business. I can’t think of a more important connection than corruption.

I was asked a question on Quora recently, specifically about start ups but I think my answer applies to more established companies as well. Hope you’ll find it useful.

The Original Question

How do bootstrapping start-ups in New York handle accounting?
Do they have an in-house bookkeeper or a consultant? What would be a normal monthly expense for a small company with no employees (just founders)? Where could one find a reliable accountant? There are thousands on craigslist but no way do differentiate.

My Answer

It really depends on the size and scope of your operation – and especially how many transactions you need to keep track of.  Consider the difference between functions and jobs. There are a number of finance related FUNCTIONS that every business needs to perform. In large companies some of these may involve a full time department let alone position. But in super small companies they can all be done part time by one person. The functions are needed in all companies – if there’s enough work, it becomes a job.
Here’s a short (incomplete) list of financial functions.

Bookkeeping – this function records all the transactions in a timely and appropriate way. Appropriate means not only in regards to laws and such but in a way that yields the kind of reports that the company cares about. Some companies, for example, need profitability reports by customer and job so the transactions need to be entered with that level of detail by whoever does the bookkeeping.

Collections – this function needs to know who owes you money, how much and since when (thus bookkeeping has to put that info in) and works to get the money in the door. If you have a retail operation where no one owes you money, then you don’t need anyone to perform this function.

Accountant – I’m generalizing here, but this function in a small company is usually outsourced to someone who can file taxes. They may also oversee the bookkeeping to make sure it’s done appropriately. They usually run “standard” financial reports: Profit/Loss, balance sheet, cash flow. Good ones help you understand what those reports mean.

CFO and Financial analysis – This function understands how management decisions affect the cash situation of the business. They are usually responsible for raising cash (through loans or investment) to cover the cash needs of what management decides to do. Also they should be able to run reports that tie financial data to the real world: which products are generating the most and the least profit / what does it cost to acquire a customer / what is the lifetime value of that customer.

So, back to your original question. Define your needs and work load in these various categories. Decide which ones you want to handle yourself and which ones you want someone else to do. Then depending on the scope of the work either hire someone or outsource it. To determine the qualities of that someone you want to use, ask around. Ask your lawyer or even other business owners you know who are successful. Then talk with the people and see how good they are at explaining what they do to someone who doesn’t speak accounting.

Two warnings: 1)  You should always, always, always pay enough attention to your finances to understand what is going on and find mistakes (or malfeasance) as soon as possible. You can’t outsource the responsibility. So you should not have the same person responsible to record income, make bank deposits and reconcile the bank account.

2) If yours is a start-up that is likely to grow and need to raise outside funds in the future – even if you’re bootstrapping now – then you need to have the systems set up by someone who’s familiar with what the future needs will be. Otherwise you’re asking for a large problem down the line.

I’ll be on a panel on June 7th  answering “20 Questions with Great Entrepreneurs – Getting to the Next Level” Me and 3 other advisors will be sharing everything we know between 12:30 and 1:15. Really. It should be a blast. If you’re anywhere near Hartford CT that day check it out.

Register Here.

Image from Flickr user DeltaMike

FreeCause is teaching all 60 of its employees to write code. I don’t think this make sense for every company (very few things make sense for EVERY company). But here are some things the article made me thing of that you might want to consider.

How Important is Software to Your Company?

If software is a significant differentiator for your company – either part of the product or something critical to your competitive advantage – then you might consider doing this as a way to develop the right corporate culture.

Learning Sparks Communication

I have a hunch that a big part of the benefit this company will see is not from employees learning how to code but from the activity of having their tech people mentor the non-techies through the process. That kind of interaction and communication of how different groups see the world is something that really cements the interaction between different parts of the company. Perhaps you could adapt it to other areas of learning in your company. Maybe everyone should learn to sell, or how to read a financial statement or write clearly or use a spreadsheet.

Coding is a way of Thinking – so is Design.

The ability to write code hinges on a way of thinking. You look at the data in terms of inputs, outputs and algorithms. That kind of thinking is valuable in many areas besides writing code.

In some ways the “opposite” of the ability to code is the ability to design: it’s creative, and based on narrative and emotion. This article is about when designers and MBAs were put in a contest to solve business problems, the designers beat the MBAs hands down. Maybe everyone in your company should learn about design as well as how to code.