Currently around 15-20% of sales are done online (this is a rough metric for retail brick and mortar vs. e-tail). Instead of bothering with the exact metrics the interesting thing isn’t the future (likely grows to 25% to 30% etc.). The more important item here is that it used to be 0%. So if you got in early with a basic website selling something high margin (anyone remember ring tones selling for $0.99!), you made a lot. Why? Well to go from 1% to 2% is 100% growth at minimum assuming the entire market is the same size each year (hint the total market actually grows).
Less Fund Raising Barriers: This is one the main reasons why we would not go into a fund raising position at an investment bank, venture capital firm or even private equity. Unless you *already* have relationships, fund raising has changed dramatically over the past 20 years. Back in the year 2000, the idea of fund raising millions of dollars for your video game idea, movie, or tech start up would be a pipe dream. In 2020? This is not only feasible but it is likely cheaper as well.
If you can establish a small amount of trust though an online presence and generate content that’s either informative, helpful or applicable you’ll obtain a decent number of loyal followers. Assuming that these individuals would contribute $100…. you’ll see that raising money without giving out large amounts of equity becomes possible.
What is the conclusion here? Try to use these new avenues and you should avoid using the old avenues (tons of costs). Giving away equity, paying large fund raising fees and diluting yourself overall is not a wise decision (long-term). If you continue to operate 10-20 years in the past you’re going to lose hundreds of thousands of dollars (even millions) over the course of your life.
Automatic, Systematic: If you’re not looking to automate every task possible, you’re at most risk for automation yourself! Why? Well if you stay on top of automation you should be able to drive higher operating margins, free cash flow yield and revenue/headcount. These are critical metrics as the past was built on “human capital”. Human capital drove the belief that managers should be paid a lot more since they have the headache of 1) managing egos, 2) incentivizing the right people and 3) making sure all of these people are doing their jobs correctly. In 2020, these concepts are becoming much more dated.
In 2020, you want to drive higher operating margins and sales growth with a limited number of people. The bigger you get the bigger your margins should become unless something has gone wrong. This would have sounded insane back in the year 2000. Back then the belief was that some people were not good generators and were only good people managers. Writing that concept out now just seems laughable at this point.
We now have hundreds of thousands of middle office managers who are adding zero value and soaking up a ton of the OPEX budget. Get with the times and automate away their positions. It sounds ruthless but if you don’t do it, your competitor will. Your competitor will then drop prices as well and run you out of town for good.
A simple example is running a budget. Back in the old days an actual person would track receipts and spending per person and flag strange behavior. These jobs paid decent wages even though software can do this much better (for free). Take a basic free software tool like mint and you’ll see why it no longer makes any sense. You should code in a specific budget per person, shipment and transaction so that the item cannot go through without approval. Sure there might be a loophole or two that you miss, but you’ll catch them over time as you review all expenses per person in a line-by-line statement. Why do things the old way when it costs more in time, money and resources? Doesn’t make any sense at all.
Social Media/Marketing Budgets: If the 2016 election taught us anything it is that social media is the new media. It’s strange that many people did not realize that was the official passing of the torch to social media (internet based). Social media is designed to be addictive, fast and easy to track. You even have main stream media outlets relying on social media to simply come up with content for their shows.
Again you’re either going to use this to your advantage or you’re going to be used by it. From what we’ve seen over the past 10 years? There are really two types of people. 1) a person who uses it to make money and 2) a person who uses it to consume. You can guess which one makes more money over the long-term. With a simple Facebook/Instagram page and a few hundred dollars in ad spending… you’ve got enough eye balls to begin attracting attention if you flag your new business to all of the contacts in your cellphone as well.
You’re going to learn about marketing at some point. Even established companies like Coca Cola are consistently spending money on marketing. Practically everyone in the world knows the brand. And. They spend to make sure they are always on top. Staying on top requires looking at new avenues and not knowing how to use social media if you’re a young company is a death sentence at this point. (We’ll delete all the exception to the rule stories from the comments section as they continue to miss the point and will fail long term by copying the rare exception)
Research Tools: Assuming you’re good at learning by yourself, there is practically no task you cannot learn. Back in the year 2000 people said things like “it’s easier for kids to learn languages so you shouldn’t try after age 20”. Something along these lines. Those mental barriers are now broken as you can easily obtain all content in a foreign language to practice your skills and you can get online classes for cheap (sometimes free).
It doesn’t stop there, it includes coding, math, science, health, athletics, gardening, construction, knitting…. the list is endless. Since the internet is cheap, most people will use it for entertainment, consuming things like porn and TikTok videos. The average person cannot understand how learning is fun and they cannot comprehend enjoying the process of expanding your skill set. At this point, we’re actually bored when we sit in front of a screen to watch something. The only reason for it? As you age your energy levels do come down so you’re forced to consume a bit more than when you were 21. At age 21 you could be in full production mode 24/7/365. At age 50 or so, that’s just not feasible as your body is not going to be able to lift and sprint for 4 hours a day like it could at age 21.
Use Technology to Connect: It would be crazy to look locally when building any internet/e-commerce type business anymore. Prices fluctuate wildly across geographies and the quality is easy to test and control. You should take advantage of this when looking for any task from design to virtual assistants. In fact, if you hire locally the chances of failure is higher since you’ve decreased your candidate selection to a tiny population sample. Come up with basic tasks to mimic the job, that’s the “interview” and then decide from there.
In addition to connecting, you should be able to monitor a lot easier. Since we’re entering into a world where KPIs can validate results of almost any industry, you want to steer clear from hiring into non-performance tasks. If you can’t validate the value, it is best to avoid especially if you’re starting something new. Sales is the most obvious as you track conversions and decide who is good and who is bad. If you have basic tasks that need to be done you run a simulation of the tasks and see who can do the most with the least number of errors. If you’re hiring someone based on skills that can’t be tracked, you should probably curb that hire/outsourcing task for now. Over time, positions that cannot be tracked become popularity contests that are unprofitable.
Implement Advanced Technology: At this point, you should be familiar with basic concepts like photoshop and CGI. If you really want to drive down costs, increase margins, increase profits and push out your competition, you must test new technology. This means you can replace your paid photos with digital ones since they look near-human at this point (hint: there are ways to get this to work where no one can tell the person is entirely fake/a bot). You should certainly cat-fish as an attractive woman for all of your customer service emails and you should certainly use machine learning to target your audience.
If any of those items seem new/confusing that is not a good sign. It is a bad sign because it means you don’t have anything that will allow you to scale a bit faster than your competition. Remember. Anyone in the industry is already bogged down by putting out other fires (customer service, old technology breaking etc.). The one benefit of being new and young is you can make a lot more mistakes without suffering a serious penalty. By the time you figure out how to optimize it, the 200-400 people you annoyed with poor photos/design won’t even remember being on your e-commerce website.
Replace or Be Replaced: This is the cold hard truth at this time. Every single manager wants to improve operating margins without impacting sales. They are constantly looking for ways to reduce costs without any impact to top-line sales. This means you should operate in the same manner. On a weekly basis (at minimum) you should ask yourself if any of the tasks you did that week can be automated. If it can… or you think it can… you have a new weekend project.
People laugh at this idea and these same people are shocked when their entire business/income stream is automated. By consistently looking for ways to replace current tasks, you are able to save 10-15 minutes per week every week. This sounds like nothing until you realize it results in 50+ hours saved per year (over 5 full standard working days per year). You fill those free hours with new tasks and iterate over and over and over again.
If you want a simple example just look at Amazon Go. Everyone thought self check-out was an insane innovation to save time. Amazon said “F that” we’re going for the jugular. Now in certain cities you have full automatic shopping. Scan in pick up things and leave. If you place something back on the shelves it automatically takes it off your bill. That’s real innovation. You’ve now saved 5-15 minutes or so per person. People waiting around in lines and paying for goods.
Conclusion – Don’t Bet Against Tech: If you want a sure fire way to lose everything, hang out with people who constantly talk about the good old days. Talk to people who believe that tech won’t work and talk to people who refuse to adapt. You’ll feel smart hanging out on the Titanic for a couple weeks but when the iceberg comes the party ends abruptly. As they say money is made slowly and lost all at once. From this you can see we’re positive on the use of tech for 1) ads, 2) fund raising, 3) machine learning, 4) displacing repetitive tasks with code and 5) advanced visualization functions. As usual we could be wrong. That said, we wouldn’t bet against these five and would continue to monitor them to reduce all of your costs and improve sales/profit margins.
Next Q&A will be on Friday July 24.
Newer Readers: For those that are unfamiliar with our blog we have three high quality products in order: 1) Efficiency, 2) Triangle Investing and 3) Spending for Maximum Return. In order, you learn how to make a good amount of money (a million liquid within 10 years or so), how to correctly invest it and finally how we’d avoid blowing it all with intelligent spending and PED use to improve quality of life. We hold Q&As 1x a month for purchasers only.