Open Source Software – Investable Business Model or Not?

Open-source software (OSS) is a catalyst for growth and change in the IT industry, and one can’t overestimate its importance to the sector. Quoting Mike Olson, co-founder of Cloudera, “No dominant platform-level software infrastructure has emerged in the last ten years in closed-source, proprietary form.”

Apart from independent OSS projects, an increasing number of companies, including the blue chips, are opening their source code to the public. They start by distributing their internally developed products for free, giving rise to widespread frameworks and libraries that later become an industry standard (e.g., React, Flow, Angular, Kubernetes, TensorFlow, V8, to name a few).

Adding to this momentum, there has been a surge in venture capital dollars being invested into the sector in recent years. Several high profile funding rounds have been completed, with multimillion dollar valuations emerging (Chart 1).

But are these valuations justified? And more importantly, can the business perform, both growth-wise and profitability-wise, as venture capitalists expect? OSS companies typically monetize with a business model based around providing support and consulting services. How well does this model translate to the traditional VC growth model? Is the OSS space in a VC-driven bubble?

In this article, I assess the questions above, and find that the traditional monetization model for OSS companies based on providing support and consulting services doesn’t seem to lend itself well to the venture capital growth model, and that OSS companies likely need to switch their pricing and business models in order to justify their valuations.

OSS Monetization Models

By definition, open source software is free. This of course generates obvious advantages to consumers, and in fact, a 2008 study by The Standish Group estimates that “free open source software is [saving consumers] $60 billion [per year in IT costs].”

While providing free software is obviously good for consumers, it still costs money to develop. Very few companies are able to live on donations and sponsorships. And with fierce competition from proprietary software vendors, growing R&D costs, and ever-increasing marketing requirements, providing a “free” product necessitates a sustainable path to market success.

As a result of the above, a commonly seen structure related to OSS projects is the following: A “parent” commercial company that is the key contributor to the OSS project provides support to users, maintains the product, and defines the product strategy.

Latched on to this are the monetization strategies, the most common being the following:

Historically, the vast majority of OSS projects have pursued the first monetization strategy (support and consulting), but at their core, all of these models allow a company to earn money on their “bread and butter” and feed the development team as needed.

Influx of VC Dollars

An interesting recent development has been the huge inflows of VC/PE money into the industry. Going back to 2004, only nine firms producing OSS had raised venture funding, but by 2015, that number had exploded to 110, raising over $7 billion from venture capital funds (chart 2).

Underpinning this development is the large addressable market that OSS companies benefit from. Akin to other “platform” plays, OSS allows companies (in theory) to rapidly expand their customer base, with the idea that at some point in the future they can leverage this growth by beginning to tack-on appropriate monetization models in order to start translating their customer base into revenue, and profits.

At the same time, we’re also seeing an increasing number of reports about potential IPOs in the sector. Several OSS commercial companies, some of them unicorns with $1B+ valuations, have been rumored to be mulling a public markets debut (MongoDB, Cloudera, MapR, Alfresco, Automattic, Canonical, etc.).

With this in mind, the obvious question is whether the OSS model works from a financial standpoint, particularly for VC and PE investors. After all, the venture funding model necessitates rapid growth in order to comply with their 7-10 year fund life cycle. And with a product that is at its core free, it remains to be seen whether OSS companies can pin down the correct monetization model to justify the number of dollars invested into the space.

Answering this question is hard, mainly because most of these companies are private and therefore do not disclose their financial performance. Usually, the only sources of information that can be relied upon are the estimates of industry experts and management interviews where unaudited key performance metrics are sometimes disclosed.

Nevertheless, in this article, I take a look at the evidence from the only two public OSS companies in the market, Red Hat and Hortonworks, and use their publicly available information to try and assess the more general question of whether the OSS model makes sense for VC investors.

Case Study 1: Red Hat

Red Hat is an example of a commercial company that pioneered the open source business model. Founded in 1993 and going public in 1999 right before the Dot Com Bubble, they achieved the 8th biggest first-day gain in share price in the history of Wall Street at that time.

At the time of their IPO, Red Hat was not a profitable company, but since then has managed to post solid financial results, as detailed in Table 1.

Instead of chasing multifold annual growth, Red Hat has followed the “boring” path of gradually building a sustainable business. Over the last ten years, the company increased its revenues tenfold from $200 million to $2 billion with no significant change in operating and net income margins. G&A and marketing expenses never exceeded 50% of revenue (Chart 3).

The above indicates therefore that OSS companies do have a chance to build sustainable and profitable business models. Red Hat’s approach of focusing primarily on offering support and consulting services has delivered gradual but steady growth, and the company is hardly facing any funding or solvency problems, posting decent profitability metrics when compared to peers.

However, what is clear from the Red Hat case study is that such a strategy can take time—many years, in fact. While this is a perfectly reasonable situation for most companies, the issue is that it doesn’t sit well with venture capital funds who, by the very nature of their business model, require far more rapid growth profiles.

More troubling than that, for venture capital investors, is that the OSS model may in and of itself not allow for the type of growth that such funds require. As the founder of MySQL Marten Mickos put it, MySQL’s goal was “to turn the $10 billion a year database business into a $1 billion one.”

In other words, the open source approach limits the market size from the get-go by making the company focus only on enterprise customers who are able to pay for support, and foregoing revenue from a long tail of SME and retail clients. That may help explain the company’s less than exciting stock price performance post-IPO (Chart 4).

If such a conclusion were true, this would spell trouble for those OSS companies that have raised significant amounts of VC dollars along with the funds that have invested in them.

Case Study 2: Hortonworks

To further assess our overarching question of OSS’s viability as a venture capital investment, I took a look at another public OSS company: Hortonworks.

The Hadoop vendors’ market is an interesting one because it is completely built around the “open core” idea (another comparable market being the NoSQL databases space with MongoDB, Datastax, and Couchbase OSS).

All three of the largest Hadoop vendors—Cloudera, Hortonworks, and MapR—are based on essentially the same OSS stack (with some specific differences) but interestingly have different monetization models. In particular, Hortonworks—the only public company among them—is the only player that provides all of its software for free and charges only for support, consulting, and training services.

At first glance, Hortonworks’ post-IPO path appears to differ considerably from Red Hat’s in that it seems to be a story of a rapid growth and success. The company was founded in 2011, tripled its revenue every year for three consecutive years, and went public in 2014.

Immediate reception in the public markets was strong, with the stock popping 65% in the first few days of trading. Nevertheless, the company’s story since IPO has turned decisively sour. In January 2016, the company was forced to access the public markets again for a secondary public offering, a move that prompted a 60% share price fall within a month (Chart 5).

Underpinning all this is that fact that despite top-line growth, the company continues to incur substantial, and growing, operating losses. It’s evident from the financial statements that its operating performance has worsened over time, mainly because of operating expenses growing faster than revenue leading to increasing losses as a percent of revenue (Table 2).

Among all of the periods in question, Hortonworks spent more on sales and marketing than it earns in revenue. Adding to that, the company incurred significant R&D and G&A as well (Table 2).

On average, Hortonworks is burning around $100 million cash per year (less than its operating loss because of stock-based compensation expenses and changes in deferred revenue booked on the Balance Sheet). This amount is very significant when compared to its $630 million market capitalization and circa $350 million raised from investors so far. Of course, the company can still raise debt (which it did, in November 2016, to the tune of a $30 million loan from SVB), but there’s a natural limit to how often it can tap the debt markets.

All of this might of course be justified if the marketing expense served an important purpose. One such purpose could be the company’s need to diversify its customer base. In fact, when Hortonworks first launched, the company was heavily reliant on a few major clients (Yahoo and Microsoft, the latter accounting for 37% of revenues in 2013). This has now changed, and by 2016, the company reported 1000 customers.

But again, even if this were to have been the reason, one cannot ignore the costs required to achieve this. After all, marketing expenses increased eightfold between 2013 and 2015. And how valuable are the clients that Hortonworks has acquired? Unfortunately, the company reports little information on the makeup of its client base, so it’s hard to assess other important metrics such as client “stickyness”. But in a competitive OSS market where “rival developers could build the same tools—and make them free—essentially stripping the value from the proprietary software,” strong doubts loom.

With all this in mind, returning to our original question of whether the OSS model makes for good VC investments, while the Hortonworks growth story certainly seems to counter Red Hat’s—and therefore sustain the idea that such investments can work from a VC standpoint—I remain skeptical. Hortonworks seems to be chasing market share at exorbitant and unsustainable costs. And while this conclusion is based on only two companies in the space, it is enough to raise serious doubts about the overall model’s fit for VC.

Why are VCs Investing in OSS Companies?

Given the above, it seems questionable that OSS companies make for good VC investments. So with this in mind, why do venture capital funds continue to invest in such companies?

Good Fit for a Strategic Acquisition

Apart from going public and growing organically, an OSS company may find a strategic buyer to provide a good exit opportunity for its early stage investors. And in fact, the sector has seen several high profile acquisitions over the years (Table 3).

What makes an OSS company a good target? In general, the underlying strategic rationale for an acquisition might be as follows:

What about the financial rationale? The standard transaction multiples valuation approach completely breaks apart when it comes to the OSS market. Multiples reach 20x and even 50x price/sales, and are therefore largely irrelevant, leading to the obvious conclusion that such deals are not financially but strategically motivated, and that the financial health of the target is more of a “nice to have.”

With this in mind, would a strategy of investing in OSS companies with the eventual aim of a strategic sale make sense? After all, there seems to be a decent track-record to go off of.

My assessment is that this strategy on its own is not enough. Pursuing such an approach from the start is risky—there are not enough exits in the history of OSS to justify the risks.

A Better Monetization Model: SaaS

While the promise of a lucrative strategic sale may be enough to motivate VC funds to put money to work in the space, as discussed above, it remains a risky path. As such, it feels like the rationale for such investments must be reliant on other factors as well. One such factor could be returning to basics: building profitable companies.

But as we have seen in the case studies above, this strategy doesn’t seem to be working out so well, certainly not within the timeframes required for VC investors. Nevertheless, it is important to point out that both Red Hat and Hortonworks primarily focus on monetizing through offering support and consulting services. As such, it would be wrong to dismiss OSS monetization prospects altogether. More likely, monetization models focused on support and consulting are inappropriate, but others may work better.

In fact, the SaaS business model might be the answer. As per Peter Levine’s analysis, “by packaging open source into a service, […] companies can monetize open source with a far more robust and flexible model, encouraging innovation and ongoing investment in software development.”

Why is SaaS a better model for OSS? There are several reasons for this, most of which are applicable not only to OSS SaaS, but to SaaS in general.

First, SaaS opens the market for the long tail of SME clients. Smaller companies usually don’t need enterprise support and on-premises installation, but may already have sophisticated needs from a technology standpoint. As a result, it’s easier for them to purchase a SaaS product and pay a relatively low price for using it.

Citing MongoDB’s VP of Strategy, Kelly Stirman, “Where we have a suite of management technologies as a cloud service, that is geared for people that we are never going to talk to and it’s at a very attractive price point—$39 a server, a month. It allows us to go after this long tail of the market that isn’t Fortune 500 companies, necessarily.”

Second, SaaS scales well. SaaS creates economies of scale for clients by allowing them to save money on infrastructure and operations through aggregation of resources and a combination and centralization of customer requirements, which improves manageability.

This, therefore, makes it an attractive model for clients who, as a result, will be more willing to lock themselves into monthly payment plans in order to reap the benefits of the service.

Finally, SaaS businesses are more difficult to replicate. In the traditional OSS model, everyone has access to the source code, so the support and consulting business model hardly has protection for the incumbent from new market entrants.

In the SaaS OSS case, the investment required for building the infrastructure upon which clients rely is fairly onerous. This, therefore, builds bigger barriers to entry, and makes it more difficult for competitors who lack the same amount of funding to replicate the offering.

Success Stories for OSS with SaaS

Importantly, OSS SaaS companies can be financially viable on their own. GitHub is a good example of this.

Founded in 2008, GitHub was able to bootstrap the business for four years without any external funding. The company has reportedly always been cash-flow positive (except for 2015) and generated estimated revenues of $100 million in 2016. In 2012, they accepted $100 million in funding from Andreessen Horowitz and later in 2015, $250 million from Sequoia with an implied $2 billion valuation.

Another well-known successful OSS company is DataBricks, which provides commercial support for Apache Spark, but—more importantly—allows its customers to run Spark in the cloud. The company has raised $100 million from Andreessen Horowitz, Data Collective, and NEA. Unfortunately, we don’t have a lot of insight into their profitability, but they are reported to be performing strongly and had more than 500 companies using the technology as of 2015 already.

Generally, many OSS companies are in one way or another gradually drifting towards the SaaS model or other types of cloud offerings. For instance, Red Hat is moving to PaaS over support and consulting, as evidenced by OpenShift and the acquisition of AnsibleWorks.

Different ways of mixing support and consulting with SaaS are common too. We, unfortunately, don’t have detailed statistics on Elastic’s on-premises vs. cloud installation product offering, but we can see from the presentation of its closest competitor Splunk that their SaaS offering is gaining scale: Its share in revenue is expected to triple by 2020 (chart 6).

Investable Business Model or Not?

To conclude, while recent years have seen an influx of venture capital dollars poured into OSS companies, there are strong doubts that such investments make sense if the monetization models being used remain focused on the traditional support and consulting model. Such a model can work (as seen in the Red Hat case study) but cannot scale at the pace required by VC investors.

Of course, VC funds may always hope for a lucrative strategic exit, and there have been several examples of such transactions. But relying on this alone is not enough. OSS companies need to innovate around monetization strategies in order to build profitable and fast-growing companies.

The most plausible answer to this conundrum may come from switching to SaaS as a business model. SaaS allows one to tap into a longer-tail of SME clients and improve margins through better product offerings. Quoting Peter Levine again, “Cloud and SaaS adoption is accelerating at an order of magnitude faster than on-premise deployments, and open source has been the enabler of this transformation. Beyond SaaS, I would expect there to be future models for open source monetization, which is great for the industry”.

Whatever ends up happening, the sheer amount of venture investment into OSS companies means that smarter monetization strategies will be needed to keep the open source dream alive.

This article is originally posted in Toptal.

5 Tips How to Simplify your Business Accounts

Keeping up with your accounting is a necessary part of doing business. Even if you don’t do it all yourself, as a business owner it’s important to keep track of the company’s financial status. Below are five ways you can simplify your accounting so you’re always on top of it but it doesn’t take up a lot of your time.

1) Keep Your Accounts Up To Date

Set aside time each day to enter sales, receive payments and reconcile accounts. It’s easy to let a little time go by without looking at your financials, but the longer you wait, the harder it is going to be to catch up with your accounting. If you make it a daily habit, it will be like brushing your teeth; you’ll do it no matter what, without letting it add to the stress of running a business.

2) Start Using a Dedicated Online Accounting Software

One of the easiest ways to simplify your budget, keep your accounts up to date and track income and expenses is by using accounting software. It’s hard to get away from technology these days and with good reason; it’s useful and can help you become more productive, organized and successful.

Software that is installed on one computer can make it difficult to keep track of your finances when you’re out of the office. Online accounting software allows you to access your sales receipts, invoices, accounts and other financial documents from any computer. Many cloud accounting programs offer a full suite of features that let you customize everything from billing to budgeting.

3) Always Keep Track of What is Due to You

Outstanding invoices may slowly be killing your business. Invoices that haven’t been paid but aren’t quite late are a cash flow problem in the making. The longer you wait to collect them the more likely your client is to default on the payment completely.

If you’ve lost track of what you’re owed, you’ve also probably stopped communicating with the client who hasn’t paid. Chances are that client has also forgotten about the past-due invoice. It’s harder to persuade someone to pay you the more time that has gone by, so keep the cash flowing by keeping tabs on open balances.

4) Create a Budget

Budgeting may be one of the most vital accounting activities you perform in your business. Creating an annual budget can cut down on the amount of time you spend managing your money throughout the year.

Online accounting software can come in handy when you’re establishing a budget. You can easily pull reports based on sales and expenditures from previous years and use them to forecast future spending. In addition, cloud accounting is often responsive, adjusting budget calculations based on the information entered into the software. This is an easy way to limit unnecessary spending, increase profits and strategize for future growth.

5) Regularly Track Your Profit & Loss and Other Financial KPI

Key performance indicators, or KPI, provide data that helps companies measure progress toward their goals. Profit and expenses are key indicators of a company’s performance, but so are more detailed markers, such as percentage of returning customers. Keeping track of the KPI that are significant in your business can help you look at what is working and what isn’t working and adjust different areas of the business accordingly.

When monitoring your accounting, keep in mind that having all of the information easily accessible and in one place can make your life easier. Accounting software can provide you with the organization you need to examine your financials. It makes it easy for you and boosts your productivity.

How Using Spreadsheets For Accounting Is Dangerous For Your Business

Six Ways Using Spreadsheets for Accounting Puts Your Business at Risk

There are many small business owners and entrepreneurs out there who rely on spreadsheet programs for their accounting needs.

Are you one of them?

Since Excel and similar programs are included in almost all major productivity suites, it seems like a convenient solution. You might be using spreadsheets to meet your needs, but it’s time to ask if using them for accounting is really a savvy business move. Here are six significant ways that spreadsheet programs fall short when used for accounting (even for small businesses!):

1) Poor Organization

Simply put, spreadsheets are clumsy. You have to build your own file hierarchy to organize them, and it’s hard to share data between different sheets. It’s even tougher to get these spreadsheets to integrate with business data stored in other applications. Imagine that you want to send a sale offer to every customer who has spent more than $100 at your store in the last month. Spreadsheet programs are too clumsy to execute that task efficiently. They also make it difficult to share essential data with your accountant, bookkeeper or tax preparer.

2) Growth Restrictions

Imagine that you need to enter data into your accounting spreadsheet in more than one currency. You can already imagine the headache. After all, your spreadsheet just isn’t designed for that, and that’s the biggest problem. When it comes to meeting your organization’s growth needs, a spreadsheet program can’t do it. That’s where accounting software comes into play. It’s purpose designed for what it does. Spreadsheet programs are designed to meet a different kind of need, and that becomes painfully apparent when you try to use them as part of your growing business.

3) Questionable Accuracy

In order to make spreadsheets work their magic, you have to write formulas to handle equations. Some of these are pretty basic. Others, though, are incredibly tricky. If you get a formula wrong, your spreadsheet program can’t tell you. It will just do the calculation you told it to do, and it could be months before you realize you have a problem. That’s not the only accuracy woe either. Spreadsheet programs don’t have a sophisticated understanding of accounting data. They can’t catch entry errors that accounting programs identify automatically.

4) Storage & Security Troubles

Many business owners who use spreadsheets for accounting needs save the data directly to their computers. The problem with doing so is that data simply won’t be secure enough. If your computer dies and the data can’t be recovered, you’ll be without those essential records. If your computer is stolen or someone hacks into it, all of your business financial data could be exposed. It’s just too much of a security risk. Even if you store everything in the Cloud, your data is only as good as your last backup.

5) Restricted Vision

Creating meaningful financial reports is one of the biggest reasons that accurate accounting matters to small business owners and entrepreneurs. With spreadsheet programs, generating such reports is either very hard or impossible. That means you can’t get an accurate picture of what’s going on in your business today. Spreadsheets restrict your vision when it comes to handling other tasks such as inventory or client credit too. Making smart decisions as a business leader means having access to the best data. Spreadsheets just can’t provide that.

6) Lack of User Focus

The folks who designed spreadsheet programs are among the minority who find them intuitive and easy to use. Yes, you might know how to make basic manipulations to cells in Excel. Doing anything beyond the basics in terms of both formatting and formulating can be a lot more difficult. Even if you’re pretty savvy with spreadsheets, there will come a day when you need to translate a business calculation into a spreadsheet formula and won’t be able to figure it out on your own. You’ll spend hours searching for the answer online, and you might never find it.

That’s the crux of the problem with using spreadsheet programs to handle your business accounting needs. They steal time you could have used to focus on growing your enterprise.

On the other hand, web-based accounting software gives you the freedom to focus on what’s important instead. If you don’t want to continue risking your business, check out what Clever Accounting has to offer and try us free for 30 days. If your company is a startup, you can even find out if you qualify for a completely free package.

How to find the ideal accountant for your business

 

Being an entrepreneur doesn’t mean you have to know everything there is to know about business.

One of the most important aspects of running a business that most entrepreneurs don’t know much about is financial management.

Most entrepreneurs don’t know how to manage the money that they work so hard to bring in. This is why many small businesses work with third-party accountants.

An accountant can help you in many ways such as by analysing the financial performance of your business, making sure you’re paying the correct amount of tax and by informing you of new grants and funding opportunities.

What accounting services do you need?

When you start looking for an accountant, it is very important that you start by deciding what services you want from your accountant. This is an important step as you’re going to be paying for these services, so you better be sure that you need them. For instance:

You can divide different responsibilities amongst different people. However, the important thing at this stage is to understand what your requirements truly are.

The difference between Accountants & Bookkeepers

Once you have decided what services you need, you will have to decide whether you need the services of a bookkeeper or an accountant or maybe both.

Bookkeepers tend to charge less as they are normally focused on more mundane work such as posting debits and credits, producing invoices, completing payroll, and maintaining and balancing subsidiaries, general ledgers and historical accounts.

On the other hand, accounting is more of a high-level process that makes sense of previously compiled information (by the bookkeeper). Accounting is comprised of preparing financial statements, analyzing costs of operations, completing VAT returns, aiding the business owner in understanding the impact of financial decisions, and more.

Nowadays the difference between Bookkeepers and Accountants is more blurred than in the past. One reason is because modern accounting software has simplified certain accounting tasks, such as preparing company financial statements (which can now be automated). Another task that many bookkeepers carry out is the completion of tax returns.

As I specified before, when choosing a service-provider it is important to know exactly what you are paying for. If you are a small business owner and you are using user-friendly online accounting software and you are creating your own sales invoices, you’re entering most of your expenses, creating your own reports, then you know that your accounting expenses shouldn’t be too high.

On the other hand, if you require a bookkeeper to do all the mundane work for you, then you are going to have to pay a larger bill.

Finding the right accountant

Once you know what kind of financial professional you need, where do you start looking?

Referrals are always a good place to start. Ask your business contacts who they use and whether they would recommend the services of their accountant/bookkeeper.

It is generally recommended to shortlist at least three different service-providers and to interview each individually. The accountant and/or bookkeeper that you choose should have the necessary qualifications and also the experience of working with similar companies in your industry.

During the interview, it is important to ask about their charging structure and about what accounting software they use. Ideally you want an online solution that you can access at any time and from anywhere with an Internet connection. Considering we are living in an increasingly mobile world, you will want to be able to, for instance, check your sales using a tablet.

Finally, it’s important to choose an accountant that you feel comfortable with. The relationship with your accountant will be one of the most important relationships your company has and this is why your accountant needs to be able to speak your ‘language’.

Being able to communicate clearly with your accountant will help you get more value for what you are paying for, and it will help your business survive and prosper.

To learn more about how to manage your accounting successfully, download our ebook “Entrepreneur Accounting for Success”.

3 Reasons Why All Entrepreneurs Need Accounting

A great business-person needs accounting

It’s true that not many people who start a business do it because they are good with numbers. Many times “accounting” and “financial analysis” seem very annoying and overwhelming. They are just another task that need to be marked in an entrepreneur’s must-do checklist.

The fact is that in order to run a successful and profitable business, as an entrepreneur, you need to have some understanding of your business finances.

However, we konw that it can seem daunting that you have to pay attention to your tax structure, to the good management of your bookkeeping, to maximizing cashflow, to finding out what you can deduct from taxes, and so on.

How can you do all this?

To begin with, you can gain the knowledge yourself. There are some great eBooks and courses available on these matters. You can download our eBook and you’ll learn some important basics of accounting and how to reach a more professional understanding of it.

You can also work with a bookkeeper or accountant. Someone who can help you sail through all tax rules and organize your affairs responsibly. All entrepreneurs reach a point when they understand that finance is not just about paying taxes and reporting results once a year.

The reasons why entrepreneurs should learn some accounting

There are many reasons why entrepreneurs benefit from Accounting. Here are three key reasons according to Forbes:

1) Making predictions about the future

Visions in projects, startups and small businesses are great. However, visions need to have a solid pragmatic base, in order to turn from wishful thinking to palpable reality.

That’s why any entrepreneur has to stick to three basic projections: “future revenues, future operating costs, and assets needed to service future demand. ” Accounting and finance step in, as they offer the analytical tools for connecting expectations with what’s actually possible in the real world.

2) Remaining Responsable

Accounting helps entrepreneurs be more responsible when it comes to time, energy and money being invested. It helps them be more efficient in attracting customers and in selling their goods or services.

All entrepreneurs make commitments over time. Cost accounting, which measures costs and relates them to activities, is essential. Through this it becomes clearer for a business how profits and cash flow are impacted by operational and financial decisions.

3) Measuring and reassessing progress.

This way you can encourage profit, review your progress, make reports, and organize your business as is required in the long run.

You can track your progress by measuring profits and expenses to see whether you’ve turned out profitable & productive, and also to highlight problem areas. Through financial analysis you become more transparent and responsible in running your business.

Would you like to learn more about accounting?

There are more reasons why accounting benefits entrepreneurs. However, I hope that by now you appreciate the importance that Acounting plays in running a successful business.

To learn more about this subject download our eBook. It will help you grasp more basics of this essential business skill. What are ou waiting for?

Turning a hobby into a successful startup

Most of us enjoy spending our time one way or the other: photography, cooking, painting, archery, solving puzzle games, etc. Only some of us have what it takes to turn their hobbies into successful startups.

Let me give you a few examples and then I will ask you if you think you’ve got what it takes to turn your hobby into a flowering business. Is it guts, money, ambition or determination? We’ll see in a moment.

Successful startups from hobbies

Terry Finley is one man that saw that his passion for horse racing could bring him money, satisfaction and the possibility of quitting his dull job of selling life insurance. As Jane Porter writes for the Entrepreneur.com, Terry Finley turned his passion into a thriving business.( Read more…).

His first horse, Sunbelt, won a few races and attracted an investor who paid $5000 for partial ownership. Within two months, Terry had 2 horses and he continued to invest in his business. So, he quit his job and founded West Point Thoroughbreds, a race horse syndication management company. In 2011 they had a revenue of $6.5 million, which has grown from $2 mill. in 2005. Now, the purses they’ve won up to the present rise up to almost $22 mill.

Another hobby mentioned by Jane Porter is sewing. Megan Duckett worked with an event-planning company, as she wanted to work in the entertainment industry. In her free time she was sewing, making bedding, drapes and costumes. In 1996 she was earning more money from her sewing than from her full-time job. So, she quit and started working at a successful startup, with only 3 hired seamstresses. In the first year she generated $80.000 in revenue. She is the founder of 2 thriving business: Sew What? and Rent What?.  Now she has over 32 employees and Sew What? had a revenue of $5.2 million last year, while Rent What? another $1.5 million.

Do you have what it takes to turn your hobby into a successful startup?

Though there can be no book of rules you should follow in order to achieve success, there are some questions you should answer if you want to know if you have what it takes. Asheesh Advani offers you “5 questions to answer before you make the leap from hobbyist to full-time entrepreneur” in her post for Entrepreneur. I believe her explanations and questions provide useful insight into what being an entrepreneur means. She shows that in order to be a business person you must be “committed to excel” and “not waver when the going gets tough”.

Another suggestion is that being a successful entrepreneur needs “confident optimism”. If you think about it, how could you push your employees further if you didn’t believe in any of your business plans and your every failure would seem the end of the world, not that which it is: a mere failure.

Asheesh Advani also highlights the importance in building a successful startup from hobbies of being a decision-making person and having enough money to encourage your business to thrive. You also need to know how to sell your product, so if persuasion and charisma are what defines you, you’re heading in the right direction.

What’s your hobby and could it bring you money? Do you think you have what it takes to transform it into a successful startup? Write me in the comments below.

Source: http://www.squirrly.co

7 Surprising Lessons I Learnt from Winning Startup Weekend

 

You can learn a lot in a very short amount of time.

During Startup Weekend you are surrounded by people who have their best being brought out of them.

Apart from being stimulated by the energy of other participants, mentors continuously push your boundaries through their questions, insights and experiences.

I’ve participated in two Startup Weekends. The second time, me and my team won.

The way I approached the second Startup Weekend was really different to how I approached the first one. In my second one, I had a much better idea of how the system worked.

The fact that I was part of the winning team had a lot to do with these 7 surprising lessons:

The Team is More Important Than The Idea

The way Startup Weekend works, people first pitch their ideas, then teams are formed around the more popular ideas. Important: Don’t focus on joining the team with the best idea but join the team made up of the best participants.

A great team can get a crappy idea, turn it around, develop it and end up with Gold.

A mediocre team with a great idea will probably not develop their idea enough and end up with nothing.

Always Be Networking

On the first day, there is a lot of time to get to know other participants. Make friends. At the start, many people like talking about their idea or their skill sets or just about being at Startup Weekend.

When making friends, people will ask you what you do. Make sure you communicate a skill that’ll be helpful during the weekend.

In my second Startup Weekend, half of the teams asked me to join their team whilst a few individuals were asking around to join teams. I joined what ended up being the winning team. I’m not saying this to boast, but to outline how important networking can be.

Focus On Winning

From the get-go, you want to have a winning mentality. Working in the startup space is a competitive business. Personally, I don’t love working with people who are in it just for the ride. I look out for people who are driven, motivated and ready to really push themselves.

Finishing second means you’re first from the losers. Bring out the best of yourself.

Ultimately, Startup Weekend is not about winning, but it’s a much more interesting experience when participants push themselves to win and succeed.

“Winning is not everything, but wanting to win is” – Vince Lombardi

Validate, Validate, Validate

There’s a misconception that Startup Weekend is about building an innovative prototype product to impress people. It’s not!

Startup Weekend is about getting an idea, validating it, building a business case for it, and selling it to a panel of judges.

You don’t have to build anything.

That’s why it’s important to have business-focused people in your team. If your team is just made up of developers, that’s a red-flag.

Your Primary Priority is your Presentation

Ultimately, everything depends on your presentation.

A business case, that is poorly presented will leave people uninspired, unexcited, and with little faith in you and your team.

A stand out business case, that is impressively presented will capture the judges’ attention and they might just give you the benefit of the doubt you need to win.

Enthusiasm is contagious, but it’s not enough

The first time I participated in Startup Weekend, I joined a team of Italians whose energy was infectious. Everybody loved them.

During my second startup weekend, one of the teams stood out because of their amazing enthusiasm and energy.

Both teams lost. Enthusiasm and passion are great. But alone, they’re not enough to win. Look out for teams with the right skill sets, a promising idea and the right attitude.

Having fun helps!

Although learning, winning, and working hard are all great, make sure you have fun throughout the weekend. For energy, having a laugh is better than having a red bull. Besides, Startup Weekend is a great opportunity to make friends beyond the weekend itself.

Conclusion

The lessons I mentioned above apply beyond Startup Weekend. They apply to the startup world in general.

Startup Weekend is a great learning experience and an introduction to startups. After my first Startup Weekend, I co-founded a startup project, an online accounting software called Clever Accounting.

After your first Startup Weekend, you’re going to be full of energy to start your own special startup.

If you’ve read this far, I really encourage you to take part in an upcoming Startup Weekend. Click here for a list of upcoming Startup Weekends. Push your boundaries and try this unforgettable experience.

Check out the Startup Weekend Trailer

Small Business Craft? You Decide!

Can you imagine Michael Phelps in the pool but forgetting how to swim? Highly unimaginable!

If you are a small business owner, can you imagine forgetting what got you started in the first place? Highly unimaginable but shockingly, many small businesses may be doing exactly the unimaginable!

Whatever the reason, whatever your “why” behind you starting your own business, the one unmistakable thing you did was to take that (hopefully) calculated risk to start that business. You became an entrepreneur. You may have already known your craft before starting out or you may have learnt it on your way or both.

Merriam Webster Dictionary defines:

CRAFT:

If we imagine your small business like being a small boat – your craft – that involves making something with your skilful way (you craft):

Your small business is your craft that you craft!

Ever notice craft anchored in a harbor points towards the water currents?

Small business “anchors” itself in the community and “weathers” the economy. Small business owners always feel like they fight the current.

That is because it is anchored. Small business, particularly in today’s economy, needs to leave the harbor for bigger waters. Others may need to come to shore.

What use is the craft if not to explore the waters?

A ship is safe in harbor, but that’s not what ships are for.

― William G.T. Shedd

True entrepreneurs are never satisfied with anchored craft…but hungry for navigation. They know that the engine is never in the water when a craft is anchored. And that’s when the craft is always fighting the current.

You might know your industry. That’s why you created your craft and pushed it into the waters (business). But not all craft-owners may know everything about business. An accountant who has been helping small business owners for years told me that:

accounting is the engine that must be in the “water” (fully entrenched with business) to enable the business to navigate.

A good accountant will tell the entrepreneur how the currents have been affecting the business.

A great accountant will help small business owners to safely leave the harbor and navigate bigger waters.

Sara Rotman, founder of ad agency MODCo, says the best advice she ever received was from her first accountant who told her to only have enough cash on hand to barely survive and in Sara’s words “to stay hungry“. And staying hungry means you need to go out in larger waters. Unknown waters represent a risk. Anchoring is for business that stays in the harbor. Putting the engine in the water and weathering economic currents by taking calculated risks is navigating your business towards growth and success. Calculated risks, you might consider, directly relates to accounting and it’s systems. Calculated risks in business is a numbers game, is it not?

Are you a small business owner? And if yes, is your craft “anchored” in the harbor? And if yes, is it because you are not helping your accountant to put the engine in the water? Just like it is unimaginable for Phelps to forget swimming, it should have been unimaginable for you to not think about leaving the harbor into bigger waters. The question is : is it so?

7 Disadvantages of Invoicing using Spreadsheets

Do you use spreadsheet software to create invoices for your clients? Many businessmen find online invoice templates, modify them and try to make do with them. As we shall see there are many disadvantages with invoicing using spreadsheets.

The correct way to invoice clients is through using computerized accounting software. Before you say, “I don’t know Accounting so I can’t use Accounting software”, realize that accounting software nowadays is made for non-Accountants.

Especially for simple tasks like invoicing, using accounting software is straightforward.

So going back to invoicing with spreadsheets, here are 7 disadvantages you are putting yourself through:

1. Repeatedly entering the same information

When you invoice using a spreadsheet you have to repeatedly enter the same information. For example, the clients’ address and the item description have to be repeatedly entered for different invoices. With accounting software, the client and the item of sale would have been predefined. So when you’re invoicing, it’s just a matter of choosing them from a drop down list and all the necessary details are automatically generated.

In short, if you invoice the same client 12 times in a year, you only have to write the client’s address once. This saves time and avoids typing mistakes.

2. The invoice still has to be processed by accounts

This is a big advantage. When you use a spreadsheet, you still have to print the invoice and give it to your accountant so it may be entered into your accounts.

When you use accounting software, you don’t have to do this anymore. Your invoices are accounted for automatically by the software. It’s much less hassle and again you decrease the possibility of mistakes.

3. You don’t necessarily know who issued what

What happens if one of your employees issued an invoice with a mistake? With a spreadsheet, you can’t really know who did the mistake. Accounting software like Clever Accounting keeps an audit trail of each user’s transactions. This makes it possible to find out what every user has done within the system and therefore, track who did the mistake.

4. You have to manually back up the invoices

Business owners see backups as a hassle. When one is using online accounting software, there is no more need to manually back up your data. This is done automatically. Furthermore, you will have your data backed up in multiple secure locations, greatly increasing the reliability of your data.

5. The whole process takes lots of time

First you have to create the invoice. Then print it. Then give it to your accountant. Then s/he has to enter it into your accounts. That’s quite a process.

When using accounting software, you just fill in the invoice form and it’s done. There’s no comparison really!

6. You’re giving your accountant boring work

The odds are that your accountant doesn’t enjoy accounting for your invoices. It’s boring work for the accountant. This work only has to be done because you create your invoices using spreadsheets. If you used an online accounting package, then your invoices would be accounted for automatically. It’s good for you because you become more efficient and it’s good for your accountant because s/he doesn’t have to do boring work that can be easily automated. It’s a win-win situation.

7. You can’t automatically create client statements

Client statements are a very handy tool because they tell you how much a particular client owes you. If you have clients that you work for regularly and for which you issue multiple invoices, then client statements can be very helpful in making sure that all your invoices get paid.

Conclusion

Using spreadsheets for invoicing is to modern accounting what typewriters were in the early 1990’s to office work, a technology on the way out. Invoicing has advanced. Using online accounting software for invoicing is becoming the norm around the world (especially in the US, UK & Australia) and it’s only a matter of time until companies in other countries follow suit.

The question is, considering the above, will you take advantage of this technology and benefit your company, or will you lag behind the leaders and shift technology only when you’re forced to?

Image courtesy of Just2shutter / FreeDigitalPhotos.net

Small Business Tips: Is being a miser, wiser?

Running a small business requires a number of skills. Managers and owners must be able to build relationships with clients and business contacts, and knowing which products and services to sell is essential. However, perhaps one of the most difficult aspects of running a small business is knowing where to invest and how much to spend. While some advise keeping a healthy bank account, others believe in aggressive investment. Here are some of the pros and cons of both spending and saving.

The Benefits of Being a Miser

While the word miser has a negative connotation, most people value saving money for difficult times. These advantages occur in the business world as well. For small businesses, borrowing money isn’t cheap, and it may not be possible if money is needed quickly. By focusing on growing your company’s bank account, you can ensure that you’ll be able to weather difficult times.

Being miserly also has another benefit: It gives your business the means to jump on big opportunities. By saving, your company will have a large fund to use for future investments. While long-term, stable investments are essential, it can sometimes help to make large expenditures when the time is right. Being miserly lets you take advantage of unique opportunities.

The Disadvantages of Being a Miser

Perhaps the biggest disadvantage of being a miser is risking long-term growth. Any money that sits in a bank account is money that is gaining little in terms of interest, and money in a bank account is not actively improving the business. Being a miser has an opportunity cost, and this cost may be too much for small businesses.

Being miserly can also be paralyzing. While it is important to set aside an emergency fund, having the mindset that a company’s bank account should always grow can lead to stagnation and a failure to grow as fast as possible. Businesses need to grow in order to thrive, and those who fail to invest wisely risk falling behind competitors and losing customers.

Conclusion: What’s the Right Path?

Fortunately, there are a wide range of strategies available for deciding between investment and saving. Some experts recommend an aggressive approach where all money is spent toward investments. Others advise saving as much money as possible to keep the business afloat in case of emergencies. For most businesses, choosing a moderate path is likely the safest bet, but it is important to evaluate your company’s specific needs to determine which strategy is most likely to succeed.

Which is the best approach in your opinion? Is being a miser, wiser?

Clever Accounting helps small business owners and accountants to record their accounts, carry out bank reconciliation, invoicing, tax, and to generate accounting reports and financial statements. It is a fully-featured online accounting system that is easy to use, secure, and affordable.

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