The Startup Geography Question

Dealing with lots of startups in San Antonio, one topic we discuss regularly is whether San Antonio is the right place for them to be. Sometimes it is; sometimes it is not. In general, startups have two options: 1) pick the correct business to where geography is a strategic advantage or 2) pick a different home base.

To explain, startups should locate in a place where their geography is a strategic advantage. If a city is not providing your startup with an advantage, it’s time to make a change. That means moving or picking a new idea.

There are a lot of ways that geography can help or hurt a startup:

Talent

The obvious one. If your startup is located in Death Valley, you are going to have a tough time hiring programmers. Tech talent in Silicon Valley is going to be more plentiful but much more expensive. It is easier to recruit people to New York than Spokane, WA.  In San Antonio, we have the place to move if you’re a Mexican wanting to go to America so it’s easy to attract spanish-speaking tech talent.

Customers

If you want to sell to big oil companies, your startup perhaps should be in Houston. For finance, New York. For consumer goods, Chicago is a good bet. Your home base should offer easy access to your customers. This offers plenty of advantages, like being able to offer personal customer support, among others.

Focus

In a place like San Antonio, the tech community is much smaller, but that also means it is much more focused. I know founders here (I’m one of them) who get so much love from experienced entrepreneurs. Being in a small community can help because of focus. In a big community like San Francisco, it is easy to get lost.

Resources

Electricity costs, investors, vendors, or travel options are a few resources. Rackspace, San Antonio’s most successful tech company, initially relied upon the legacy of AT&T’s fiber infrastructure through downtown. It also benefitted in that its early investors were mostly old money, so they were not susceptible to the tech downturn in the early 2000s.

San Antonio is very good for people wanting to hunt a hispanic population, especially Mexican nationals. It is good if you are doing something cloud computing related since Rackspace is here. On the other hand, if you are doing a business focused on enterprise sales to Fortune 500 oil companies, Houston will make more sense.  A business focused on social networking would be better suited to Austin and so on.

If a startup does not see their hometown providing a strategic advantage, they need to move or pick a new location.  It is easier to pick a new idea rather than a new geography.   However, if the team feels the idea would be better done elsewhere, that is a decision that should be made sooner rather than later.  It is always easier to move a business with two employees than one with two hundred.

 

Don’t Read Malcolm Gladwell

Don’t get me wrong.  I like Malcolm.  Nice guy with a sweet head of hair.  But, in a world where we’re overwhelmed by incoming information, spending any time reading Malcolm, Thomas L. Friedman or any of the other Pop Intellectuals is dumb.  Their writing sucks up brain cycles on inconsequential topics and, since he sells millions of books, that means his ideas are immediately common knowledge.

The best type of food for a brain is exactly the opposite.  It more closely resembles secrets:  things that only I (or a few people know) and that I synthesize from my inquiry and observation.  Instead of reading something read by everyone, the better strategy is to search out people or places that can enable you to discover things that no one else knows.

If I’m hunting for a business idea, perhaps that’s talking with someone about an unsolved problem in their life.  Or, if life wisdom is what I’m looking for, I’ll ask to people about their approaches to life.  What is “normal” for them may be something that I never considered as an option.  Or, if I need a new perspective, go to a museum or walk around a new neighborhood.

But, my recommendation is to avoid Mr. Gladwell and Mr. Friedman unless you’re reading just for entertainment.  Nice guys, but they’re not going to get someone anywhere except through a long plane flight.

How I made bicycle commuting work in San Antonio

When I lived in San Francisco, I rode public transport and bicycled exclusively.  My car sat unused for 3 months until I finally decided to give it to charity.

Bike commuting in San Antonio is much harder.  My route goes through Alamo Heights*, which is a bike commute nightmare.  The only bike lane is on the hilliest road through town.  Hills make you work hard and hard work makes you perspire.  So, biking the 6.5 miles from my house to Geekdom downtown meant I arrived a sweaty mess.

But, an electric bike kit made bike commuting work for me now:

The ride time decreased by a third.  I pedal in a relaxed manner and the motor powers me up the hills.  I don’t have to worry about parking.  I don’t arrive a sweaty mess and I’ve learned to get really angry at drivers who are texting.  Perfect.

So, if you’ll buy a hybrid car for $35k, how about a hybrid bicycle for $500?

* Proposed new slogan: “The Worst City for Bicycling in America”

The Sad Lesson of Megabus

The promise of Megabus for consumers is low prices for upscale bus trips between major cities including free wifi, new buses and no sketchy downtown bus stations.  The parent company of Megabus is a provider of ultra-low-end bus travel, CoachUSA.   For them, starting Megabus promised they could break into a previously untapped market segment (yuppies and the middle class) from their base in the low-end of the travel market.

But, they screwed it up.

Instead of making a clean start to target a new market segment with very different needs, CoachUSA took its same drivers and infrastructure and slapped a Megabus name on it.  The buses usually have broken air conditioning and smell badly.  The drivers have the toughness of those who are clearly accustomed to a bus full of ruffians and the free internet rarely works.  These things are OK for the low-end of the travel market that is chasing the lowest bus fares possible but unacceptable to soccer moms.

The lesson is that new market segments usually need to be attacked with a fresh start.  Customers see very quickly when lipstick has been put on a pig.

An Alternative Proposal for a Downtown San Antonio Grocery

Instead of spending government money to bring a grocery downtown, there’s another option that wouldn’t need any help: crowdfunding.  And by “crowd,” I mean the residents of downtown and San Antonio.

Here’s how one motivated entrepreneur could get a downtown grocery going with zero startup capital and create a nice career for themselves in the process. (In case it’s not obvious, I’m not volunteering to do the job!).

It’s not a sure thing and there are lots of unknowns but we won’t know unless someone tries.

But, first some background.

What we know about an urban grocery in downtown San Antonio

  • There’s not enough population to make it economically feasible as a conventional retail store model.  Otherwise, someone would have built one by now without the City needing to gift $1mm.  The grocery business is ridiculously low-margin.  It’s more expensive to build an urban store compared to the suburbs and there’s limited incentive for a HEB, Wal-Mart, Whole Foods or La Fiesta to do something downtown when their customers will have shown they’ll drive the two miles to their nearest store.
  • Many people dislike the current HEB proposal for different reasons:  I’ve heard too upscale, too many road closures, too small at 8,000 square feet and too much government money needed to make it happen.  Clearly, the proposed store design is optimized to help HEB rather than downtown.
  • We all complain about HEB and/or Wal-Mart not providing a grocery like it’s their job to make downtown better.  But those corporations have a primary purpose — and that’s to enrich people named Butt and Walton.  Period.  They are generally good corporate citizens but we shouldn’t be surprised when they act in a way consistent with their mission.
  • Any store that is going to make it downtown must have prices very close to an HEB and choice needs to be enough to make sure people can use our store as a one-stop shop.

So, with all that in mind, we need something that (a) isn’t just deriving revenue from a classic grocery business, (b) is say 6-8,000 square feet and (c) offers prices and choice close to a modern grocery store.  A grocery co-op can work but they’re slow and cumbersome.  A for-profit entity will be superior for all the reasons that for-profit businesses are better at making customers happy.

So, how to get there?

A Downtown Grocery in 9 Steps

1) Identify a site.  Meet with the landowner and frame out a lease.  Ideally, some place between Southtown and downtown and on as busy of a street as possible.  Negotiate and sign a lease with a 120-day feasibility period so it can be canceled if we can’t get steps 2-9 done. (My guess is about $12-15k/month rent is to be expected for a 7,500 sq ft store.)

2) Develop a concept that will appeal to downtown residents. Get one of the many Southtown architects to sketch out a concept store.  With the right talking to, a sketch would likely be done free — with the hopes of getting the job of drawing up the plans later.  Let’s stick with our concept of a 7,500 square foot store for now.

3) Get bids from contractors.  Get a budget put together for the store build-out.  (My guess: $300k if we are very frugal but I’ve never been in the grocery business.)  If we’re lucky,our site from Step 1 might already have some build out left over from a previous tenant.

4) Meet with a grocery distributors.  McLane is one of the largest.  Compare the cost from them to the HEB costs.  My guess is our costs will be about what HEB’s prices are to consumers.  Let’s say you get a 5% markup on average after shrinkage, theft and waste (the industry average markup is about 12%).  If we’re lucky, we can get to $3mm in annual sales in the second year.  That’s a net from grocery sales in the $150-200k range.

5) Create an operations budget.  Presuming we’re open 10 hours a day, we’re likely looking at labor of $75/hr (2 workers, 1 cashier, 1 manager, 1/4 of a bookkeeper).  Add in insurance, utilities, legal, web design, etc. and I’m guessing we have about 750k per year in annual operating expenses.

6) Create a formal proposal.  After fleshing out the numbers, put all the above into a package summarizing the startup and ongoing expenses.  Let’s estimate the startup at about $900k (double our build out cost of $300k since entrepreneurs alway underestimate plus $300k of starting inventory).  A similar store in Dallas lost $1.2mm in it’s first year.  Let’s say we’re smarter than they were and would only lose $800k each year from normal grocery operations.

7) Sell memberships to the public, much like Costco.  Now this the secret sauce to make this thing work.  We know that our grocery store by itself will be a money losing proposition.  So, we go to the public and ask them sign up for annual memberships at $500 / business, $200 / family or $100 per person for residents.  These entitle you to 5% off at the store.  We set a threshold of at least 2,000 memberships or a total gross of $800,000 per year — whichever is less.  (We can also sell ‘super’ memberships at $1,000 / year for the truly committed.  That would earn you a free t-shirt!).  We can also work out memberships for people who only work downtown.  So, we could offer them a 5% discount but for 5-6:30pm for example.

8) Launch a crowdfunding campaign on a site like indiegogo with the before mentioned startup costs and first membership dues.  With our startup costs of $900k and $800k of first year memberships, we need to raise $1.7 million.  While that number seems like a bunch and it is a lot of money, it’s an average of $100 from each of our 17,000 downtown residents or about $1 on average from each resident of San Antonio.  

9) Close on the funding, incorporate — and get to work.

The nice thing about this crowdfunding approach is that we’ll know very quickly if downtown’s want of an urban grocery store is truly the will of the people.  If we can’t find enough downtown residents willing to pony up money to build and shop at the store, perhaps our city should not pay $1mm for one either.

Ultimately, this depends upon getting the right entrepreneur to make it happen.  Know anyone?

EDIT: I fixed some math.  Thanks to Jay!

For Tech Startups: Software Remains > Hardware

The press is abuzz with how hardware startups are ‘hot’ again but software remains the most desirable part of the high-tech startup business.  

In software, you’re licensing intellectual property.  Hit ‘copy’ and you have another satisfied customer for practically nothing.  In network effect businesses, adding another customer actually makes your product more valuable.

In hardware, you need to make another physical device — or another 100,000 just to get a manufacturer to talk to you.  Hardware businesses are more expensive, riskier, and much harder to scale rapidly.  While the press loves the story of hardware, it’s still an inferior space compared to software.

How to Stop Digital Piracy

How to stop piracy of movies, software and TV shows?  Charge a reasonable price.

In the 90s, my broke college friends went to extreme lengths to pirate copies of Microsoft Windows and Office.  It made sense as Windows and Office bought standalone would be nearly the same price as the PC hardware.  Even people who could afford Office pirated it because they considered the price unfairly high.

Music was widely pirated when the industry forced consumers to spend $18 on an album to get one or two good songs.  iTunes made single song purchases practical and now Spotify/Rdio provides all-you-can-eat plans for <$10 a month.  Now, most music is gone from BitTorrent (a pirating protocol) and all that remains are first-run movies and cable shows priced ridiculously high (like HBO’s slate).

Where Netflix has priced some TV and movies reasonably, people stopped pirating them.  Netlix says piracy is down 50% since Netflix entered Canada.

It likely makes business sense for publishers to price some content ridiculously high as a small percentage of the world will overpay for it and thus the publishers end up ahead versus democratic pricing.  However, industry shouldn’t complain about piracy since they are creating it.

Businesses Involving Bad Habits

Many new businesses attempt to fight people’s bad habits (smoking, sloth, overeating, etc.)  They think “I’ll help these people and make money!” But, most people truly don’t want change. They actually just want to feel better about not putting in hard work. So, customers buy a product (like a gym membership or running shoes), feel temporarily better and then usually never use it again.

The businesses that succeed versus bad habits recognize this pattern and profit from selling instant gratification and not change.  See gym memberships, electronic cigarettes, P90X.  If your business involves fighting customers’ bad habits, know you’re really selling immediate gratification — make certain your business model allows you to profit from that.

Dear Kids, About College

A college degree once guaranteed to put you ahead in life.  Now, it doesn’t.  I don’t think it’s essential that you get a degree for most professions.  Instead, create your learning through classes, asking questions and reading.  Do and build meaningful things by working hard starting now.  Take classes if they’ll help you with your passions.  But better is to teach yourself by doing.  Make lots of mistakes and own them.  Mom and I will help you as much as we can.

Thoughts on Startups, San Antonio, Tech.