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Transnational China Project Commentary:"Melt-Down in East Asia"Speech by Senior Minister LEE Kuan Yew of SingaporeThe James A. Baker III Institute for Public PolicyRie UniversityHouston, TexasPart of the East Lecture Series and Sponsored by the Shell Foundation23 October 1998(Following is from Prepared Text)Introduction:More than a year after the Asian currency crisis started in July 1997, the world economy has never been more fragile. East Asia including Japan, is in recession. Latin America appears to be headed for a major economic slowdown if not a recession. The US economy, which is already in its seventh year of economic expansion, is being sustained by high consumer spending and is susceptible to a major downturn in the stock market. Europe continues to grow but its recovery has been export-based while domestic spending continues to be hobbled by the high unemployment rate.All over the world, nervous investors are running for cover and moving out of risky assets into treasury bonds. Indeed, with the collapse of the Russian rouble in mid-August, the financial crisis has now infected all emerging markets. Spreads on emerging market bonds have risen to stratospheric levels. Latin America is desperately trying to fend off a run on its economies. Today it is tottering on the brink of a financial collapse, a situation not unlike that of East Asia a year ago. Even the mature markets of the US and Europe have not been spared by the flight to quality.Short-Term Capital and Premature LiberalisationOnly a few years ago, these same investors from the G7 countries were bullish on East Asia. Their optimism was not unfounded. East Asia’s fundamentals were strong: high growth and low inflation, with government budgets in balance or in surplus, and high savings rate. Compared to G7 home markets, where interest rates had fallen as inflationary pressures subsided, East Asia offered higher returns on capital.Since the mid-1980s, East Asia has benefited from Japanese capital flowing into the region in search of low-cost production bases. The rising tide of Japanese foreign direct investment or FDI had lifted all the economies in the region: FDI created manufacturing jobs, upgraded technology, enhanced productive capacity, and opened up export markets for East Asia.East Asia’s positive experience with foreign capital inflows whetted its appetite for more. By the early 1990s, however, information technology and financial innovation and liberalisation were bringing a different type of capital into East Asia. G7 international banks and institutional investors poured into Asia in search of higher returns on their investment, because their own economies were in recession. G7 capital flows to emerging markets increased five-fold from US$40 bn in 1990 to over US$200 bn in 1996. Asia absorbed almost half of these net private flows between 1994 to 1996.With hindsight, East Asia should have taken measures to fend off and control these massive capital inflows. After all, their own domestic savings were high enough to finance most of their investment needs. Thailand, Indonesia, Malaysia and Korea had savings rates averaging more than 30% of GDP in the 1990s, much higher than the 18% in Latin America. All they needed was to supplement their considerable savings with FDI, which could bring technology, management expertise, and access to export markets.Moreover, East Asia was already running at or near full capacity. Growing current account deficits in the mid-1990s and declining unemployment rates were clear signs of overheating. They did not need the extra boost from large short-term capital inflows. What they needed was the opposite: to slow down and cool their economies while they built up their productive capacity and strengthened their institutional framework to manage the problems of integrating with the global financial market.However, they were encouraged by multilateral institutions like WTO, IMF and WB and the finance ministers of the G7 to open up their capital accounts and liberalise their financial systems in order to reap the full benefits from a globally efficient allocation of capital. Analysts from these international institutions, and rating agencies in both US and EU assured these countries that with their strong macroeconomic fundamentals, there was negligible risk from a further liberalisation of their capital accounts. On their side, these countries found the prospect of easy access to cheap foreign funds irresistible.Between 1990 and 1994, Thailand undertook three rounds of foreign exchange control liberalisation, essentially removing most controls on capital inflows, leaving some restrictions on outflows. The Bangkok International Banking Facility or BIBF, established originally to promote Bangkok as an offshore banking centre, became instead a channel for offshore funds into Thailand.Indonesia had opened its capital account in the early 1970s, when the international capital markets were not as sophisticated. But it was only in the 1990s that domestic corporations and banks began tapping international capital markets in a big way. Because they had no exchange control, Indonesian authorities had not set up any system for monitoring capital flows. Nobody knew that Indonesian corporations had run up so much short-term foreign debt. It was the same story in Thailand. By 1997, both Thailand and Indonesia had more short-term external debt than they had foreign reserves.Korea had a more nationalistic industrial policy, maintaining tight control on its capital account into the 1990s. But it came under international pressure to liberalise. As part of the process of joining the OECD in 1996, it accelerated the liberalisation of its capital account. Ironically, Korea eased controls on short-term capital to permit external borrowing by Korean banks, including greater access to trade credit, but kept controls on medium and long-term capital to protect its industries. This made for a rapid build-up of short-term external bank debt, leading to the November 1997 crisis.Domestic corporations in Thailand, Indonesia and Korea borrowed from abroad because interest rates on the US dollar were much lower than their domestic interest rates. This led to a massive increase in external debt. Many of these companies made the fundamental mistake of borrowing short-term for long-term projects. They could not have done so with such impunity if their capital accounts had not been so open.Their governments also did not appreciate the moral hazard problem of pegging their exchange rates when they no longer had restrictions on capital flows. Thailand and Indonesia had their currencies closely linked to the US dollar. This led their private corporations to believe the stable exchange rates were their governments’ guarantee that there would be no currency exchange risk. So they borrowed in US dollars, assuming that exchange rates would remain more or less the same when the repayment time came. As a result, they did not hedge their foreign exchange exposure.Funds in international capital markets were deceptively cheap, only because the true risks were not fully priced in. If these countries had floating exchange rates, borrowers would have been more aware of the risk they carried of a possible depreciation as against the benefit of a lower interest rate. And foreign lenders would not have been so confident the borrower could repay if exchange rates were subject to sudden changes.Liberalisation should have been CalibratedThailand, Indonesia and other East Asian countries would have been better off if their capital accounts had been liberalised more gradually, in tandem with the strength of their financial systems and institutional capability. At the minimum, they needed a system to monitor, check and control the flow of short-term speculative funds and to ensure that the maturity of the debts and investment were properly matched. As it was, large amounts of short term funds flowed in to finance long term investment. A significant proportion went into the asset markets: stocks and properties, office blocks and condominiums. These stocks and properties were in turn used as collateral for borrowing, further inflating the asset bubble.It is widely accepted that free trade in goods and services – where countries specialise in producing what they have a comparative advantage in, and gain by trading what they produce beyond their needs – produces efficiency gains. The G7 countries were right to advocate trade liberalisation. The G7 countries should have been more cautious in pressing for more liberalised financial markets and free capital movements. There is an on-going dispute among financial experts whether free capital mobility is an unalloyed good. There are inherent dangers in today's globalised financial markets, when massive amounts can flow in or out at the touch of a computer button.Capital account liberalisation should have been more carefully calibrated according to the level of soundness and sophistication of each country's financial system. Countries that are not ready for the risks should have installed circuit breakers – controls to cope with any sudden inflow or outflow of funds. Chile, for example, imposes a tax on foreign borrowing, and requires portfolio investors to put a portion of their funds in non-interest bearing deposits with the central bank, to discourage volatile short-term inflows. Of course controls restricting capital mobility will increase the cost of capital. Growth may be slower, but it will be more stable and sustainable in the long run.Are Capital Controls the Way Out?Are capital controls the way forward in East Asia? Paul Krugman, the MIT economist, has argued that "Plan A" of IMF orthodoxy - high interest rates, and austerity in monetary and fiscal policies - has failed in East Asia. He suggested that it was time to try "Plan B" of capital controls. With controls, an economy could plug capital outflows that result from a loss of confidence, while pursuing expansionary monetary policies, like cutting interest rates, without hurting its currency.Dr. Mahathir is now implementing Plan B in Malaysia. On 1 Sep 98, Malaysia imposed capital controls. Malaysian ringgit deposits held offshore must be repatriated within a month, or become worthless. Foreigners who sell Malaysian shares cannot take out the proceeds for a year. Malaysian exports and imports must be settled in foreign currency. The ringgit was fixed at 3.8 to the dollar, a 10% premium to the traded rate before controls.Malaysia’s capital controls can offer a temporary window of opportunity to stimulate and reform its economy. The government has sharply lowered interest rates, reduced bank reserve requirements, and instructed banks to maintain their lending growth at 8%. This could reverse the decline in economic growth. However, excessive expansion in domestic demand could lead to a deterioration of their trade balance, a loss of foreign reserves, and capital flight. Capital controls provide the opportunity to carry out banking reform and corporate restructuring without the pressures of a volatile currency that has to be propped up by high interest rates.Experts are not in agreement on the merits of capital controls. A growing view is that regulations over short term capital flows can be useful in shielding developing countries against the volatility of capital flows in today's globalized financial market. However, comprehensive capital controls are administratively cumbersome and can lead to corruption. They induce a false sense of security and result in loose macroeconomic policy and weak financial discipline. Open economies like Singapore cannot afford to consider capital controls. Such controls will irrevocably damage our reputation as an international financial centre.No country in the region, however strong its fundamentals, can insulate itself from the effects of the financial turmoil. Singapore has also suffered from the fallout. Tourism from Korea, Japan and Southeast Asia has declined, and our exports and imports with the region have fallen. However, Singapore has escaped the brunt of the crisis because we maintained tight macroeconomic discipline and constant vigilance over the banking system. As a result of sound macroeconomic policies, our interest rates were lower than US dollar interest rates, and Singapore companies had little reason to borrow in US dollars. Our banks are strong and well-supervised. Thus, even though Singapore’s financial system is more open than those of our neighbours, we have weathered the crisis better.What can be done?The Asian crisis caused heavy losses to investors, but was a tragedy for the countries they had invested in. It has wiped out years of growth and development in Indonesia and other affected countries. The Indonesian rupiah today is worth only 20% of its value in June last year, although they have not printed five times the amount of money.In time, investor confidence should return to East Asia. What we saw in East Asia in the past 30 years was not a mirage. Strong growth in their export industries has transformed agricultural communities into industrial nations. The East Asian values of hard work, sacrifice for the future, respect for education and learning, and an entrepreneurial spirit are the underlying strengths which will see these countries through the current crisis, and help them regain their former economic dynamism.In these decades of development these countries have acquired the infrastructure, technology and management skills that will survive the crisis. The rankings of East Asian countries in international surveys of economic competitiveness have dropped in the past year. But they remain ahead of other developing regions and transition economies. The 1998 World Competitiveness Yearbook, by IMD in Lausanne, finds Singapore, Hong Kong and Taiwan still within the top ten countries in the world where "enterprises are managed in an innovative, profitable and responsible manner". The crisis has shown East Asia areas for improvement, but the development base built-up in the last three decades is still in place.The pace of recovery will depend on the way individual countries reform their economies. For those under IMF programs, international investors will be watching closely for their compliance with IMF prescriptions. The IMF may have made some mistakes through lack of experience with the type of problems faced by East Asia, because it was more accustomed to dealing with Latin American problems. The IMF has been learning and modifying its policy prescriptions. In any case, IMF endorsement of the economic programmes of a distressed country is essential to restore investor confidence.With or without IMF help, these countries will have to build up their financial system and the supporting legal framework. Banks will have to be recapitalised, some merged into stronger entities and sold to foreigners, others allowed to go bankrupt. A strong regulatory and supervisory regime has to be established, and proper systems of credit assessment and loan provisioning put in place.Institutional weaknesses, masked in times of high growth, will now have to be put right. Insolvency laws, drafted for a different age and rarely used, have proved inadequate. Indonesia and Thailand have passed new bankruptcy laws; they now have to follow through with the implementation. Transparency in corporate accounts and protection of minority shareholders, which were ignored when share prices were rising, have now become issues of importance. In today’s high-risk environment, greater transparency will prove critical in convincing investors, both domestic and foreign, to buy a stake in a local company.All these structural reforms take time. In the meantime, the crisis-stricken countries must cope with the social and political consequences of the deepening economic crisis. Unemployment is rising and companies are failing under the burden of high debt and poor business conditions. These countries need to turn around their economies quickly, but they cannot do so without foreign assistance, especially when the external environment remains unfavourable. Hence, the US, Japan and EU can, and must, play their part in facilitating the recovery of the East Asian economies.As long as Japan – East Asia’s largest economy – remains depressed, the whole region will be hobbled. Since 1986, Japan has been the prime mover of the industrialisation of the region. Japan absorbs 12% of East Asia's exports and has been the largest source of FDI in nearly every country in East Asia since the mid-1980s. Japan has been generous in its response to the Asian crisis. It has carried the biggest share of the IMF rescue packages in Korea, Indonesia and Thailand, and has been forthcoming with humanitarian aid. Japan announced during the IMF meeting a new initiative of a US$30 billion package to help the affected countries in East Asia raise funds in the international capital market. Really the best contribution that Japan can make is to get its economy moving again.Japan is an export powerhouse and a net creditor nation. Its financial problems, the bad debts in the banking sector, were not the result of excessive borrowing from abroad, but home-made. With political will, it can cut the Gordian knot of domestic bad debt and begin its recovery.US LeadershipThe US has a strategic stake in East Asia’s recovery. The US exports more to East Asia, including Japan, than it does to Europe. In 1997, exports to East Asia accounted for 28% of total US exports. The West Coast states of California, Washington and Oregon sell more than half of their exports to Asia. Among the 50 states, Texas is the fourth largest exporter to Asia. Texas' principal sectors that export to Asia include chemicals, electronics and industrial machinery and computers.Beyond its commercial interests, however, the US has worked hard to craft and establish the present world economic order based on free market principles. The US must take the lead in managing this crisis. Charles Kindleberger, in a history of the Great Depression published in 1973, pointed to a leadership crisis in the industrial nations as the main cause of the economic slump. The First World War had produced a power shift from Britain to the US. Because the US was unwilling to assume responsibility for stabilising the world economy, there was a leadership vacuum. In the 1930’s, Kindleberger noted, "when every country turned to protect its national private interest, the world public interest went down the drain, and with it the private interests of all."The world has come a long way from protectionist responses like the Smoot-Hawley Tariff Act of 1930, which worsened the Great Depression. Working with the IMF, the US has played the key role in responding to the crisis-stricken Asian countries. However, the US cannot stop there. President Clinton has said recently that the financial crisis is the biggest challenge to the world economy in the last 50 years. I believe he is right. In the coming months, the US will have to take a strong leadership role and work with other major countries to address the immediate problems thrown up by the financial crisis. The crisis has also raised fundamental and complex issues about the architecture of the global financial system. The US would also need to provide enlightened intellectual leadership to address these issues.Allow me to conclude by saying that it would be short-sighted and potentially disastrous for the US to neglect troubled East Asia when it is an important part of the world. The US must stay engaged, and provide the focus and leadership in an Asian financial crisis that has gone global.Two decades after this speech was delivered, I still consider this the best and most comprehensive exploration of the AFC by anyone.Mr. Lee was more professor than politician here.For those unable to follow the highly nuanced argument, east Asia got screwed by the flight of giant pools of foreign capital.

Method1Getting Paid to Learn1Apply for new scholarships and grants. A lot of students think that they are only eligible for funding when they initially apply for admission. This is a mistake! There are often new scholarship opportunities for upperclassmen, though they aren't always widely advertised. You may also be able to apply for external scholarships or grants, which are offered from groups outside of your school.Begin by scoping out bulletin boards on campus and paying careful attention to email announcements.You can also search online for new funding opportunities, and there are apps that you can download for free (or for very little, such as the app Scholly, available for just $.99) that can help you tailor your search.[1]2Offer your services as a tutor. One of the best ways to learn a subject is to teach it. By becoming a tutor, you can hone your own knowledge of your field of study, perform a valuable service to others, and earn some needed cash—it's a win-win scenario for everyone involved!You can often get paid through your school to tutor other students in classes you have completed and done well in, or you can advertise your own services to your fellow http://classmates.To find tutoring opportunities, meet with your advisor or your professors, or go to the campus tutoring center.3Get paid to take notes. You are hopefully already taking careful, thorough notes in your classes for your own benefit. Why not make your efforts pay out double?It's fairly common for students who need special arrangements because of learning disabilities to be assigned a (usually anonymous) note-taker for their classes.These positions are usually compensated—you can often make up to $10 an hour for every hour of class.You'll take careful notes, type them up, and email or drop them off at disability services, where they will be passed on to the students who need them.4Watch for emails asking for note-takers. Once a fellow students' needs are documented, disability services will contact the professors and ask for volunteers in the class to take notes, and your professor will in turn email the class.Respond quickly before your fellow cash-strapped students snag the job away from you!5Advertise your services yourself. You can also contact disability services directly to see if they have a need for note-takers in the courses you are taking, or you can advertise your services yourself to your fellow classmates.If you advertise yourself, make sure that you aren't violating class or university policy.6Proofread your classmates' essays. If you excel at writing and editing, you can hone your skills and get paid for it at the same time by offering to proofread your classmates' papers for a reasonable fee.Spread the word among your friends and roommates, and consider posting fliers which advertise your services.7Study the honor code carefully. If you do get work proofreading, be careful about how you offer feedback and make suggestions for revision. You should be very familiar with your school's honor code and rules regarding plagiarism.Double-check the particular professor's policy about sharing written work with others, too. Some professors assign take-home essays that are more like exams, and they forbid students from talking to one another during the writing process.If you rewrite, instead of proofread, someone else's paper, you both could be brought up on academic fraud charges, and you could face serious consequences, to include being expelled.8Take advantage of your strong typing and computer skills. If you are a fast and accurate typist, if you are great at creating interesting presentations with sophisticated graphics, or if you excel at creating tables and graphs to represent data, you may be able to get paid to teach and help other students with their assignments and hone your own skills at the same time.9Visit Career Services. Most campuses have a Career Services office which counsels students on job market possibilities, and which helps prepare them for applying and interviewing as they near graduation. Don't think, however, that you should only use this resource as a senior.You can often find advertisements for paid internships and part-time work in your field of study at the Career Services office.Finding these opportunities early in your studies will not only help you excel in your field and build up your resume, but can add some much needed cash to your wallet while you learn.10Enter academic competitions. You can pretty regularly find advertisements for essay contests and scholarly competitions (such as science or engineering competitions) which offer cash prizes for the top http://performers.Be on the lookout for these opportunities by regularly checking the bulletin boards around campus (begin by looking in academic departments and the library), going through your email carefully, and by going directly to your advisor and/or professors to see if they know of any such competitions for which you may be a good fit.Even if you don't win, you'll get experience in your field, make connections, and build up your portfolio or work.Method2Finding Other Ways to Make Money on Campus1Apply for work study. Even if you weren't awarded work study when you first applied to your school, you may be able to apply now. Make an appointment at the financial aid office to see if you can still apply (or reapply, if your financial situation has recently changed).There are all sorts of jobs available on campus, from working in the dining halls, to performing administrative work in academic departments, and even working at campus theaters, where you'll have access to free performances or movies!2See if your college participates in the Federal Work Study Program. This program provides part-time work opportunities for students with financial aid, and guarantees that you'll be paid at least the federal minimum wage.[2]Whenever possible, the positions available are relevant to your area of study and are civic-minded, aimed to serve the public interest.[3]3Become an RA. If you live in the dorms, are an active participant in dorm and campus activities, have a good grade point average, and enjoy working with and counseling others, then becoming an RA (resident assistant) could be a great opportunity for you.While you may not bring home an additional pay-check for being an RA, you'll usually get either free or greatly reduced room and board, which will then free up money for your other expenses. At some schools, though, you may receive a stipend as an RA.[4]4Become a guinea pig. Scope out bulletin boards on campus for advertisements looking for volunteers for psychology studies or medical experiments.[5]These usually pay a flat rate, though at some schools, you could make up to $20 an hour doing something as simple (and possibly as interesting!) as filling out questionnaires.[6]5Verify that the experiment is safe. Before you agree to participate, make sure that the experiment was approved by an Institutional Review Board or a Human Subjects Participant Program. This will help ensure that your rights and physical and mental well-being are protected.[7]6Look for off-campus research trials. If you can't find opportunities to participate in research on campus, go to the US Government's official clinical trial website to find legit trials in your area. You can also visit the webpages of local hospitals to see if they are looking for participants.[8]7Sell your textbooks at the end of the term. One of your biggest expenses may be the cash you have to set aside for textbooks. You can usually get a good chunk of your money back at the end of the term by selling back your books.Campus bookstores will sometimes buy back books, but many campuses also allow independent companies to set up shop at the end of the term. You can also scope out used bookstores in the area to see if they buy used books Resources and Information. improve your odds of being able to sell a book (or fetch a good price for it), take care of your books throughout the semester, and avoid marking up the pages with notes and highlighters.8Become an organizational guru. It's hard to succeed in school (or at at any job!) if your work materials are a messy nightmare. Spend some time developing your organizational skills, and then advertise your services to your fellow classmates, and possibly even your professors.Offer to help your clients go through their files (either paper or electronic), and help them come up with a method for sorting and arranging their work that they can manage on their own.9Offer your cleaning and laundering services. College student usually aren't known for keeping spotless rooms or staying on top of their laundry. If you don't mind doing either of these tasks, and if you can stand the mess and stink, consider getting paid to clean dorm rooms or do laundry for your lazier classmates.10Open a salon in your dorm room (or make house calls). If you are talented at doing nails, hair, or make-up, consider advertising your services to your classmates, especially before big events like sorority formals or Valentine's Day.Research what local salons charge for services, and then undercut their prices to the point where you'll still be making a profit, but will be an affordable option for your fellow classmates.11Open a snack-shop. It's not a secret that college students get the munchies! If you're good at baking (or even just scoping out good deals on prepackaged snack items), take advantage of your classmates' perpetual hunger.Post fliers with tantalizing pictures of your baked goods, or visit the library and other hot study spots at key points in the term, such as midterm and finals week.If you're a night owl, then you're sure to find students on the prowl for a good snack in the wee hours of Friday and Saturday (or even Thursday, at some party schools!). If you decide to sell to the night crowd, though, it's a smart, safe move to work with a partner.12Set up a recycling center on your dorm room floor. If you live in a state which accepts bottle redemptions, you can make easy money by collecting and returning soda cans.[9]Consider making a small investment in a large plastic garbage bin, line it with a sturdy plastic bag, and decorate it with signs: “Place your used soda cans here!”. Place the bin outside your dorm, and then all you'll have to do is sort through it before bringing it to the redemption center.Make sure that you aren't violating dorm policy by doing this. So long as it's allowed, you may also be able to go through any other recycling bins that are set up on campus.Method3Finding Jobs Off-Campus1Seek out tip jobs. As a college student, having access to quick cash is extremely helpful. Look for part-time job opportunities that will allow you to walk away with cash in hand at the end of your shift.Serving or tending bar in restaurants, working as a hotel or restaurant valet, delivering food (which usually requires you to have your own car and insurance), or doing street performance are good options.[10]2Get a part-time job at a local shop. Hit the pavement and check out the local businesses around your area. You may be able to find part-time work that fits around your school schedule.While you should check the classifieds regularly for posted job ads, understand that not all businesses use these, and you may have better luck if you inquire in person about possible job http://openings.Be prepared with a copy of your resume and look presentable when you first go to the shop. Don't pop in on your way home from the gym! That won't leave a good impression!3Visit a temp agency. The process of finding an available job can be simplified by enlisting the help of a temp agency. They can sort through all the ads for you, and already have established relationships with local businesses.[11]While the agency will take a portion of your wages, temp jobs tend to pay fairly well, and you can be clear about what your availability is around your class schedule.Another advantage of working through an agency is that you can turn down work if you are having a particularly busy week or month at school.4Baby-sit or nanny for local families. If you are responsible and good with children, you can often find steady work as a baby-sitter or nanny.Research the going rates in your area; as a college student, you may be able to demand a higher rate, particularly if you are an education major (or psychology, pre-med or nursing student, have certification in CPR and/or first-aid, etc.). In some cities, you may be able to make up to $15 an hour.[12]5Consider signing up with professional baby-sitting services. These businesses screen and run back-ground checks on their sitters. Many parents are more comfortable placing their children in the care of sitters who have been vetted through this process.6Advertise your baby-sitting business on campus. You may also consider offering your services to your professors. If you are their current student, they may not feel comfortable (or be allowed to) hire you, but they may be able to recommend you to other of their friends and colleagues.7Negotiate additional tasks for extra pay. If you are already spending time in a home taking care of children, you may be able to make some extra cash by going above and beyond.For example, you can offer to do laundry and wash dishes for an extra fee (perhaps $10 more) on top of your regular baby-sitting rate.[13]8Work with children in other ways. If baby-sitting isn't your thing, you may find fulfilling and lucrative work by tutoring or coaching elementary or high school students.Contact the local schools to see if they have children who might benefit from your services or to see if they have part-time coaching positions available.You may also be able to find these sorts of jobs by going to local organizations like the YMCA or YWCA.9Work with animals. If you connect better with animals than people, then you may be able to find work that puts you in contact with our non-human friends, which will be good for both your mental and your financial health.Advertise your services as a dog walker or pet sitter. You can place fliers (dog-parks and local veterinarians are great places to start) or advertise on-line, but don't overlook the importance of networking with people you know.You may even want to think about opening a pooper-scooper business. Cleaning up Fido's business is no one's favorite chore, but armed with gloves and the proper tools, it's an easy enough job. You'll also be provided with steady work![14]10Get paid to work outside. If you're young and strong and like to be outside, then starting a business in which you do yard work or landscaping could be right up your Alley | hell yes. able to switch up your services as the seasons change: have access to a lawn-mower and weed-whacker in the warmer months, and switch out to warm clothes and a shovel once the cold hits.If it snows a lot where you live, buying a snow-blower could be a solid investment. If you're an early bird, you may be able to make money by offering to scrape the ice off cars in the early hours before people have to go to work. You may be able to find several clients in your own neighborhood or at a single apartment complex.11Use your vehicle to your advantage. If you own your own car, are insured, and have a good driving record, then there are various ways you can put your car to work for you.You may be able to find work delivering papers, driving fellow students (to the airport, to run errands or go to appointments off-campus), or you can even open up your own delivery service. For example, you can get paid to grocery shopping for those who are home-bound while you stock up for your own pantry.If you have a truck, you probably already know that you (or rather, it) is in high demand, especially come moving in/out day on campus: offer your services as a mover—for a fee, of course!12House sit. Do you know anyone who is planning to take a long vacation, or has your professor mentioned their plans to travel overseas on their sabbatical? If so, you may be the perfect candidate to house-sit.This is a particularly great gig: you usually won't be asked to do much more than watch over the home, collect mail, water the plants, perform yard work as necessary, and perhaps care for pets. Beyond that, though, you'll get to live in a home that's probably far nicer than yours for a few days or even weeks.13Network to find house-sitting opportunities. Let your family, friends, and professors know about your availability to house-sit. It's usually best to try to find a friend-of-a-friend (or a coworker or boss of a friend or parent, etc.)Your immediate friends and family members may expect you to help out for free and be insulted at your request for payment.[15]14Sell blood and/or plasma. Why not perform a valuable service for others while getting paid at the same time? Depending upon whether you are giving blood or plasma, you can usually make in the range of $20-45 per “donation”.You will need to meet certain eligibility requirements before you'll be allowed to donate, though, and there are limits to how often you can donate.Read up on the American Red Cross's donation guidelines before you commit, or check in with the hospital or clinic where you'll be donating.[16]Method4Working from Home1Sell your gently used clothes to consignment shops. Take a careful look at your closet; how much of it do you regularly wear? How much of it still fits? How much of it is still in style? There's a good chance that you have a decent amount of money tied up in your wardrobe.Pull out any items that are still in good condition, make sure they are clean and wrinkle-free, and then take them to a local consignment shop.[17] You should be able to walk away with cash in hand. Just try not to spend it all on new clothes while you're there—unless, of course, that's why you wanted the extra money in the first place!2Sell your stuff online. If there isn't a good consignment shop nearby (or if you think you may be able to make more by selling your items yourself), you may want to consider selling your no-longer-wanted-or-needed possessions online. Craigslist and eBay are two popular sites to try.[18]Think about offering up your clothes, shoes, bags, accessories, exercise equipment, and/or electronic equipment. So long as it's in decent condition, you can usually find a buyer for nearly any item.You'll want to take high resolution pictures of your items, and be sure to offer a clear, complete description of the item. If you have warranty information, manuals, or brochures that accompany the items, you may have better luck making a sell.3Have a yard sale. You can also set up shop in your own yard (or drive-way, or garage). Many areas have active yard sale scenes, and it takes minimal work for you to be able to meet up with those who are looking for great deals.Post fliers around your neighborhood, and remember to place an ad in your local paper if they advertise garage/yard http://sales.Be willing to negotiate with buyers, and don't set your expectations too high when you set your prices. At best, you may only be able to fetch 25% of the original price you paid for an item. [19]4Write online. If you are good with the written word, you should be able to find plenty of opportunities to write (or edit others' work) online.Search for freelance writing and editing gigs. The rates for these jobs vary: you may be paid by the word, be offered a flat rate for a project, or in some cases can be paid an hourly rate. You typically won't be able to retain copyright over your work or collect royalties, however. Even so, by doing freelance work you can build a portfolio and make valuable connections which may later pay off with more stable job opportunities.5Start your own blog or website. If you want your work to remain your own, and if you want the freedom to write about whatever topics interest you, you can think about creating your own website or blog. If you get enough followers, you can start to bring in revenue through advertising.You'll only make a few cents per click on the ads on your page, but with enough followers, this can add up for you over time.6Start a YouTube channel. If you prefer visual media and are great at creating videos which are funny or informative, you may also be able to make money by creating a YouTube channel with advertising.See our related wikiHow on how to earn money on YouTube.7Turn your hobbies into a business. Do you love do-it-yourself projects? Are you able to knit, crochet, work with wood, or craft hand-made jewelry? If so, you may find a good client base by setting up shop on sites like eBay or Etsy.You'll need a PayPal account, a good camera to take quality pictures of your crafts, and a way to organize your orders.8Perform paid administrative work. If you have basic computer skills and don't mind doing repetitive work, you may be able to find work stuffing envelopes, doing data entry, or working as a telemarketer from your home.These jobs typically can be done in your spare time and require minimal training from the employing company.9Make the most of your time online. If you already spend too much time surfing or shopping online, you may be able to find a way to turn your time-wasting past time into a profitable venture. There are various business which offer you small amounts of money to take surveys (such as Online Surveys for Cash), download apps or listen to music.The money you'll be able to make will probably only amount to pocket change—you'll be offered a few cents to a few dollars per task—but it can add up over the course of time, and will certainly help you feel less guilty about the occasional latte splurge.10Design an app. There's a lot of potential money to be made in the mobile app business. If you've got an idea for a great new app that can either provide people with a fun diversion or help them organize their life or learn in creative new ways, you may be sitting on potentially lucrative idea.There are many tutorials available which offer helpful advice, and you can even create an app if you lack coding experience. See our related wikiHow on how to create an app.Method5Making Money by Saving Money1Rent a room. If you rent or own off-campus, you can free up a large chunk of cash by cutting down on your share of rent and utility expenses by finding a roommate. [20]Carefully screen applicants—it may be a good idea to begin searching for a roommate among your friends and classmates. Be sure to draw up an agreement between the two of you outlining how bills will be handled, and make sure you aren't violating your current lease if you bring in an additional person to your home.2Save money on books. Books are a large expense for any college student, but it's not a good idea to forego purchasing them at all. There are, however, various ways to potentially save hundreds on your book costs over the course of the school year.[21]Once your reading list is available, begin by checking the prices in the campus bookstore, but them look elsewhere for better deals.3Look for used books. You can usually find cheaper options (both new and used) online or by going to local used bookstores, who often buy books from students at the end of the term.Given that professors often use the same texts from term to term, you may be able to score much cheaper versions of the book. You may even be able to check the text out for free from the campus or local library.4See if you can use an older edition. If your professor has assigned a newer edition of a text, you may be able to get buy with an older (cheaper) edition of the text. Publishers often make very few changes from edition to edition, and the only thing that may vary is the page numbers or the occasional addition of a new reading.Double-check with your professor to see if an older edition will work for you before you commit to buying.5Rent or share textbooks. You may also be able to rent your textbooks for a much reduced cost, or you can split the cost of a pricey book with a classmate or roommate who is enrolled in the same course.If you do this, make sure that you have a clear schedule for when each of you will access to the book.6Carry cash only. You may be able to spend less by limiting yourself to only paying for items with cash. Put your debit and credit cards away, or tuck them in corner of your wallet to only be brought out for emergencies.When you cash your check or make a withdrawal, take out enough to last you for the month, if possible. This way, you can avoid having to make repeat trips to the ATM. At an average fee of $3 per withdrawal, the fees can really add up.[22]Avoid carrying all of your cash when you go out, though. Take just what you think you'll need.7Save on food on campus. If you live on campus, you may be required to purchase a dining plan. If so, select the most economical plan (be honest about how often you'll be willing or able to go to the cafeteria).Then, whatever plan you have, take full advantage of it: avoid skipping meals so that you won't need to purchase food later; and if you're allowed, take fruit or leftovers so that you'll have snacks available throughout the day.Also, scope out events on campus which offer free food.If you have a work study with the dining hall or catering services, you may be able to take home free food.[23]8Opt out of your dining plan. If you are able to, you may be able to save more money by opting out of a dining plan and buying your groceries yourself.Shop at discount grocery stores or buy in bulk from stores like Costco. While you get more bang for your buck when you buy in bulk, your tab can be pretty high. You can work around this problem by having a friend or roommate go in with you on purchases.9Save on clothes. Sure you want to look good, but you don't have to spend a lot to stay on trend. Consider simplifying your wardrobe: build a solid base of classics that you can easily mix and match.Buy all of your clothes second-hand or commit to only buying items on sale. You can also swap clothes with your friends to keep things fresh.10Barter your services with friends. Do you spend more than you'd like getting your hair and nails done each month? Do you have a friend who can't resist the pastries at the coffee shop or who pays for a personal trainer? Think about what both you and your friends spend money on, and then see if there's a way for you to barter and trade services with each other in order to save money.For example, in exchange for doing your hair before a big date, you can offer to supply your friend with some fresh-baked goodies.11Reduce your transportation costs. The costs associated with commuting to and from school (or across town as you run errands) can be quite high. In an effort to save money on gas, insurance, and parking, try to take public transportation as much as possible.Your school may have discounted bus passes available for students, or you may be able to arrange to carpool with your fellow students to classes or for supply runs.12Cut out luxuries. You may think that you can't live without your cable or Starbucks, but be honest with yourself. It's probably just the caffeine you need, and not the $4 latte.Make your coffee at home, consider cutting out the cable and switching to free or cheaper tv options (such as NetFlix or Hulu), and hold off on upgrading to the newest, shiniest electronic gadgets.[24]By going without luxuries, you'll of course free up money, but you'll also come to enjoy and appreciate them more once you can truly be able to afford them again.13Take advantage of student discounts. Before you head out to a local restaurant or museum, do some quick research to see if they offer discounts for students. As a student, you can often get free admission or great deals with your student identification.14Look for free entertainment. How much money do you currently spend going out to movies, bars, or clubs? While it's important that you have a social life and find ways to relax when you aren't hitting the books, you don't have to spend a lot of cash (or any!) to have a good time in your free time.Actually read the fliers and posters around campus, which advertise free, fun, and/or interesting activities and lectures. You may be able to see plays and concerts on campus, attend lectures from important thinkers, or go to university-sponsored parties all for free with your student ID.15Consider joining one or more of the clubs on campus. Besides being able to meet new and interesting people, some of them have regular activities (like movie nights) or even take service trips over school breaks.These are usually funded in part or sometimes completely through donations or through fund-raising efforts.[25]

Economic Moats - For Early Stage Startups and Early Stage Investors12,322 viewsShareLikeDownloadBrian Laung Aoaeh, CFA, Seed-Stage VC @KECVentures | Internet Infrastructure, Supply Chain, Transportation Services | Organizer: #TNYSCMFollowPublished onJul 28, 2016In order to grow into a company that endures, an early stage startup must...Published in: Technology1 Comment32 LikesStatisticsNotesPostAmy Wilson , Project Manager at Angel Vision Investors-= BTW Thanks for the info!.... Also you can send your pitchdeck to thousands of VC's and Angel's with just 1 click. Visit: Angelvisioninvestors.com4 weeks agoEconomic Moats - For Early Stage Startups and Early Stage Investors1. Notes on ECONOMIC MOATSfor early stage technology startups BRIAN LAUNG AOAEH2. 2  BA - Mathematics, Physics - Connecticut College  MBA – Specialization; Financial Instruments and Markets – NYU Leonard N. Stern School of Business Former employee; Watson Wyatt, UBS AG and Lehman Brothers Currently; Investment analyst, Partner - KEC Ventures, New York City WHAT DO I DO? I assess early stage technology startups for seed stage and series A venture capital investments BRIAN LAUNG AOAEH Let’s talk: @brianlaungaoaeh3. Questions I ask myself daily when assessing startups Focus on early stage technology startups A summary of the economic moats those startups might build around themselves to sustainably fend off competition and mature into successful companies The observations of this document take into account my experience as of 2015/2016 3 SCOPE OF THIS DOCUMENT 20164. 4 DEFINITIONS1 3 SWITCHING COSTS 2 NETWORK EFFECTS 4 INTANGIBLES 7 CONNECTING THE DOTS 5 COST ADVANTAGES 6 EFFICIENT SCALE SUMMARY5. 5 1 DEFINITIONS6. WHAT IS A STARTUP? A temporary organization built to search for the solution to a problem, and in the process to find a repeatable, scalable and profitable business model that is designed for incredibly fast growth #Experimentation #SteveBlank #PaulGraham 6 WHAT IS AN ECONOMIC MOAT? When specifically thinking of early stage technology startups: A structural feature of a startup’s business model that protects it from competition in the present but enhances its competitive position in the future WHAT ARE THE SOURCES OF ECONOMIC MOAT? NETWORK EFFECT SWITCHING COSTS INTANGIBLE ASSETS EFFICIENT SCALECOST ADVANTAGE7. 7 2 NETWORK EFFECTS8. WHAT IS A NETWORK EFFECT (also known as Direct-benefit effect)? A network effect occurs when the value of a good or service increases for both new and existing users as more customers use that good or service. The network effect is a virtuous cycle that allows strong companies to become even stronger. 8  Need for some form of interaction or compatibility with others: the number of other people using the technology has a direct impact on how valuable that technology is to each individual user.  For Network effects to evolve positively for a startup, the users of the network need to derive both inherent value and network value from their use of the product.  Inherent value is value that an individual user derives because of that individual user’s consumption of the product or service.  Network value is value that an individual user derives because other people use the product or service. HOW DO THEY DEVELOP?9. LOCAL NETWORK EFFECTS DIRECT NETWORK EFFECTS or one-sided network effects TWO-SIDED NETWORK EFFECTS INDIRECT NETWORK EFFECTS 9 4 TYPES OF DIRECT-BENEFIT EFFECTS When increased usage leads explicitly to increased welfare for the members of the network Fax machines, telephones, messaging apps When the proliferation of network members leads to the proliferation of complementary goods and services such that the welfare of the network’s members increases significantly iOS, Android, smartphones and apps When an increase in usage of the product by one group of network members increases the welfare of a separate and distinct group of other members of the same network. Marketplaces, platforms that combine hardware and software, and software pairings in which there’s a reader and writer When an individual network member’s welfare increases not because of an increase in the overall network user base, but as a result of growth in the users within a localized subset of the network’s membership. Whatsapp: welfare increases when people in your contacts’ list join, no matter the number of Whatsapp users10. The Power of Network Effects (Image Credit: Ray Stern, former CMO of Intuit) 10 THE POWER OF NETWORK EFFECTS11. 11 HOW MIGHT A STARTUP START TO EXPERIENCE NEGATIVE NETWORK EFFECTS? LOCK-IN OR SWITCHING COSTS  When a member of one network cannot switch from that network to another without suffering substantial costs.  The switching costs could be monetary and non-monetary. Often, the non-monetary switching costs far outweigh the monetary costs. Non-monetary costs might include the loss of massive amounts of information and data, business process disruptions, and so on and so forth.  Switching costs are not an issue as long as users perceive that they derive more value from being within the network than the inconvenience they suffer as a result of lock-in or switching costs. NETWORK CONGESTION CONFLICTS OF INTEREST12. 12 HOW MIGHT A STARTUP START TO EXPERIENCE NEGATIVE NETWORK EFFECTS? LOCK-IN OR SWITCHING COSTS NETWORK CONGESTION CONFLICTS OF INTEREST  When the experience of each member of the network deteriorates as the network’s membership grows. In other words the network becomes less efficient from the users’ perspective.  As a result of this each member of the network derives decreasing inherent and network value from the network. Ex: A website, web or mobile app that is consistently unavailable because too many people are trying to access it simultaneously13.  When a network operator behaves in ways that limit or restrict the ability of network members to freely form sub-networks.  Networks that support the construction of communicating groups create value that scales exponentially with network size, i.e. much more rapidly than Metcalfe’s square law.  When the operator of a network platform starts to compete with its platform partners it is engaging in behavior that will lead to the destruction of the network. Ex: I prefer to buy used books on Amazon if possible. This is possible because Amazon has allowed independent merchants to market such goods in its marketplace. If Amazon compelled me to purchase its own offering, or pay a penalty otherwise, what effect would that have on my behavior? On the behavior of the independent sellers? What if an Amazon competitor did not impose that penalty? How might that shift the competitive landscape? 13 HOW MIGHT A STARTUP START TO EXPERIENCE NEGATIVE NETWORK EFFECTS? LOCK-IN OR SWITCHING COSTS NETWORK CONGESTION CONFLICTS OF INTEREST14. First mover adoption matters It can pay to subsidize adoption – by providing an in-network benefit of some sort Viral marketing matters Redefine the market Form alliances and partnerships Leverage distribution channels Seed the market Encourage the development of complementary goods Leverage backward compatibility Build-in compatibility with the market leader Close-off access to new entrants and existing rivals and innovate constantly Pre-announcements 14 WHAT STRATEGIES SHOULD A STARTUP THAT’S COMPETING IN A MARKET IN WHICH NETWORK EFFECTS MATTER EMPLOY IN ORDER TO WIN?15.  Understanding networks effects and how they unfold for an early stage startup is critical  Markets with network effects are fiercely competitive  A bandwagon effect tends to take hold thanks to positive-feedback loops  A winner can emerge in remarkably short order and that winner typically garners a commanding market share lead over its competitors  Once a winner has been established it is extremely difficult for competitors to win users away from it 15 CONCLUSION ON NETWORK EFFECTS16. 16 3 SWITCHING COSTS17.  Switching costs refer to the expense in cash, time, convenience, risk, and process disruption that a customer of one product or service must incur if they change from one product from an incumbent Producer A to another product from Producer B.  Switching costs can be explicit or implicit.  It can confer the benefit of customer lock-in to incumbent suppliers if the customer perceives the cost of switching as outweighing the benefits that would be obtained by making the switch. 17 WHAT ARE SWITCHING COSTS?18. 18 HOW DO SWITCHING COSTS DEVELOP?  When an incumbent product becomes “mission-critical” for the purpose for which the customer acquired the product in the first place.  An incumbent that combines network effects with high switching costs in the same product line is well positioned to build a durable moat around its business.  3 main assumptions about switching costs: They can be exogenous Switching costs are symmetricalThey can be endogenous When they evolve without any intentional influence from the incumbent producer Ex: From customers that adapt the product When they evolve through deliberate actions by the incumbent Ex: volume discounts , long-lived license agreements, incompatibility with competing products between all the producers competing within a given market19. COMPATIBILITY REQUIREMENTS TRANSACTION COSTS COGNITIVE COSTS UNCERTAINTY LEARNING COSTS LOST-BENEFIT COSTS 19 WHAT ARE THE TYPES OF SWITHCHING COSTS THAT LEAD TO BUYER LOCK-IN? One might consider switching costs to exist along a continuum that is characterized most distinctly by how intertwined each of the categories identified by economists is tightly intertwined with nearly every other category below:  They make it difficult and expensive to switch between products.  It is an implicit cost that is borne by the customer. Ex: An individual or organization running MS Windows contemplating a decision to switch to Linux.20. COMPATIBILITY REQUIREMENTS TRANSACTION COSTS COGNITIVE COSTS UNCERTAINTY LEARNING COSTS LOST-BENEFIT COSTS 20 WHAT ARE THE TYPES OF SWITHCHING COSTS THAT LEAD TO BUYER LOCK-IN? One might consider switching costs to exist along a continuum that is characterized most distinctly by how intertwined each of the categories identified by economists is tightly intertwined with nearly every other category below: They impose an explicit cost on customers who decide to switch from one product to another Ex: Cable-TV subscription agreements typically impose a high penalty on subscribers who decide to terminate their agreement before it has run its full course21. COMPATIBILITY REQUIREMENTS TRANSACTION COSTS COGNITIVE COSTS UNCERTAINTY LEARNING COSTS LOST-BENEFIT COSTS 21 WHAT ARE THE TYPES OF SWITHCHING COSTS THAT LEAD TO BUYER LOCK-IN? One might consider switching costs to exist along a continuum that is characterized most distinctly by how intertwined each of the categories identified by economists is tightly intertwined with nearly every other category below: They are the perceived hurdles customers feel they will have to overcome when they switch from one product to another. Ex: The dichotomy between Mac and Windows lovers. Beyond the practical reasons for preferring one system over the other, discussions often turn to name-calling. That suggests there are significant psychological issues at play that have nothing to do with the reality one might face if one tried to switch products22. COMPATIBILITY REQUIREMENTS TRANSACTION COSTS COGNITIVE COSTS UNCERTAINTY LEARNING COSTS LOST-BENEFIT COSTS 22 WHAT ARE THE TYPES OF SWITHCHING COSTS THAT LEAD TO BUYER LOCK-IN? One might consider switching costs to exist along a continuum that is characterized most distinctly by how intertwined each of the categories identified by economists is tightly intertwined with nearly every other category below:  The apprehension regarding the quality of the new product – it works for the incumbent when customers have very little information about the relative performance characteristics of the new product  Uncertainty is minimized only if the customer believes that, at a minimum, the new product will match the old product in quality. Ex: A small business considering migrating from MS Exchange Server to Google Apps for Business at a time when its license for the former is up for renewal.23. COMPATIBILITY REQUIREMENTS TRANSACTION COSTS COGNITIVE COSTS UNCERTAINTY LEARNING COSTS LOST-BENEFIT COSTS 23 WHAT ARE THE TYPES OF SWITHCHING COSTS THAT LEAD TO BUYER LOCK-IN? One might consider switching costs to exist along a continuum that is characterized most distinctly by how intertwined each of the categories identified by economists is tightly intertwined with nearly every other category below:  They are the hurdles to overcome to attain a mastery of the new product that is at par with mastery of the incumbent product.  Learning costs need to be considered on their own, independent of other categories of switching costs.  High learning costs increase switching costs in favor of the incumbent and vice- versa.  The decision to switch products often depends on the consequences when things go wrong, whether it’s an inconvenience or a potential significant loss of revenue.24. COMPATIBILITY REQUIREMENTS TRANSACTION COSTS COGNITIVE COSTS UNCERTAINTY LEARNING COSTS LOST-BENEFIT COSTS 24 WHAT ARE THE TYPES OF SWITHCHING COSTS THAT LEAD TO BUYER LOCK-IN? One might consider switching costs to exist along a continuum that is characterized most distinctly by how intertwined each of the categories identified by economists is tightly intertwined with nearly every other category below:  They are costs suffered by the customer because of certain non-transferable benefits that have been earned but not yet consumed as a result of its historical relationship with the incumbent.  The customer who decides to make a switch suffers a significant loss and must start to earn such benefits from scratch with the new provider. Ex: Loyalty programs such as airline travel points, or roll-over minutes for mobile phone subscriptions.25. Maintaining high switching costs leads to sustaining innovation for the incumbent  Switching costs lock in high-margin customers (with high needs) for the incumbent. To keep meeting their requirements, the incumbent needs to sustain innovation. While it improves on already existing products, it focuses on squeezing more out of a large base of existing and a comparatively small base of new customers. Disruptive innovation by competitors is aimed first at new customers in the market  However, disruptive innovation seeks to satisfy non-consumption by developing products with features so simple and inexpensive in comparison to the status quo that a disproportionately large number of new customers enter the market. The key is that the customers that flock to the disruptive product are very unattractive to established incumbents. With time, the disruptive product becomes a substitute for the incumbent product  With time, the disruptive innovation matures to the extent that it becomes a viable substitute first for the incumbent’s low-margin customers (with “only moderate” needs), and then for its most profitable customers - at a price point that is extremely hard for them to resist.  It is at this tipping point that the incumbent’s fight for its survival begins. 25 HOW MIGHT SWITCHING COSTS BECOME A DISADVANTAGE?26. It is important for early stage technology startups, and investors, to understand the dynamic that might evolve as they seek entry into a market characterized by an incumbent who benefits from customer lock-in. The incumbent sells to existing customers, rival new-entrant serves new buyers The incumbent excludes the new entrant New customers are won with bargains, then they are “ripped off” Customers are paid to switch A portfolio of products is bundled together in order to increase total switching costs 26 WHAT ARE THE COMPETITIVE STRATEGIES AT PLAY IN MARKETS IN WHICH SWITCHING COSTS MATTER? 1 2 3 4 527.  This happens in markets that are relatively mature.  The incumbent focuses its efforts on its existing customer base, with growth in revenues arising from endogenous growth within that customer base.  New entrants meanwhile utilize new technology to serve new customers, initially ignoring the incumbents existing customer base.  This is especially true in markets in which the incumbent producer has a high level of power relative to customers in that market – typified by dominant market share, giving it pricing power over its existing customer base. 27 WHAT ARE THE COMPETITIVE STRATEGIES AT PLAY IN MARKETS IN WHICH SWITCHING COSTS MATTER? The incumbent sells to existing customers, rival new-entrant serves new buyers128. 28 WHAT ARE THE COMPETITIVE STRATEGIES AT PLAY IN MARKETS IN WHICH SWITCHING COSTS MATTER? The incumbent excludes the new entrant2  This happens in markets when the incumbent’s fixed costs per customer are greater than the switching costs per customer.  The strategy works if the incumbent is in a position to set a price that makes it unattractive for any new entrant to enter the market.  Where this is not possible, the incumbent will choose to set a price that allows the market to be shared between the incumbent and the new entrant.  This is why freemium business models are so powerful, especially when a freemium business model is coupled with a product that embodies network effects and switching costs. Ex: Facebook – A cost-leadership strategy to compete with Facebook is ineffective, so competitors must seek an alternate path.29. 29 WHAT ARE THE COMPETITIVE STRATEGIES AT PLAY IN MARKETS IN WHICH SWITCHING COSTS MATTER? New customers are won with bargains, then they are “ripped off”3  This happens when customers are offered low “introductory offers” in order to entice them to adopt a product. Prices increase once lock-in has been established.  A common example are products that are free up to a certain usage threshold but for which continued use beyond the set threshold requires customers to pay. Various mechanisms might be used to ensure the onset of customer lock-in, and improvements in the product’s features and capabilities are designed to nudge users over the threshold beyond which they have to become paying customers.  This tactic is common among cable TV and satellite TV providers, and also among internet service providers.30. 30 WHAT ARE THE COMPETITIVE STRATEGIES AT PLAY IN MARKETS IN WHICH SWITCHING COSTS MATTER? Customers are paid to switch4  Consider three segments of an incumbent producer’s customers:  Existing locked-in customers,  Unattached or new customers,  Customers locked into a rival.  In this situation, rival producers will implement price discrimination:  Existing locked-in customers get one set of prices,  New or unattached customers get another set of prices,  Customers locked into rivals are paid to switch.  This tactic is common with cellular phone service providers and credit card issuers.31. 31 WHAT ARE THE COMPETITIVE STRATEGIES AT PLAY IN MARKETS IN WHICH SWITCHING COSTS MATTER? A portfolio of products is bundled together in order to increase total switching costs5  In order to make a switch, the customer must deal with nearly all the switching costs we have previously considered at the same time.  It works especially when the incumbent producer offers a product line that is so broad that most customers simply deal with the incumbent as their single supplier for the entire line of products that they use. Ex: Microsoft’s strategy of giving away Internet Explorer in a bundle with Microsoft Windows reportedly led to the demise of Netscape Navigator. I would guess that beyond merely bundling Explorer with Windows, Microsoft built-in a number of features that made Navigator less compatible with the Windows operating system than Explorer.32.  Switching costs play an important role in retaining customers, and motivating repeat purchases in the future.  Early stage startups must spend some time understanding the features that create value for the customer while building customer lock-in early in their product design process.  The existence, or lack thereof, of switching costs amongst the incumbent’s customers will play an important role in determining its competitive response:  In a market with low switching costs, one might expect vicious price wars to ensue. Generally, such price wars will always favor the presumably better capitalized incumbent. Moreover, price wars are a bad idea for the incumbent as well as the new entrants.  In a market where the incumbent enjoys significant customer lock-in with ensuing monopoly profits, one generally expects new entrants to find a foothold from which they can eventually migrate up-market 32 CONCLUSION ON SWITCHING COSTS33. 33 4 INTANGIBLE ASSETS34.  An asset is a resource that is owned by a startup with the expectation that it will provide an economic benefit to the startup in the future.  Intangible Assets are assets that are not physical in nature. 34 WHAT ARE INTANGIBLE ASSETS? Intangible assets—a skilled workforce, patents and know-how, software, strong customer relationships, brands, unique organizational designs and processes, and the like—generate most of corporate growth and shareholder value. They account for well over half the market capitalization of public companies. They absorb a trillion dollars of corporate investment funds every year. In fact, these “soft” assets are what give today’s companies their hard competitive edge. Baruch Lev, Sharpening The Intangibles Edge, Harvard Business Review June 2004 Issue “35. INTELLECTUAL PROPERTY BRAND R&D REGULATORY ENVIRONMENT CULTURE & MANAGEMENT 35 THE DIFFERENT TYPES OF INTANGIBLE ASSETS36. As far as early stage technology startups are concerned I am mostly interested in: “ Copyrights Trademarks Patents Trade secrets 36 INTELLECTUAL PROPERTY - overview Intellectual property (IP) refers to creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce. World Intellectual Property Organization37. A copyright protects the original author’s work - that can be stored in some form of fixed media - from indiscriminate copying by other people.  Original author’s work: computer software, computer programs, blog posts, advertisements, marketing materials, videos, pictures, etc.  Some form of fixed media: Creating the work in my mind is not enough, but the moment I commit it to software or document it some other tangible way (even a notebook), the copyright comes into existence.  Protects: - Copyright registration: not necessary but in the US, a copyright holder can not file a lawsuit for infringement if the copyright is not registered with the United States Copyright Office. - For an individual, for the life of the original author + 70 years beyond his death - For a startup, for 120 years from the date of creation or 95 years from the date of publication. 37 INTELLECTUAL PROPERTY Copyrights 1/238. Note on copyrights for early stage startup: “WORK FOR HIRE DOCTRINE” “ 38 INTELLECTUAL PROPERTY Copyrights 2/2 In early stage startups, the parameters for determining who is an employee is not very straightforward. Thus, I believe founders should make it a practice to protect some of the work done by contractors and vendors with work for hire agreements, that will state unambiguously that the work product covered by the agreement between the startup and the contractor is a work for hire to the benefit of the startup. If a work is made for hire, an employer is considered the author even if an employee actually created the work. The employer can be a firm, an organization, or an individual United States Copyright Office39. A trademark is a brand name. A trademark or service mark includes any word, name, symbol, device, or any combination, used or intended to be used to identify and distinguish the goods/services of one seller or provider from those of others, and to indicate the source of the goods/services. US Patent and Trademark Office “ 39 INTELLECTUAL PROPERTY Trademarks 1/2 Similar to copyright protection, merely using the mark in the course of doing business establishes the trademark right for the startup that owns the mark. A startup founder seeking trademark protection should seek the advice of an IP attorney since this is a more complicated topic than copyright protection.40. According to the International Trademark Association trademarks are:  Fanciful Marks – coined (made-up) words that have no relation to the goods being described (e.g., EXXON for petroleum products).  Arbitrary Marks – existing words that contribute no meaning to the goods being described (e.g., APPLE for computers).  Suggestive Marks – words that suggest meaning or relation but that do not describe the goods themselves (e.g., COPPERTONE for suntan lotion).  Descriptive Marks – marks that describe either the goods or a characteristic of the goods. Often it is very difficult to enforce trademark rights in a descriptive mark unless the mark has acquired a secondary meaning (e.g., SHOELAND for a shoe store).  Generic Terms – words that are the accepted and recognized description of a class of goods or services (e.g., computer software, facial tissue). A fanciful mark has the strongest trademark protection. A generic mark has the weakest protection. Over time, the protection afforded a fanciful mark can wane if that term becomes a generic term that is used to describe a category. 40 INTELLECTUAL PROPERTY Trademarks 2/241. WHAT IS A PATENT?  A patent is an exclusive right granted for an invention; a product or a process that generally provides a new way of doing something, or offers a new technical solution to a problem.  Patent protection means that the invention cannot be commercially made, used, distributed, imported, or sold by others without the patent owner’s consent.  During the period in which the invention is protected, the patent owner can:  give permission to (license) other parties to use the invention on mutually agreed terms  sell the right to the invention to someone else, who will then become the new owner of the patent.  Once a patent expires, the protection ends, and an invention enters the public domain: anyone can commercially exploit the invention without infringing the patent. 41 INTELLECTUAL PROPERTY Patents 1/742. 42 INTELLECTUAL PROPERTY Patents 2/7 TYPES OF PATENTS  There are design patents and utility patents.  Design patents are used to protect the appearance of an invention.  Utility patents comprise most of the patent applications made to the US Patent and Trademark Office and are used to protect the functional features of an invention. They generally provide broader protection than design patents, also it is easier to avoid infringing on a design patent. They are also more expensive and take longer to obtain.43. CONTENT OF PATENT APPLICATIONS To get a patent, technical information about the invention must be disclosed to the public in a patent application, that must be:  Patentable  New, or novel  Useful: a theory will not receive patent protection, in and of itself if it is not useful in a practical application.  Non-obvious: “someone of ordinary skill in the arts” would not necessarily have reached the deductions made by the inventor on the basis of prior art in that technical field  Adequately described: “someone of ordinary skill in the arts” should be able to replicate the invention using nothing but prior background in that technical field along with the inventor’s description in the patent application Software and business process patent applications will also likely be subjected to a “machine or transformation test.”  The machine test means that software or business processes can not be patented unless they are combined with a machine of some sort – a computer.  The transformation test means that software or business processes cannot be patented unless they transform one thing into another, different thing, or into a different state. 43 INTELLECTUAL PROPERTY Patents 3/744. FILING A PATENT APPLICATION There are two main patent award systems:  first to invent jurisdictions (like the US)  first to file jurisdictions Public disclosure causes the invention to become part of the “prior art” in the field of the invention. In the US: From the first disclosure to the public, the inventor has 1 year within which to file a patent application. If he doesn’t, he either forfeits patent protection for that embodiment of the invention or he can file for a provisional patent application with the USPTO to preserve a filing date. A final, or utility application has to be filed within 12 months, and will be examined by the USPTO to determine the merit of the inventors appeal for patent protection. Outside the US: Inventors do not have the benefit of a grace period. As a result any international patent applications must be made as soon as possible, in order to preclude public disclosure by the inventor. 44 INTELLECTUAL PROPERTY Patents 4/745. WORKING WITH PATENT ATTORNEYS OR PATENT AGENTS  They are unlikely to be experts in the technical field of an invention even if they specialize in the legalities of obtaining a patent in that field.  It is the inventor’s responsibility to transfer as much background knowledge as possible about the technical field of the invention and specific nuances of the invention itself to the patent agent/attorney.  This will help the attorney perform a more complete and comprehensive patentability search.  It will ensure that the patent application is drafted correctly from the outset. That has the benefit of minimizing rework.  It will also help the attorney answer questions and respond to objections during the period when the patent is being examined by patent examiners 45 INTELLECTUAL PROPERTY Patents 5/746. ADDITIONAL SUGGESTIONS – Part 1  Maintain “excruciatingly detailed” notes about the invention. You should describe the invention such that someone of considerably less expertise than you can understand the description. Keep pictures, drawings, figures, and any data that you create as you go through the invention process. You can maintain a “lab-book” with numbered pages, dates, and handwritten notes about how you have tested your invention using theory, as well as the steps you have taken to test the output of what you have created. These can be supplemented by electronic notes created with MS Word, and also saved as PDF files as well as spreadsheets you have developed to test the idea further.  Describe prior attempts to do what your invention does, and keep notes about why those prior attempts did not work.  Keep notes about the alternatives to your invention, and descriptions about how your invention is unique. You should describe the advantages of your invention over the prior art and alternative approaches.  Keep records about any discussions you have had about the invention with people outside of the immediate team working on your startup’s product. 46 INTELLECTUAL PROPERTY Patents 6/747. ADDITIONAL SUGGESTIONS – Part 2  Discuss the possibility of obtaining international patent protection with your IP attorney.  In certain instances it is possible to speed up a patent application in the founders’ home jurisdiction by first obtaining a patent abroad.  The Patent Cooperation Treaty (PCT) between different jurisdictions states that patent offices can fast track the examination of an applicant that has received a final ruling from a first patent office (which allowed at least one claim), through the Patent Prosecution Highway (PPH).  This is particularly useful when foreign patent offices can grant patents in a much shorter time than the USPTO does. Ex: a startup applying for a patent (examination times can of course vary)  In the US, it will take 5 years or more  In the UK, it will take 18 months + 6 months fast track examination in the US through the PPH = 24 months to get the patent granted 47 INTELLECTUAL PROPERTY Patents 7/748.  A trade secret is any confidential and non-public information that confers a competitive advantage to the owner of that information because it is not known to the public, and especially because it is not known to competitors in that market.  The owner of the information must make demonstrable effort to keep the information secret.  Trade secrecy can be lost by legitimate means, such as reverse-engineering by a competitor. It lasts for as long as the information remains confidential and undisclosed to the public. Any kind of information can be designated as a trade secret by its owner.  The key to maintaining trade secrecy is the creation of internal practices and procedures that are designed to protect the information designated as “trade secrets” from being divulged to the public. Ex: The mystique behind the formula for Coca Cola is one famous example of a trade secret. 48 INTELLECTUAL PROPERTY Trade secrets 1/249. ADVANTAGES  It is cheaper than going through the process of obtaining a patent.  It can cover subject matter that would not qualify for patent protection.  It comes into effect almost instantaneously, and that protection can last indefinitely if appropriate processes, procedures and practices are put in place. DISADVANTAGES  Once trade secrecy is lost, it is lost forever.  They can be reverse engineered by others.  Information protected by one party (A) could legitimately be “independently invented” by another party (B), who would patent it, resulting in a violation of B’s patent by the first inventor A  speak with an attorney for more details  It provides a significantly lower degree of protection than protection obtained from holding a patent. 49 INTELLECTUAL PROPERTY Trade secrets 2/250. INTELLECTUAL PROPERTY BRAND R&D REGULATORY ENVIRONMENT CULTURE & MANAGEMENT 50 THE DIFFERENT TYPES OF INTANGIBLE ASSETS51. WHAT IS A BRAND? Austin McGhie emphasizes throughout his book Brand is A Four Letter Word that a company’s brand embodies the market’s response to:  The company’s product,  The customer/user’s experience when they use the product, and  The company’s marketing strategy, which should lead to a differentiated and valuable positioning of the company and its products relative to its competitors.  It is an “emotional shorthand for a wealth of accumulated or assumed information”, which can be positive or negative.  It develops over time, as users and customers build an accumulation of experiences with the product or service.  Positive feelings should be reinforced continually and consistently by the company through its PR and marketing. 51 BRAND 1/352. “ “ 52 BRAND 2/3 HOW A STRONG BRAND CAN BE AN ECONOMIC MOAT A brand creates an economic moat around a company’s profits if it increases the customer’s willingness to pay or increases customer captivity. A moat worthy brand manifests itself as pricing power or repeat business that translates into sustainable economic profits. Why Moats Matter A brand is present when the value of what a product, service, or personality means to its audience is greater than the value of what it does for that audience. Brand is a Four Letter Word53. 53 BRAND 3/3 EARLY STAGE TECHNOLOGY STARTUPS TOO OFTEN NEGLECT THEIR BRAND  A common reasoning is that there is no capital to devote to marketing.  However, the first step has already been done by the company when building its product: getting an intimate knowledge of its customers/users. Marketing is multifaceted and doesn’t have to be expensive: use social media to build the hype, have the founders embody the brand, etc. Trademarks, copyrights, design, iconography, and trade secrets (as a source of implicit brand affinity and loyalty) should also all reinforce the positive emotions that the startup has already been accumulating. In a few words, implement a simple strategy to communicate on 3 levels to customers:  WHAT – What problem does the startup’s product solve for them?  HOW – How is this better than the current alternative?  WHY – Why should they accept the risk that comes with trying a product from an early-stage startup? Why will they gain more than they stand to lose?54. INTELLECTUAL PROPERTY BRAND R&D REGULATORY ENVIRONMENT CULTURE & MANAGEMENT 54 THE DIFFERENT TYPES OF INTANGIBLE ASSETS55. 55 RESEARCH AND DEVELOPMENT 1/2 WHAT IS R&D? R&D is the set of systematic, investigative, and exploratory activities that a business chooses to conduct with the intention of making a discovery that can either lead to the development of new products or procedures, or that can lead to an improvement of existing products or procedures, and in the process develop better ways of solving customers’ problems, creating new profit opportunities for the business.  It is systematic, investigative, and exploratory – it seeks to expand the boundaries of organizational knowhow and organizational capacity.  It seeks to solve customers’ problems in a better way than the status quo.  It seeks to create new opportunities for the startup to make profits. For those reasons, ongoing R&D is one important means by which any organization that operates in a competitive market can create an enduring competitive advantage for itself.56. 56 RESEARCH AND DEVELOPMENT 2/2 R&D IS A GOOD INDICATOR OF FUTURE PROFITABILITY  Studies have shown that R&D intensive firms have sustained future profitability.  So what does this mean for early stage investors? All else equal, invest in startup founders who show indications of being capable of building organizations that will become R&D leaders in the markets in which they have to compete.  How might one go about assessing this? How often in the past have the founders’ started with the same information as everyone one else, but examined it in a way that led to unexpected results that proved to be correct and so enabled them to exploit an opportunity others ignored or did not know existed? For early stage technology startups, R&D should purposely seek to strengthen both the startup’s ability to win and retain customers, and increase profitability.57. INTELLECTUAL PROPERTY BRAND R&D REGULATORY ENVIRONMENT CULTURE & MANAGEMENT 57 THE DIFFERENT TYPES OF INTANGIBLE ASSETS58. 58 CULTURE & MANAGEMENT 1/5 INVESTING IS MAKING A BET ON THE FOUNDERS’ DECISION-MAKING ABILITIES  Seed-stage investors are really taking a bet on the founders’ decision-making skill as managers of entrepreneurial risk, and the assumptions that drive those decisions.  It is very hard to differentiate between skill and luck at that stage because the financial ratios and metrics that one could use to make that determination do not yet exist. Managerial decision making skill only reveals itself over time.  What kinds of decisions will founders make, and make correctly on a consistent enough basis to yield a return on the investors’ capital?  The qualities of a good entrepreneur are multifaceted and not so easily visible in early stage technology startups.59. THE ENTREPRENEURIAL STATE OF MIND In some cases, including the entrepreneurial context, uncertainty includes not only uncertainty about others’ actions, but also uncertainty regarding the courage and willingness of others to act. Ross B. Emmet, Frank H. Knight on the “Entrepreneur Function” in Modern Enterprise (PDF)  Jean-Baptiste Say – 1800 // An entrepreneur shifts resources out of an area of lower productivity and into another area of higher productivity and return.  Frank H. Knight – 1921 // An entrepreneur is someone who confronts a business challenge and is confident enough to risk financial loss in order to overcome that challenge.  Joseph Schumpeter – 1965 // An entrepreneur is someone who exploits market opportunities through technical and organizational innovation.  Peter Drucker – 1970 // An entrepreneur is someone who always searches for change, responds to it and exploits it as a business opportunity.  Robert Hisrich – 1990 // An entrepreneur is someone who takes the initiative to organize social and economic factors of production in order to create something unique that is of value to society, and accepts financial and social risk in the process. 59 CULTURE & MANAGEMENT 2/560. 60 CULTURE & MANAGEMENT 3/5 HOW TO DISCERN POTENTIALLY GREAT MANAGERS  Study the founders’ past accomplishments and try to determine which aspects of that track record result from decision-making skill and which ones result from luck. Weigh those two things during the assessment of what that means for the startup.  Take sufficient time to observe founders’ decision-making skills and abilities – individual skill matters just as much as collective skill.  Look at the role each co-founder plays in the final outcome.  The early stage startup founders who excite me the most have convinced me that they know how to build an organization that will become exceedingly more valuable than the sum of its parts. They must inspire excellence from their co-founders, from other early team members they recruit to join the startup, and they must inspire devotion from their early customers.61. DECISION-MAKING PITFALLS  Insufficient focus on the customer, too much focus on the technological innovation.  Sub-par outcomes regarding recruiting great people, and empowering them to bring the founders’ vision into reality.  Inability to think creatively about new organizational designs and structures that will yield better insights about shifts in the expectations of existing customers, the hidden pockets of potential new customers, and opportunities that might be going unrecognized by competitors.  Incongruities between what the startup needs to accomplish in order to satisfy its customers and achieve product-market fit, and the choices that the founders make. There are many others. 61 CULTURE & MANAGEMENT 4/562. CULTURE EMERGES FROM THE START The culture of a startup is determined predominantly by the attitude, behavior, and personality of the founders. Look out for these elements:  Founders are self-aware, and understand how their behavior affects the startup through the response it elicits from members of their team, from their early customers/users, and from their early investors.  The way the founders talk about themselves and the organization they are building is distinctive, it illuminates the founders’ beliefs about the world, and about the reality they will create as a result of those beliefs.  They understand what they need to do to build a winning team. They also know why they need to do those things if they want their team to succeed.  They understand that culture is not something they can ignore until things are falling apart, rather it has to be tended continually. Culture matters just as much as other organizational functions that are much easier to measure and manage. 62 CULTURE & MANAGEMENT 5/563. INTELLECTUAL PROPERTY BRAND R&D REGULATORY ENVIRONMENT CULTURE & MANAGEMENT 63 THE DIFFERENT TYPES OF INTANGIBLE ASSETS64. WHAT IS IT AND HOW DOES IT WORK?  The regulatory environment is the framework of rules, laws, and regulations that the startup and its competitors have to adhere to as they go about their operations.  The benefits of this asset accrue to every entity that decides to enter that market after rules have been established by regulatory bodies:  First-movers usually bear all the social, political, and financial risks of putting the regulatory environment in place.  Fast-followers get a free-ride after a regulatory framework has been established  In the United States there are many examples of regulators requesting comment from participants in an industry during the period when rules, laws, regulations are being crafted to govern the activities of organizations within a given market. 64 REGULATORY ENVIRONMENT 1/265. WHAT ABOUT ASSESSING EARLY STAGE STARTUPS?  Startup founders who can play a role in shaping the regulatory environment that is developed to govern their activities have a better chance of influencing events in their favor than founders who demonstrate an inability to influence legislation.  If it is appropriate I want to see some evidence that founders have an understanding of the role that regulations might play; will they be a catalyst or an impediment? What can the startup do to make regulations work in favor of the business model that the startup has set out to create?  This is one of the most difficult intangibles for me discuss:  I have relatively less experience on this subject than on the preceding ones.  It is so specialized, it will largely be outsourced to a lobbyist, at least in the US.  This is unlikely to be something a startup needs to worry about until it has grown considerably, which is likely to happen well beyond the seed stage. 65 REGULATORY ENVIRONMENT 2/266.  Assessing intangibles and their potential impact on the future of an early stage startup is hard work that can seem to rely on information that is even more qualitative and less data driven than other aspects of early-stage startup investment analysis.  Nonetheless, it is important to think through the issues carefully since that work can lead to important conclusions that highlight potential risks and uncertainties, point to future areas of possible opportunity, and yield better decisions about when and where the investor should deploy scarce capital.  Collectively, intangibles are important because once a startup establishes them as an asset, it is impossible for that asset to be replicated in exactly the same way by a competitor. 66 CONCLUSION ON INTANGIBLE ASSETS67. 67 5 COST ADVANTAGES68.  A cost advantage arises when a company can sustainably lower its costs of doing business relative to its competitors.  Such a reduction in costs can be due to process advantages, superior location, economies of scale, or access to a unique asset. In other words: Definition: A cost advantage is a structural feature of a startup’s business model that enables it to maintain sustainably lower overall costs of doing business than its competitors while earning equal or higher margins over time. 68 WHAT IS A COST ADVANTAGE?69. For early stage technology startups, these are the most important sources from which a cost advantage may be derived. 69 SOURCES OF COST ADVANTAGE PEOPLE & CULTURE SYSTEMS & PROCESSES FACILITIES CAPITAL  When a startup develops a unique organizational culture, it creates management processes, and organizational structures that enable and empower members of the team to consistently generate significantly better results than the results of its direct competitors and that beat the adjusted-performance of more well-established incumbents in that market.  This source of cost advantage is intimately connected to the intangibles of Management and Culture, and Research and Development.70. For early stage technology startups, these are the most important sources from which a cost advantage may be derived. 70 SOURCES OF COST ADVANTAGE PEOPLE & CULTURE SYSTEMS & PROCESSES FACILITIES CAPITAL  When a startup develops unique organizational processes that enable it to consistently generate comparatively superior results. Key categories are:  Marketing and Sales Processes: how to create demand and satisfy it through delivery.  Operational Processes: how tangible and intangible inputs are turned into something the market is willing to pay for.  Distribution Processes: channels of delivery. A choice must be made between direct distribution and indirect distribution channels, and how it will affect the ability to maintain an overall cost advantage.  Support Processes: activities that make everything else that the startup does possible – ex: HR.  Systems & Processes are intimately tied to People & Culture to create an environment in which unique tangible and intangible assets are developed consistently over time to increase the competitive advantage over competitors.71. For early stage technology startups, these are the most important sources from which a cost advantage may be derived. 71 SOURCES OF COST ADVANTAGE PEOPLE & CULTURE SYSTEMS & PROCESSES FACILITIES CAPITAL  This cost advantage is derived from the physical infrastructure that a startup needs in order to operate.  For early stage tech startups, hard decisions begin to be necessary when the startup has scaled to a point at which off-the-shelf hardware products are no longer good enough for what the startup seeks to accomplish.  This is often the point at which startups must consider the advantages or disadvantages they may derive from building custom hardware instead of relying on what’s available from outside vendors or partners.  It can also be tied to a geographic location which gives the startup unfair access to an input that is critical for what it does.72. For early stage technology startups, these are the most important sources from which a cost advantage may be derived. 72 SOURCES OF COST ADVANTAGE PEOPLE & CULTURE SYSTEMS & PROCESSES FACILITIES CAPITAL  This cost advantage is determined by the startup management team’s ability to allocate capital in such a way that the startup successfully navigates the path it must travel between being a startup and becoming a company.  Cost advantages due to capital are determined by:  External sources of capital – potential outside investors and sources of trade credit,  Internal sources of capital – existing capital raised from investors, financial management of money the startup expects from its users or customers and money it owes to the vendors and business partners with whom it has a working relationship.73. 73 6 EFFICIENT SCALE74. “ Efficient scale describes a dynamic in which a market of limited size is effectively served by one company or a small handful of companies. The incumbents generate economic profits, but a potential competitor is discouraged from entering because doing so would cause returns in the market to fall well below the cost of capital. Why Moats Matter 74 WHAT IS EFFICIENT SCALE? In other words, from my perspective as an early stage investor: A startup can scale efficiently if doing so does not drive its customer or user acquisition costs to unsustainable levels over time, and if the startup’s decision to enter that market does not drive returns in the market to levels that are below the cost of capital for incumbent companies in that market over the short term.75. Product-market fit milestone: when demand for a product at a price that is profitable for the startup’s business model begins to outstrip the demand that could have been explained by its marketing, sales, advertising, and PR efforts. Before Product-Market Fit (BPMF) Everything takes a lot of effort. Every sale is tough, everything that can go wrong will go wrong, and most of the sales deals will fall apart. After Product-Market Fit (APMF)  Demand for the startup’s product threatens to outstrip the startup’s ability to meet that demand. This is when a startup must scale, and scale fast and efficiently. 75 BEFORE AND AFTER THE PRODUCT-MARKET FIT  There are two reasons to scale at this point:  There is demand for the startup’s product from its users or customers that should be met  APMF is the point at which copy-cat competition starts to materialize from new entrants, and possibly from incumbents too.76.  Efficient scale means different things at different points in the startup’s lifecycle: A team of 2 co-founders scales differently than when the team has grown to 20 people. In other words the way to pursue scale BPMF differs markedly from the way to pursue scale APMF.  Premature scaling seems great initially, until it leads to startup failure and death  The cadence of hiring is important:  BPMF hiring should be slow, deliberate and methodical  APMF the challenge is to hire the right people for the startup as quickly as is necessary to keep up with demand, and cope with competition. For this reason building sound and cost-advantageous systems & processes, and modifying them as the startup grows is important.  Technology-enabled scaling wins:  Tools to promote communication and collaboration once the teams grow  Tools to make salespeople as effective as they can be  Operations should seamlessly transition from one order of magnitude of scale to another without a deterioration in customer or user satisfaction  Customer or user acquisition should not be slowed unnecessarily by a failure to account for what customers are willing to do in order to get the product.  Culture makes a difference: Startups with a strong culture will scale more successfully than startups with a weak culture.  Eventually, most founders must also become managers and coaches: Not every founder is cut out for this and some may want to remain as close to building the product as possible – they need to be self-aware about this. 76 KEY CONSIDERATIONS FOR EFFICIENT SCALE77. 77 7 CONNECTING THE DOTS78. Founders’ willingness to conceptualize and build such moats should be self-evident. It should not be a secret that is hidden from investors. An economic moat is not the same thing as a competitive advantage. A competitive advantage is temporary. A durable economic moat is unique, and typically can not be duplicated. Startups need an economic moat that is derived from more than one source. In relation to Internet and other software technology business models, indirect network effects can prove to be as important as direct network effects. Intangibles often offer some of the strongest foundations on which to build an economic moat. Management & Culture, and R&D stand out to me because everything else emanates from those two. Cognitive costs are a real barrier to entry - especially for startups building products for sale to other businesses - and are nearly impossible to articulate or measure. A seed stage startup must find that niche of potential customers for whom the sum of cognitive costs and uncertainty is a minimum. To last, a cost advantage should yield increased value for users and customers. Finding product market fit does not automatically lead to conditions that favor efficient scale. Extended unprofitable growth is one sign that a market might not have the characteristics to support efficient scale, or that the startup has not thought its business model through enough. 78 SOME FINAL OBSERVATIONS when assessing early stage technology startups and their potential economic moats79. CONTACT ME 79 Twitter: @brianlaungaoaeh Blog: Brian Laung Aoaeh's Blog | Innovation Footprints THANK YOU! For more detailed discussion, the content of this presentation is available on my blog Design credits: Chloe Lolicart – [email protected] // Send Chloe a request for your next presentation!i hope that could be more help