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ProjectionHub

Should You Get a Patent or Just Go To Market Fast?

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This is an incredibly tough question for an entrepreneur to answer.  If you have an innovative product that customers are clamoring for now, should you start to sell it without a patent?  Or should you just get to market first and try to gain a first mover advantage?

There is no one right answer.

But let me suggest some things to look for that might inform your decision making.

Get a Patent If…

  1. Your product can be useful for a long time – If your product will likely only be trendy or useful for 12 to 24 months, then there is no sense in wasting time on a patent, just sell, sell, sell.
  2. You have the funding to defend it – If you spend every last dollar to get your patent, but have no funds to defend it when someone infringes upon your patent, then what is the point?
  3. There are few other alternatives to solve the same problem – If your solution is just one of many ways to solve the same problem, then a patent may not be useful because a competitor can simply use a different approach to solve the problem.  If your solution is the only good way to solve the particular problem, then a patent would be more valuable
  4. You can afford a good patent attorney – If you can’t afford to do it right, then don’t do it at all.  A poorly written patent is not useful at all.

Again I am not an attorney, so I would ask a respectable attorney as well, but these are some things to think about when you have to make the decision to patent or go to market.

Why are Financial Projections Such a Hard Problem to Solve with Software?

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We have been working to solve the problem of creating realistic financial projections for over 2 years now and I feel like we are on 1st base.  This is such a huge problem, and I am quickly starting to realize why it is so hard to solve with software.

When we started ProjectionHub I thought it was pretty simple.  We would just take an Excel template and recreate it with a software platform.  We did just that, but we are still so far away from solving the problem and here is why:

1.  Every Business Needs a Custom Financial Model – There is no such thing as a 1 size fits all financial model.  We have tried to create a flexible model that can work for any business, and with enough effort, our model could probably work for just about any business model, but that is the problem.  It works OK for everyone, but it doesn’t work GREAT for anyone.

2.  Categorizing Similar Businesses is Hard – When we started ProjectionHub I thought we would just simply categorize each business and then put similar businesses together in the same pile and use that data to make recommendations to future users.  For example, I thought we could put all restaurants together in one pile and then analyze their projections and come up with an average Cost of Goods Sold for a restaurant.  Then, when new restaurants used ProjectionHub we would notify them that their projections are out of line with the average.  Here is the problem – Every restaurant is different.  A fast food restaurant should have a different COGS than a high end cuisine establishment.  So it is actually really hard to determine if 2 businesses are alike and can be put in the same category.

3.  Excel is Still Dominant –  I used to use Excel for all financial projections, and even after I created ProjectionHub I still used Excel in some cases.  It is a bad sign when you don’t use your own product, but the problem was that I needed to create such a customized financial model that Excel seemed easier.  Now we are to the point that I would always use ProjectionHub as the base model, download it to Excel and then customize from there, but it took a long time to get to that point.  Now our challenge is to educate business owners that you can use ProjectionHub as a base model and then customize your projections from there.  It is much simpler than trying to create your projection file from scratch.

We have so much work to do, but the good news is – we have time.  I don’t think any company is going to be able to solve the financial projection problem overnight.  It is a complicated and time consuming process to solve, but we are committed to sticking with it for years to come.

Check out what we have done so far with ProjectionHub

ProjectionHub Wins Business Plan Competition

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competitors answer questions from judgesWe are honored and humbled to announce that we won the 2014 Taylor University Business Plan Competition.  The $7,000 prize will allow us to continue to innovate and improve ProjectionHub for our users.  Specifically we look forward to integrating ProjectionHub with Quickbooks in the next 6 months.

Below you will find the press release published on PRWeb – Brothers Dominate 2014 Taylor Business Plan Competition with ProjectionHub

Upland, Indiana (PRWEB) May 06, 2014

Returning competitor and Taylor University graduate, Adam Hoeksema, joined forces with brother, Brandon Hoeksema, to claim first place in the ninth annual Taylor Business Plan Competition last Friday. The winning duo progressed to the finals where they impressed a panel of judges with a comprehensive business plan for ProjectionHub. CommSense placed second in the competition; CommSense’s three-member team consisted of two Purdue PhD students, Wesley Allen and Andrew Kovacs, and MBA candidate, Christopher Ochynski. Anderson University MBA candidate, Ashley Ledford, and Anderson graduate, Eric Baker, took third place with The Anderson Brewery.

“It helps business create financial projections using a web interface and then it uses all the input and puts it in a fancy little Excel template,” said sophomore Brandon of ProjectionHub.

Initially, the idea for ProjectionHub was prompted from Adam’s experience working in economic development. “We require a lot of our loan applicants to create projections for their business, and the common way to do this is with Excel templates,” he said. “It’s just not a good way to do it, so we created a web application to allow you to do this online and have made a more powerful and simpler alternative to your Excel template.”

Adam participated in the business plan competition when he was a freshman at Taylor University, but did not place so competition rules allowed him to re-enter. Adam has also competed in the I-69 Collegiate Innovation Challenge, hosted by the Grant County Economic Growth Council. In February, Adam served as a judge for the eighth annual I-69 Challenge.

Larry Belcher, director of undergraduate business program at Taylor, said the competition is designed to promote business in Indiana. The Taylor Business Plan Competition targets businesses, existing or potential, operating within the Taylor University campus area of influence encompassing Grant, Blackford, Delaware, surrounding counties, and the entire state of Indiana.

“It’s an annual competition and it actually started earlier in the fall. We made an announcement for proposals and they sent an executive summary in. Those were reviewed and then cut down to a semifinalist group. Those were then asked to submit a full plan and from those we chose three finalists to actually do a presentation,” Dr. Belcher said.

Belcher said it presents an opportunity for people, primarily from Indiana, to have judges with experience in start-up businesses critique their plans.

“We are presenting the idea of bringing a local brewery to the city of Anderson,” said Ashley Ledford. “We both are very interested in the craft brew industry, both on the business side of things and the brewing side of things. It’s something that the city of Anderson is really pushing for so it’s an attractive business to get into right now.”

While the brewery placed third, the team noted the valuable insight gained from the panel of judges. The competition offers tangible rewards for 1st, 2nd, and 3rd place amounting to $7,000, $3,000 and $2,000 respectively. In addition to cash prizes, the winning entrepreneurs are offered the following forgivable loans from the Grant County Economic Growth Council for the purpose of building upon their investment in Grant County:

  •     First Place: $15,000.00 in forgivable loans
  •     Second Place: $10,000.00 in forgivable loans
  •     Third Place: $7,000.00 in forgivable loans

The long-term objective of the competition is to spur entrepreneurial growth that will generate significant job opportunities for the residents of Indiana. Because the purpose of the competition fits the Growth Council’s mission, Executive Director, Tim Eckerle, says, “By offering forgivable loans to winning investors who choose Grant County as their business location, the Growth Council looks attract and retain startups in Grant County. We continue to support this professional competition which imbues the spirit of entrepreneurship within the community.”

For more information regarding sponsorship, support opportunities and entry, email info(at)grantcounty(dot)com.

Is your Market Big Enough? Or Are you Wasting Your Time?

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One of the first things an entrepreneur should do before investing time and money into a new venture, is to determine whether the market is big enough to support your business. In this blog post I am going to go through an example that will demonstrate how to estimate the size of your market, and how to determine whether it is big enough to allow you to meet your goals as a business owner.  

Market for an Innovative Startup

This process is really back of the napkin type math, but it is so simple that many entrepreneurs simply overlook its necessity.  

For example, let’s say you have a new payment technology that would make it more efficient for consumers to make large one time payments.  Your solution is an alternative to a wire transfer from your local bank which may cost the consumer between $20 and $50 just to wire the funds.  Maybe your solution is much more efficient and you only charge $1 to transfer any amount of funds up to $1 million.  Sounds great right?  Everyone should start to use your product, but now the question is, even if everyone starts to use the product, is the market big enough for you to make a profit?  

 

After a bit of research you find that the average consumer performs a wire transfer once every 5 years.  Most people will never make a wire transfer, and those that do, don’t transfer large sums very often.  Let’s say you find that there are 10 million wire transfers made by consumers each year.  You know that if you advertise you can acquire a customer for every $1 of advertising.  So let’s say you invest a million dollars in development of the system and a million dollars in marketing/advertising.

  • This will allow you to acquire 1,000,000 users.

  • Each user will perform (on average) 1 wire transfer every 5 years.

  • You have 90% gross profit margins per transfer, in other words you make 90 cents per transfer

  • So in year 1 after investing $2 million you will make 200,000 transfer x .90 = $180,000

So is the market big enough in this scenario?  No.  It would take you over 10 years to generate $2 million in gross profit.  The back of the napkin math does not work, so you should not waste your time, energy and money to take on this project.

The purpose of this blog post is not to tell you that wire transfer technology is a bad idea, it is simply to show you the process that you should think through before you start a company.  If all goes as planned, is your market even big enough to allow you to generate a profit someday?  If not, don’t waste your time.

ProjectionHub Partners with LegallyLink to Help Startups Create Financial Projections

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New Partnership

ProjectionHub is now partnering with LegallyLink to make it easier for startups to get off the ground.  The ProjectionHub financial projection software will now be made available to LegallyLink customers.  LegallyLink customers will now be able to complete standard financial projections along with the legal forms required to open a business, register a trademark, apply for 501(c)(3) status and much more.

Adam Hoeksema, Co-Founder of ProjectionHub said, “LegallyLink is an exciting new company that can really simplify the process of opening your startup.  As an entrepreneur you want to spend your time and money on customer and product development, not legal forms and high priced law firms.  LegallyLink is the right solution for startups, and I am excited to partner with them.”

About ProjectionHub

ProjectionHub is a web application that helps entrepreneurs create financial projections without Excel.  With over 5,000 users to date, ProjectionHub is helping entrepreneurs focus on their business, not complex financial modeling.

Average Salaries for Startups

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A couple weeks ago we released our new Salaries Module on our financial projection app – ProjectionHub so I thought I would share some stats about the first 200 salaried positions at startups.  Although not all of our users are startups, I sorted the data to only include startup salaried positions.  Here is what I found:

  • Average Annual Salary for All Startup Positions – $66,894
  • Average Annual Salary for all C-Level Positions (CEO, CFO, COO, CMO, CTO) – $61,928  (notice this is lower than the average of all positions)
  • Some of the positions that had high outlier salaries include – Sales, Engineers, Web Developers
  • Not all positions start right away of course.  Many startups have to hire as they raise money and increase their customer base.  The average starting month for the first 200 positions was – Month 4
  • The average tax rate that users are tacking on to the projected salaries is – 8.9%

These are just a few interesting stats that I thought could be useful for other entrepreneurs.  We would love for you to create your financial projections with ProjectionHub here and use coupon code “ba25off” to get 25% off.

Average Startup Expenses – Are you Spending Too Much?

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At ProjectionHub we help entrepreneurs create financial projections without using Excel.  Over the last 6 months we have had thousands of business owners use our tool to create their financial projections.   Out of the thousands of users, we chose 800 accounts that we believe have realistic data.  We took this aggregate data and found some interesting trends and numbers that we wanted to share related to expenses.  Approximately 80% of our users are startup companies, so here are some average expenses numbers that you can compare to your startup to help you determine if you are spending too much.

Also, just keep in mind that not every business actually had each of these expense categories, we calculated the average only based on the companies who actually projected spending something in that category.  For example, not everyone had legal expenses, but those who did, spent $1,006 per month on average over the first 3 years.  Here are several other average expense categories over the first 3 years of business.

Accounting – $482

Advertising – $2,767

Insurance – $298

Licenses – $262

Maintenance – $504

Office Supplies – $142

Rent – $1,800

Salaries – $16,700

Telephone – $356

Utilities – $190

Website – $689

Keep an eye out for additional blog posts as we continue to release interesting data related to startup finances.  Also, make sure to test out our financial projection tool at ProjectionHub. 

How Accurate Should My Financial Projections Be?

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This is a common question I get from ProjectionHub users.  There is no simple answer but there are some basic principles I can share.

Who are the Projections For?

Depending on who the projections are for, you will need varying levels of accuracy.  Here are some differences in your projections based on how the projections will be used.

Investors – Primarily concerned with your business model in general.  They will want to know what your margins are and what your market potential is.  See my answer on Quora titled “How to Calculate Market Potential for a Startup”

Lenders – Concerned with financial ratios.  Will review your projected and current balance sheet to compare assets vs. debt, and cash balance to current liabilities, etc.

Planning Purposes – If you are creating projections in order to determine if you have enough cash to survive, or to find out when you will need more capital, you will need to improve your accuracy.  

Here are 3 ways to improve the accuracy of your financial projections:

1.  How to Improve Revenue Projection Accuracy?

In order to improve the accuracy of your revenue projections I recommend that you focus on 3 specific areas that will impact your final forecast.  

  • Sales Cycle – The most common mistake is probably an overly optimistic outlook on your sales cycle.  In other words, how long will it take from the time you met the potential customer to the time you closed the sale.  You might project a 30 day sales cycle and it turns out that it takes 120 days.  This will make a huge difference in your revenue.

  • Market Potential – You might think that “Everyone” is going to want your product or service.  Rather than assume your target market is Everyone, I recommend that you use the Google Adwords Keyword Tool to find how many people are searching for keywords relevant to your product or service.  I gave a detailed explanation of how to do this with Google Adwords on Quora.  Check it out.

  • Pricing – Lastly, your pricing will dramatically impact your revenue.  You might be able to sell a thousand units if you price the product at $5, but maybe you could sell 500 units at $50 a piece.  Although your units sold is cut in half, your revenue increases 5 times over at the $50 price.

2.  How to Improve Expense Projection Accuracy?

In order to improve the accuracy of your expense projections I recommend that you focus on the following 2 areas:

  • Cost of Goods Sold – Your cost of goods sold is the most important expense to get right.  Why?  Because when you are off, you are off every time you sell a unit or a billable hour.  For example, if you make a $1 mistake on how much it will cost to produce your product, it quickly becomes a $100,000 mistake when you sell 100k units.  It sounds much worse to make a $500 mistake with your monthly rent, but it actually will only cost you $6,000 of the 12 months of the year.  Cost of goods sold is variable, so the more units you sell the more important it is to improve the accuracy of your COGS projections.

  • Bad Debt Expense – It is easy to forget to include bad debt expense within your expense projections.  But every business, every industry can expect to have some bad debt.  Sometimes customers simply don’t pay.  The other important thing to remember with Bad Debt expense is that it is variable as well.  The more you sell, the more bad debt you are likely to have.  You should try to find what an average bad debt expense percentage is for your industry.  Maybe it is 3% of sales, maybe it is 10% of sales.  Whatever it is, try to be accurate here, or this expense could wreak havoc on your projections.

3.  How to Improve Cash Flow Projection Accuracy?

In order to improve the accuracy of your cash flow projections, I recommend that you focus on the following 3 areas:

  • Days to Get Paid – This is definitely the most common cash flow projection mistake.  No one realizes how long their customers will take to pay their bills.  Depending on your industry and the size of your customers you could be waiting up to 100 days to get paid.  This just kills your cash flow.  Many startups and small businesses end up factoring their receivables with companies like our partner Lendio.  You can actually sell your invoices at a discount for cash now.  So if you have a $50,000 invoice out to a customer, you might sell it for $47,500 in cash now rather than waiting 60 or 90 days for that customer to pay. You can find a factoring company that fits your needs at Lendio.

  • Days to Pay – While your customers may not pay for 90+ days, your vendors will likely require you to pay within 30 days or less.  When you are a startup, you probably won’t get good terms with your vendors.  Don’t assume you can wait 60 days to pay your vendors, if you do it will likely kill your cash flow projections.

  • Sales Cycle – I know I already mentioned this above in the revenue projections section, but I wanted to reiterate how important this is.  One of the most common ways for cash flow projections to end up way off, is to be too optimistic with your sales cycle.  Do you really think it will only take 30 days from the time you meet a potential customer to the time that you close the sale?  This is a dangerous assumption to be optimistic about.  As you watch how long it takes to close a sale for your initial sales, tweak your projections to reflect that sales cycle.

At the end of the day the answer to how accurate should your financial projections be, is… it depends.  It depends on the purpose of the projections and your audience.  I recommend that you start with a very basic set of financial projections, and improve accuracy as needed.  If you have any specific questions about your projections, please feel free to reach out to me at adam@projectionhub.com

ProjectionHub Introduces Custom Expenses

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We are excited to release our new custom expense feature for our ProjectionHub users.  For the last 6 months users have only been able to enter general expenses for the categories that we had provided.  We knew this was limiting to users, so we released a new update that now allows you to create custom expenses.