DealHorizon - the faster, easier way to create and share business plans

Dave McClure of the Founders Fund presented an excellent powerpoint at SeedCamp in London this week that should be required reading for anyone starting a web-based startup. Here it is:

Startup Metrics for Pirates (SeedCamp, Sept 2009)

As exciting as it can be to watch the growth of a single-cell idea into a company, sometimes the cells don't divide fast enough for the organism to survive. Many times, the post-mortem of a startup reveals a basic lack of understanding about why startups start up.

Firstly, let's agree one thing: startups are not a new concept. The idea of a venture-backed company has been around for hundreds of years. The first trans-Atlantic telecommunications cable was a venture-backed startup (their target ROI was based on the potential arbitrage opportunities made possible through the transmission of real-time stock and commodity information between the US and London.)

British Telecom passed on investing venture capital into the "wireless" technology pioneered by Marconi. Tesla famously took on funding for his AC power technology from the Westinghouse patriach - who himself made his initial money from an improved railway braking system - the early equivalent of succesful entrepreneurs funding promising new entrants. You all know thousands of similar stories.

One thing all successful startups display is an understanding that the fundamental goal of a startup is to take an existing process and make it more effective or efficient (AC power, the transfer of information between London and New York) - or establish a new market for a new product (Coca Cola, King Gillette's disposable razor). In other words, your startup needs to do something:

• Better
• Faster
• Cheaper
• Entirely new

These days, it's rare to spot a technology or cleantech company doing somerthing enitrely new. Chances are, your energy, SAAS, or semiconductor startup is improving an existing process, or making a manufacturing process more efficient.

If that is the case, a really thorough understanding - and a demonstration - of the ROI associated with such an efficiency is necessary to obtain top-tier venture backing for this kind of effort. Your ability to maximize your price, your return on investment, and your initial valuation, will be highly dependent on everyone involved understanding exactly the ROI that you are targeting, and can deliver.

In the area of life sciences and some biotech firms, one of the attractions is that some startups in this space are indeed attempting something entirely new. The quid pro quo here is that they are biting of a huge speculative risk that requires large investments - but the promise of massive returns if everything goes right.

Entirely new products and processes happen less often than improvements on existing products. Predicting whether or not an entirely new product will "hit" and create a brand new category has resulted in some specutalur successes (Coke, HBO, RedBull, AdWords, Twitter to pick some at random) - but over the past two hundred years, the roadside has become littered with failures.

To achieve success for an entirely new product, you need that rare combination of a great vision backed by a working technology, backed by a one-in-a-million marketing team and patient investors, and lots and lots of luck.

Taking the first step along this path involves taking some time to think. You need to be able to tell your closest advisors why your startup is going to succeed - the better you can articulate exactly why your approach is better, faster, cheaper than the competition, and what that difference will mean in terms of cash in the hand over time, the better you will be able to protect your valuation, and create a return on investment for everyone involved.

John Cook blogged about using the new Starbucks iPhone app this morning, and posted a video about his experience.

I don't see single-product-payment solutions like this taking off - especially ones tied to a clunky bar-reader type device that doesn't actually work very well (see video). I could understand this if it were a supermarket payment alternative, but is sure seems like a lot of work if you're only ever going to buy coffee using the app...

I went to my doctor recently complaining about a pain in my wrist. He suggested that I may be spending too much time on my computer, and as a result, suffering from the early stages of RSI (repeditive strain injury.)

"Hogwash," I thought to myself, as I drove home one-handed. But then as I sat down in front of my laptop and started tapping, and my wrist started hurting again, I started to wonder - exactly how many repetitions of actions do I take on this PC? Has anyone done any studies?

I decided to seek out some basic stats. What I found (at the site of Remedy Interactive, based in Sausilito, Calif.) floored me. Their data - specific to RSI analysis and prevention - illustrates a far greater breadth and frequency of computer-related activities than I ever would have imagined.

Here's some of the stats published on their site, from a case study Remedy conducted at an unnamed workplace using their GroupInsight tool:

564 mouse clicks per day? 13,360 keyboard strokes? 531 uses of the scroll wheel? 95 switches between keyboard and mouse? Four thousand three hundred plus words typed by the average employee? That data describes an extraordinary amount of tiny motor movement. Dr R., I owe you an apology.

Note: Remedy Interactive's customer list would indicate that large companies are only too aware of the issues in this area. If you're in a management positoin at a large (or even a small) firm, you might want to consider checking these guys out. Their software looks like something every information-based company could benefit from.

It was recently reported by eWeek and others that Jeff Bezos, founder of Amazon, stated at a conference in May that Kindle sales now account for 35% of book sales on Amazon - a figure that flashed up impressively on a flash-based powerpoint filled with social media stats that I watched yesterday.

That stat bothered me. I got to thinking... how can this be? Are there really that many Kindles out there that they could account for 35% of all book sales on Amazon?

So I set out to find out. And as it turns out, I'm not the only one who had trouble parsing that stat. Steve Weber of WeberBooks.com condensed the problem nicely, and backed it up with his own sales data as an Amazon-publised author:

... there are more than 80 million paperback book buyers on Amazon, and less than 1 million (perhaps less than 500,000) Kindle owners. While I can believe Kindle owners buy more books than the average book buyer, I don't believe they're buying THAT many more books, and it's certainly not reflected in my sales reports.

Obviously, either Bezos misspoke, or the folks who reported the event misheard him. Cowen and Company agree with this finding. Their recent (August 11, 2009) forecast states that Kindle services will represent 10 percent of Amazon's total North American sales within five years, accounting for $2.3 billion in GAAP revenues.

That sounds more like it.

*Interesting note added by Weber - he claims Amazon's business model for Kindle is 65% Amazon, 35% author/publisher. That's even better than iTunes.

Over the past three stories, no doubt you've read many times the stories of how Doug Engelbart and his team of Xerox researchers invented the mouse, windows, the point and click GUI, only to see them adopted and productized by Apple, Microsoft, and others. It's happening again - this time with vanishing ink.

Vanishing ink is the opposite to invisible ink. Invisible ink starts out invisble, then is rendered visible, historically by a heat process that turned the acidic ink permanently readable. Vanishing ink starts out readable (i.e. in the form of a bus pass, drug prescription or amusement park ticket), then turns invisible within a set period of time (say 24 hours, or one week).

Note: This set of chemicals - a mix of gold dust, silver and methyl methacrylate - will not be replacing the lemon juice-based science project at your local high scool anytime soon.

Xerox has made plenty of announcements over the past several years, and thought of several really nice applications that have splendid connotations for the environment (reusable copy paper, packaging that fades to environmentally-friendly colors over time). But once again it would appear they will not be the folks to bring this innovation to market.

As reported this week in the Economist, Northwestern University researchers are also working hard on coming up with a vanishing ink solution - and appear to have succeeded in coming up with a process that the paper describes as "more deployable", and, as a result of being able to reuse the materials hundreds of times, far less cotly, and far better for the environment.

This is not great news for Xerox, or PARC. I have some buddies at PARC from my old ISS days in Singapore. I would encourage them to read this week's article in the Economist, then emulate either Jerry Maguire (and post a memo to everyone's inbox in non-vanishing ink), or emulate Howard Beale's speech in Network ("I'm mad as hell and I'm not going to take it anymore!")

Beale's speech was first published, coincidentally, in 1976 - around the time a young Steve Jobs was watching over Doug Engelbart's shoulder.

*Note: for more on the subject of Xerox (and some very interesting and enlightening comments), check out Amazon's book reviews for "Fumbling the Future..."

Elaine Giam, who was our highly effective 'go to' PR chief at Singapore-based Channel KTV, posted a cool video to her Facebook page yesterday that had some nice social media stats embedded in it.

Who is Generation Z? Socialnomics9, one on the 670,000 viewers of this video left a nice list of "the named generations" taken from "Generations" by Strauss and Howe. Check it out:

• The Lost Generation (1883 - 1900)
• The Greatest Generation (1901 - 1924)
• The Silent Generation (1925 - 1942)
• Baby Boomers (1943 - 1960)
• Generation X (1961 - 1981)
• Generation Y (1982 - 2001)
• Generation Z (2001+)

A good friend of mine who writes about social media strategies, trends and technologies recently asked me to fill out a short Zoomerang survey on SEO and web marketing spending ahead of a talk he's giving at the Harvard Club in New York next month.

If you have a few minutes, please take the survey and share your thoughts - the more inputs, the better. The link to the survey is http://tinyurl.com/nyngvh.

We don't have television in our house, which three years ago was something we didn't often share because people would give us pitying looks. Now, we mention it with pride - because today, more and more people are watching TV on the Internet.

The next wave? Twitter search. If you're reading this on Wednesday night in North America, try this example - go to Google, then Bing, then Yahoo, then Twitter, and type in "America's Got Talent" (this show is big in our house).

On the old style search engines, you'll find pages of archaic references about the show, some going back to the dawn of time, but virtually no information about the finals that just happened two hours ago. Search Twitter, and the results couldn't be more different.

On Twitter, the most recent information is presented first, which means if you're looking for sports scores, stock prices, job vacancies, breaking news, latest blogs on a subject, happening bars, or... the winner of AGT (spoiler alert - the chicken farmer took top prize, not the opera singer)... Twitter is the most logical destination.

Add some (18-34) demographics into the mix and it becomes abundantly clear why the smart money is ready to accept a billion dollar pre-money valuation for Twitter's next $50mm round. There are a lot of people at any one time searching for stuff that is time-relevant, and a whole lot of those searches are connected to a purchasing decision.

On some search engines, only the advertising is fresh. On Twitter, the content is fresh too.

Two decades ago, both my father and mother were diagnosed with Parkinson's Disease - a disease of the basal ganglia section of the brain characterized by muscle rigidity and increasing difficulty in movement.

In those pre-Internet days, information on a diagnosis generally came from one source - the diagnosing doctor - and whatever other (typically out-of-date) sources you could lay your hands on. In our small rural farming community in Australia, there were only a small number of sufferers, and relatively few resources. Our local library had exactly one up-to-date reference.

At the time of their diagnosis, I was living in LA. I called an old girlfriend who at the time was doing brain research at UCLA. She arranged access to a microfiche machine and UCLA's extensive news archive and research library.

With her help, I was able to pull together a massive amount of documents, some of which were early studies on the bowel-brain connection and basal ganglia-based problems, a connection now being followed by several well-funded life sciences companies.

However, we then ran into an unexpected problem: we were suddenly better-researched than the doctors. You know what happened next - the doctors ignored the research, and, given the strong bonds in our small town, my parents felt obligated to follow their advice.

Roll forward to today. Today, thanks to the Internet, and sites like PatientsLikeUs.com and similar destinations, there is not only a wealth of scientific data instantly available to the likes of celebrities suffering from relatively rare diseases, such as Steve Jobs or Scott Adams, you can also access data directly from people that are two years ahead in their treatment programs, and capture clues on what might work best for your own situation. Amazing.

For the past ten years I've been working mainly in Internet security, and have often heard the phrase "no one ever died because of the Internet". This phrase simply isn't true - you only need to look at cases like Megan Meier and the recent cluster of cult-like "Internet suicides" in Japan.

But what I suspect is also true, is that for every life endangered by the Internet, thousands are being saved, through better access to information. More and more people with rare ailments are able to live longer and better-quality lives because of what they are able to do to find paths to healing, by themselves, using the Internet.

*Note: Though my mother passed away a couple of years ago, my Dad continues to amaze us all. Despite the massive challenges Parkinson's introduces to daily life, he has worked on staying fit, retained his sense of humor, and remains active (some would say *too* active) 25 years after his diagnosis. He is my hero.

I was having lunch with the CxO of a bank recently and we got talking about Mint.com. I asked him what he thought about the service, and whether or not Mint was showing up on their radar screen. His reply was interesting.

"Mint is certainly showing up on our radar screen," he said, "Mint and the other aggregators now account for more than 25% of our login requests. It's a real concern."

That number floored me. Think about it: 25%+ of this bank's login requests are now coming from customers who used to log in directly to the bank, but now receive their account updates (and new product pitches, and market interest rate information) from Mint.com and its rivals, rather than their bank.

Why should this be a concern for the bank? Because most consumers have more than one banking relationship (bankers refer to their share of this relationship with the consumer as "share of wallet"). Mint.com uses the data it obtains from these multiple relationships to allow you to log in to one place and receive information pertenant to multiple accounts. That disintermediates the bank from the consumer.

Banks used to enjoy a virtually closed channel while selling new products to consumers. The bank's site was the only way that the consumer could check their spending online.

If trends continue, the banks will rapidly lose eyeballs to the Mints of the world. It is pretty obvious that Mint.com has a fast-growing "share of wallet", when it comes to attention and the sale of new products, relative to the providers of the underlying services.

This fact - the fact that consumers are using account aggregators as their new financial dashboards - should scare the heck out of every bank's CEO - because if this trend continues, the aggregators will find themselves with all the power, and the individual banks, with increasingly less. Add in the Intuit brand name, and growth may even accelerate.

In the beginning, I suspect that this will only affect banks with lower "share of wallet" - but over time, even larger brands may find themselves "out of position" when it comes to the marketing of new products via the Internet.

How can the banks compete? Only by offering Mint-like aggregation services themselves, which all but the most powerful players will be reticent to do. You know what happens next.

Intuit's purchase of Mint.com is a super-smart play and comes at a smart price. I'm just surprised that one of the bigger retail banks didn't step up and offer a higher number - that would have been a really smart move.

The "Free" business model continues to be touted as a revolution. But "Free" has been around for centuries. And what a cursory view of history shows us is that "Free" only works as a business strategy if your business objective involves the eventual creation of paid extensions of your "Free" platform.

Eighty years ago, "Free to Air" broadcasting was created - by RCA - as a means of selling radios. Once radios were around in sufficient numbers, a paid advertising extension to the business was invented as a means of sustaining the costs of the "Free" programming.

Thirty-plus years ago, Bill Gates and Paul Allen created a "free" platform (BASIC, later Windows) that enabled thousands of free applications to be offered by hobbyists to end users - a tradition that has continued to be supported by MSFT's dot.net development tools and similar offerings. The OS OEM revenues and spectacula success of Office came about as paid extensions of the original platform.

Two decades later, Google created a free search platform that enabled millions of Internet users to find information. Around the same time, Craig Newmark created a platform that enabled free classified advertising. A few years later, Linux emerged as a third generation free application platform for computing.

None of these Internet and/or data processor-based "Free" platforms would still be around had they not created paid extensions to their businesses, such as embedded advertising (Google), standards-based/interoperable applications (Office), paid classified segments (CraigsList), paid support and certification (RedHat et al), or deep-level data analysis (Mint.com).

Any business thinking of offering a "Free" service needs to have, on their roadmap, the paid extension to the platform that will make the journey worthwhile. Despite all the folks claiming the contrary to be true, "Free" is not a business model. "Free" is a business strategy, not a goal. It is the journey, not the destination.

If you are spending 100% of your time thinking about how to create even better free offerings and 0% thinking about your destination - paid extensions to the business - your business will struggle to find funding, and eventually disappear.

Three decades ago, while working as a lowly, 19 year old junior advertising copywriter, I would watch, eyes rolling, as product managers caved to the demands of lawyers and inserted large subtitles saying "Closed Track - Professional Driver - Don't Attempt At Home" over our magnificent pictures of sporty cars speeding through green forests.

Only the toughest account managers and product managers had the guts to push the lawyer out of the edit room and preserve the script. Whichever of our TV commercials you ultimately found watchable can be attributed to them.

Roll on 30 years. I just downloaded all 88 megabytes of the latest version of iTunes. I experienced no technical issues, but the appearance of no less than four (possibly five, I'm not sure - I stopped counting) "Please accept the terms and conditions" screens and megalength contracts that all said the same thing suggest to me that a weakened product management team is now in charge - and is taking its user experience cues from the lawyers.

That is not very Apple. Nor was the message that popped up and said I couldn't buy anything at the iTunes software without upgrading to the latest iTunes version. Hello? I'm in an airport! Like, I want to download 88 megs right now. I just want some new songs!

Suggestion to Apple iTunes product managers: find one lawyer willing to work with you to create a single form and a consistent user experience. Click here to accept. Click here to accept. Click here to accept.

If I were CEO for a day at Toys R Us or sister company Babies R Us, I would immediately do two things: add more staff (the check-out staff to customer ratio is just appalling), and; put a counter in every store where parents can bring their toys - even non-Toys R Us purchases - to be tested for lead paint and other contaminants.

There are some test programs currently but most of them are run as "events" by government-based entities. Surely, a service available at a leading retailer seven days a week would generate traffic, buzz and sales in excess of costs?

The failure of larger stores to capitalize on shifts in the market and carefully vet products is enabling some new startups in this area. One New York state startup seems to have a) a great product (an eco-friendly breach bucket for kids), and b) the kind of entrepreneur that doesn't take "no" for an answer: Mesko Associates, creator of the SandSac.

Their recent press release demonstrates a solid understanding of the power of well-placed media stories, and, more importantly tells a great story about the importance of taking chances, and perservering. Here's a sample of a recent summary they provided of their success:

Creating a sand storm with the SandSac®…………how a startup is kicking up some Sand in this economy. A recipe for success?

• Lose your corporate job
• Have a dream about owning your own business
• Come up with the “idea”
• Have the economy tank
• Spend months in research of your product, and making samples ( from your basement)
• Juggle family responsibilities ( remember to have 5 kids –ages 14 to 6)
• Make your booth for the big trade show in your garage
• Buy the mailing list and hand stamp 2000 post cards with your kids and mail before the show
• Deliver 50 press kits to show manager
• Go to the show – new guy – last row – back corner
• Believe……take the plunge and order the inventory…
• Keep your product away from poachers looking to steal your idea
• Smile and hope the one buyer passing your booth looks your way and not at the guy across the way eating pizza.
• Collect all the business cards and mail them follow-up letters
• Wait for the phone to ring, or the emails to arrive….
• Keep waiting, economy tanks deeper
• Meet the wonderful staff at the ToyDirectory.com….do a email blast to their list ….
• Get some grumblings from the press….hope….a small breeze…..a little picks up….
• Catch two accounts with very good web presence…..orders flow in…….
• Email out another press release…the press names I have hate them…lots of “take me off your list”
• Do another show……meet some good accounts…..word of mouth ….another puff of a breeze….
• Economy tanks deeper……
• Win a Dr. Toy Best Travel Toy 2009 Award….breeze picks up….carries sand……
• We get lucky….a wonderful media (insert plug) Circle F Media of Austin Texas needs a last minute replacement product for their TV spot and website www.dailylounge.com....hit it big – and to think they saw my last press release!!!! Over 100 spots nationally…….wow… the Sand is kicking up!!!!
• Thing take off…..reorders…..sale triple….
• Get blog hits from CoolMomPicks.com, another from FunkyMonkey, another from MomTends.com……….another from thegrandkidsgiftguide.com…..the storm is coming…..
• Then comes the topper……iVillage Chief Toy Officer Elizabeth Werner hears about the Sandsac® and wow we get into their summer travel toy guide…..the sand storm hits….
• And that’s how it happened….a little company creates a good product and with a hard work, meeting good people willing to help, and lots of luck….is succeeding in the today’s tough business world.
• Pass the sand….The SandSac® is on the beach!!!

This kind of story is the reason we all do this stuff. Good luck to Robin Deutche - I hope the sales continue to triple.

This list is designed to work as a process flow chart - if you are missing any of these items, you shouldn't, in my opinion, proceed to the next one - unless you're a proven serial entrepreneur, in which case you can reduce this list to the one thing than transcends everything else: previous success. Until then:

1. You Need: More Than an Idea

Investors rarely invest in "ideas", regardless of what it says on their web sites. The only guys who obtain funding on the basis of an idea alone are serious scientists with a history of transforming molecular structures into highly successful drugs, or serial technology entrepreneurs with a history of turning ideas into valuable products or services.

To obtain funding, you need more than an idea, you need a great, tangible expression of that idea, preferably in the form of a prototype or better still, a debugged, revenue-producing, fast-selling product.

2. You Need: More Than One Guy

It is rare for investors to find an engineer that is equally enamoured with balance sheet mechanics and shell commands, or vice-versa when it comes to marketing-based visionaries. For that reason - and for practical reasons, such as insurance against something happening to the main guy - you need a team.

As with point 1, some investors may be prepared to take a chance on a guy they know is capable of pulling together strong teams, but whereas you need to take "we invest in ideas" with a grain of salt, you can take "we invest in teams" to the bank. Investors, with very few exceptions, invest in teams.

3. You Need: An Experienced Lawyer

There are numerous reasons why it's important to have an experienced lawyer. One of the most important is that the sale of securities is a heavily-regulated activity. And although sending out a handful of business plans to VCs is okay, sending out fifty business plans to non-accredited would-be angel investors could land you in hot water. Especially if it says "LLC" or "Inc" on the bottom of the offer page and you haven't incorporated your company yet (this happens more often than you might think - see point 4).

Lawyers can also be very helpful in directing you to investors (see point 8). They can also help you make sense of offers and pre-define your thinking around valuation and structure. If you're looking for investment, get a lawyer.

4. You Need: A Corporation in Your Country of Business

Some guys gave me a pitch a few months back that I thought was brilliant. The target market was huge and their business model was well thought-out. The team was super-experienced in the space. The catch? They weren't incorporated in the US. Though their business was in the US, they would not budge on their (not so great, IMHO) idea of being incorporated in the British Virgin Islands.

Never forget that while you may think the objective when pitching investors is to obtain capital, the real objective is the sale of equity (or other rights) at the best price you can get. You can only obtain investment is you have a capital structure available in a form and jurisdiction that works for the investors.

5. You Need: Someone of the Team Who Loves Excel

Three times in this past year, I have seen balance sheets in which the assets column didn't match the sum of liabilities and equity.

And I'm supposed to believe the sales projections?

6. You Need: A Business Model Based on Solid Assumptions

I'm saying this for your own good. It is possible to get funded without a clear - or proven - business model, if your technology does unique, valuable things for people on a frequent basis (i.e. Google, prior to AdWords). But you will need to sell much less equity if you present a coherent business model early on in the funding process.

And please, while your business model preferrably needs to address a massive un-met demand, your projections will be debated much more seriously if you can justify and show detailed market research that backs your assumptions. In my experince, a surprising amount of people don't research their assumptions, and some appear to make their projections up out of thin air. Make sure your model doesn't crumble the first time someone pokes at it.

7. You Need: A Thorough Understanding of Who You Should Pitch To

Nothing wastes more time than the pitching of seed-stage idea to a late-stage VC. If your idea is early-stage, make sure you approach the appropriate early-stage investment firms. If your idea is late-stage, at least speak with an investment banker - you have more funding options available to you than you're probably aware of. Most VC firms clearly state the kind of investments they're looking for on their web sites.

Likewise, once you're engaged with the firm, if your particular innovation involves software, make sure you're talking with the software guy, not the life sciences guy. Learn about the stuff the partner has invested in. Make sure they haven't invested in your competitors, or all you'll end up doing is handing them a bunch of great intel. Take time to research the folks you'll be in the room with on the day you pitch.

8. You Need: Access to a Long List of Suitable Investors

Although there are exceptions, most VCs won't take a meeting with some guy they've never heard of before, and fewer will act on a business plan reveived by email. Many come out and say this on the "contact us" pages of their web sites - i.e. "you should contact us through one of our portfolio company executives or someone else that we know and trust".

Fortunately, there are many people who can easily assist you in hooking up with a VC partner. I've always found lawyers and bankers to be the best connected, but successful entrepreneurs usually have a long rolodex of folks and are quite often happy to share it. Avoid retained finders - that's my personal viewpoint. Any finder worth their salt - and in love with your business - will work on a success basis if they truly think you have something valuable.

9. You Need: Milestones You Can Achive During the Investment Process

I once made this mistake myself - pitched investors a business plan with revenues inked in for the next two months, then missed the targets. Including short-term revenue targets you probably won't hit is something most experienced entrepreneurs know to avoid - they know that if they do this, the first question asked by the prospective investor in the second meeting is is "so how did you guys do on your projections this month?"

There is a way you can turn this around to your advantage - if you have confidence in your numbers. A company I know recently pitched several investors and then went on to *beat* their target sales numbers for the next three months, while the investors conducted their due diligence. This created an extremely positive response from the folks they pitched. They will get their money, I've no doubt.

10. You Need: An Understanding of the Process - and Patience

I've lost count of how many times I've heard folks say they need funding in four weeks (or less!) Having an understanding of the time it takes to bring on an investor will allow you to properly stage your meetings, not try and overwhelm everyone on day one, and plot your course towards the milestones. Not having this understanding can make you appear desperate and unknowlegeable. Desperate and unknowlegeable entrepreneurs, it should be said, rarely get funded.

It takes usually three to six months for the investors to get to know you and your customers, and understand your technology enough to close a deal - even longer on some complex deals. If you're smart, you can use this to your advantage (see point 9) and hopefully achieve a great result.

Okay, so you just read my first blog entry on revenue sharing and you're looking for some hard numbers so you can structure your rev-share deal. The past masters of the rev-share deal? The music industry, which operated on the basis of royalties ranging from 7.5% up to 25%. Let's start there.

20 years ago, in the heyday prior to the Internet, flannel-shirted unshaven artists would typically be offered 7.5% of 90% of record sales (the 90% comes from an assumed amount of 'breakage' in shipping, a hangover from the pre-CD days of fragile vinyl) - whereas the consistent megastars, such as Paul McCartney, Madonna, Sting and Michael Jackson would negotiate "tape lease" deals for upwards of 20%, sometimes upwards of 25%, of the total.

*Ex-music biz types will recognize I'm talking about "mechanical royalties." I recognize that fee-per-play "performance royalties" are an important part of an artist's income, but I'm leaving them out of this calc for the sake of simplicity, and because mechanicals present a better analogy to software/tech sales.

In my 25 years of negotiating big and small rev-share/licensing deals in countries as far afield as Japan, China, Singapore, Australia, India, and the US, and industries as diverse as aerospace, media and software, I've noticed some parallels with our friends in the music business.

It seems that with very few exceptions (i.e. big-brand motherboards and operating systems and suites of apps, sold by companies with huge standards-based strategic weight as a bundle), most OEM technology licensing deals fall within the range of 7.5% to 25% of sales.

That's not to say 25% is the absolute upper limit for a licensor. If the technology provider agrees to provide pre-sales or after-sales technical support, they can expect a little more, sometime as much as 25% more, from the deal.

If they lend their brand in a co-branding arrangement, and their brand has significant weight (as in the case of the aforementioned operating system), maybe they can pull another 15% to 25%, and push the deal towards the "50/50" mark, or beyond.

By this time, of course, the deal is typically no longer a "royalty" based deal, but a reseller or marketing and distribution agreement, based as much on the power of the licensed brand as the licensed technology. In these "50/50" split situations, the weightier brand will often use its weight to gain an extra 10% or even 20% share.

Once the rev-share rate goes past 70% to the licensor and starts narrowing to 20%, then to 10%, you're in retail distribution territory - think local CD store or cinema complex owner versus Sony. And the more CD stores in your area, well... now we're reached the point where the viability of the "licensee" (if you can still call them that), rather than the licensor, is in question.

In summary, the approach I think works for doing rev-share deals is as follows:

• Technology: 3% (ubiquitous commodity) to 15% (best in class) to 30% (unique) of sales
• Technical support: 7.5% (developer-to-developer) to 25% (tier 1 user) of sales
• Co-branding and marketing/sales support: 10% (weak) to 25% (strong) of sales
• Sales and fulfillment: 10% to 25% of sales

So if you're a developer, but your technology is a commodity and ubiquitous and not innovative (and unlikely to become so), you should maybe consider becoming *very* good at providing D2D (developer to developer) support, including API tools, and innovate "above the fold", so you can push your rate north of 10%, and continue to grow your business.

On the other hand, if you have a technology that is best of class (15%), a tier two call center (15%), and some solid marketing strengths, channel partners, and brand presence (20%), you can confidently step up and sell yourself as a 50% (or more) rev-share partner. The sky is the limit.

Note to my friends in commodities: OEM technology is still a pretty good business and rarely reaches the depths of some raw commodities as a percentage of the final price (in the case of a modern fighter jet, 1/145000 or .000007% of the ticket) - but will continue trending in that direction, with few exceptions, over the next decade.

Many years back, one of my colleagues came bounding into my office with news: he'd just convinced a technology vendor to license their technology to us for a mere 3% of revenue. He was over the moon. I was not.

"We shouldn't do it," I told my collegue. "They're not going to be able to employ a team to support the technology, let alone improve it - not based on that royalty. We might make some money but it will kill them as a company."

Years later, those words unfortunately turned out to be prescient: we didn't end up doing the deal, but they didn't change their commercial approach either, and, as a result, they are no longer with us. And from that example, we can extrapolate a basic premise: if you are licensing technology, it's a good idea to pay a fair price.

What constitutes a fair price? In a rev-share deal, the split comes down to contribution. In a commodity situation, where there are numerous potential suppliers to chose from, the percentage royalty may indeed drop to 3% - or below - at which point some vendors will find it hard to maintain operations and fall away, eventually driving the price back higher.

In more competitive situations, where you have a need to maintain an edge in a competitive market, the royalties you pay need will need to be sufficient to enable the licensor to operate and innovate. But again, fairness is key - the split should not be so extreme that the licensee finds themselves forced to dip into marketing funds to bridge the gap. When this happens, no one wins. Both sides suffer from reduced revenue, based on a reduced ability to market the product, based on a lack of funds.

Which takes me back to my first point: Don't ever assume you're winning just because you struck a fantastic deal in which your licensee is forced to pay you mucho de niro. You may have just ruined your chances for success. Look at the whole pie when doing the deal and make sure everyone gets to eat.

To be continued...