Know Your Strategy

There are two opposing views:

“Strategy is the rare and precious skill of staying one step ahead of the need to be efficient”

– Dr Jules Goddard – Uncommon Sense, Common Nonsense

Or

“Your margin is my opportunity

Jeff Bezos -Founder,  Amazon

Neither perspective on strategy is right or wrong – today we discuss the importance of understanding which end of these extremes your business is positioned?

 

Amazon Killer? Time to look at subscription models…?

Today’s ramblings are about a new rival to Amazon – Jet.com.

Jet is already being courted by Walmart as it looks to beef up its online distribution model. With 12m lines already, Jet is looking to attack Amazon’s seeming dominance of the online market by offering household goods at cost price. Customers are rewarded with further reductions for buying in bulk.

So how does Jet make its money?

Via a yearly subscription of course – $50 per year. Not a lot in of itself but potentially huge if it gains mass take up. Whatsapp showed us the power of subscription models with its $1 dollar annual fee (pre Facebook days) – not wholly exciting until it reached 200m+ users and therefore a tidy $200m per year. Also, more recently, Dollar Shave Club?

I am a huge fan of subscription models. Think monthly Saas subscription business models; membership plans, continuity programs etc. A recurring income flow. Predictable revenues with no receivables to chase. Highly attractive to prospective purchasers if you are looking to build a company to exit.

Have a think how you can add the subscription model into your business, if you haven’t already….?

 

10 Squared Principle – Business Success Model

The 10 squared principle seeks to identify specific traits that appear to apply to successful businesses.

1) Richard Branson Factor

You should never be part of the operational team – ever! (Even if a train driver is off ill, you never see Richard B step in to take over!). The same principle applies here – you are the business owner.

Work on it, not in it.

2) A recurring income stream

Have one or more recurring revenue streams built into the business model. One-off sales should not form a core of your business. Aim for 50%+ of the income to be of a contractual recurring nature.

3) The service / product offering should be well established or known

Trying to educate the marketplace on a new product or service can be very expensive. Stick to what is already known and well established.

Just execute better.

4) The business model should be high-touch

If the business model could be outsourced to offshore centres, it should be avoided.

5) If it “puffs your chest” then it should be a “no”

Vanity projects are normally expensive and destined for failure.

6) It should not rely on government policy or specific laws

These can change in an instant. You want a business for the long-term.

7) No long sales cycles

High value B2B sales can drain your cashflow as deals can take an age to complete. Smaller, cash intensive services / products via regular transactions are better.

8) Minimal specialist expertise needed

Trainable to staff (locally) so no need to suffer from limited resource pool and specialist (spiraling) wages.

9) Doesn’t have to be your startup

It could be the acquisition of an existing business that just needs to execute better (just so long as they adhere to these principles and the price is right!)

10) Make appreciable improvements day-in-day-out

The small things count if applied and compounded day after day.

Please let me know if you think I’ve missed any hidden success factors…

7 R&D Tax Credit Tips

  1. Don’t assume your company doesn’t qualify – even if your accountant has discounted it or perhaps not even mentioned it (in fact that might be all the more reason to check it out!)
  2. It doesn’t matter whether your company is profitable / tax paying in a financial period or loss-making – R&D tax relief can benefit you and release cash into your business in both cases
  3. Think about R&D tax relief and how it might apply to your company as early as possible. This way you can ensure that you are capturing relevant supporting information, documents and costs as you go along – rather than trying to cast your mind back and rebuild retrospectively which might lead to sub-optimal claims
  4. Don’t discount R&D tax relief if you carried out eligible activities a couple of years back thinking you’ve missed out – you can make a retrospective claim for accounting periods ending in the past two years. So at the time of writing this post (20 June 2016), say you have a 30 June financial year end then the periods ended 30 June 2014 and 30 June 2015 are still open and eligible for R&D tax credit claims.
  5.  Don’t wrestle with the definition of what activities qualify for R&D tax relief on your own – many companies wrongly count themselves out when a quick chat with a R&D tax specialist might have helped them understand how they do qualify. Many company owners are stunned at the breadth of the R&D tax relief.
  6. Don’t think you have to leave your current accountant to access specialist R&D tax advice – most R&D specialists will supplement the good work your accountant is already doing for you with their specialist R&D tax services so this needn’t upset your ongoing accountancy support relationship.
  7. Think about how the UK R&D tax incentive can fit into your overall funding profile – so tax advantaged funding such as SEIS / EIS can typically be used in harmony with the R&D tax incentive. Watch out for grants as these can impact adversely on the levels of tax relief available under the R&D tax incentive. Cash tax breaks such as the Patent Box can be used alongside the R&D tax relief. As you can see, thinking about how this can all fit together sooner rather than later will help optimise available funding.

SEIS / EIS: When it pays to be Ordinary!

I know it’s not cool to aim for being ‘ordinary’ and its not a label that you’ll want attached to your business but when it comes to your SEIS / EIS shares this is exactly the label you want – ordinary shares.

SEIS / EIS shares must be ordinary non-redeemable shares and carry no preferential rights to dividends or assets on a winding-up.

If you have institutional or other non SEIS / EIS investors then things can become more complex, if they say want preferential rights in relation to certain aspects of the business.

In this scenario, differing share classes would typically come into play with say ‘A’ shares for the founders, ‘B’ shares for VCs (both classes may have some preferential rights to varying degrees) and ‘C’ shares for SEIS / EIS investors – these being the ‘highest risk’ ordinary shares.

No one-size fits all but this gives you an idea. If you are going to go down the road of different share classes then bear in mind that this will require formal legal procedures to give effect plus amendments to the Articles of Association of the company (this goes beyond the scope of this course – get yourself a decent lawyer!).

This is a just one of a series of emails from our SEIS / EIS course – you can subscribe to the course below: