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Why You SHOULD Look A Gift Horse In The Mouth
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Over the last 3 years I have been immersed in start up life and due to the very nature of the game you often find yourself short of cash and scrambling to do business deals and make a little money out of thin air. Cash is at a premium. During that time I have taken part in all sorts of free work and revenue share deals. There have been advertising revenue splits, content distribution, website builds, free marketing, joint builds of apps etc. The list goes on. I would say nearly 95% of projects that I have taken on have seen no significant return for either side. They were all deals that both parties struck at the time bartering a little work or content in exchange for something in return with both parties hoping to further their own interest but most of the deals fizzled out, why is that?
People like money. It does indeed make the world go around. We know the value of a cup of coffee. We know how much a car costs and most of us would have a fair idea how much a day of our time would cost. We all have a deep connection with money and we respect it. It dictates what we can and can’t do. If I work long hours and don’t waste much money I can treat my friends and go on holidays. When we buy an ice cream we know the value of it, we don’t try to barter or exchange our services in return, it’s a fixed price and everybody comes out of the deal happy.
The problems arise when you start to do work with people when there are no fixed prices and the goal posts are constantly moving. Most work I have done on a revenue share basis or taken on for free has been when I have been promised something by the other party that sounds too good to be true (it more often than not is too good to be true).
Most of us also have a moral commitment to money. If you pay me 100 Euros to dig a hole the chances are I will dig you a hole that I think is deserving of your 100 Euros. The trouble starts when you take the money out of the equation. Ask me to dig a hole and that you will pay me 50% of the revenues from shop that the sign post points to after it is in the hole and the chances are that I will dig the hole for free. What usually happens though is that either the sign is pointing in the wrong direction or the shop is so bad that 50% of the revenues did not even equate to the amount of effort I put in to digging the hole.
I know some revenue sharing deals do work. Just look at Apple and the app store or iTunes. I do however think for small businesses and start ups in particular that the revenue share deals that work are few and far between. It has taken me quite a lot of time to figure out but whenever I am doing business now either selling my wares or buying them from somebody else I prefer to have cash involved.
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The idea of doing a revenue share is very appealing. Without having to pay (read:lose) money you can share in future rewards. It all sounds very abundant and zen-like. Putting together a deal like this actually takes a hell of a lot of skill. Balancing the motivations of all parties alone is spectacularly difficult to achieve. I’m sure there are people who can do it – but its a rare talent.
Maybe it isn’t a lack of cash which is the problem. Maybe it is a lack of ‘downside’. If I pay for something – and I don’t make sure I get the most from it – I’ve ‘waisted’ the money. If I invest time in a project but wasn’t going to get paid for that time in any case – I have nothing to lose. It seems to me though, that with most projects, there comes a time when, in order to succeed, you need to do something you wouldn’t have agreed to at the outset in order to make it a success. There is some aversive task that needs to be knuckled down on. WIthout a ‘fear of loss’, however, there is no extra motivation to help get the hard work done when it needs to be. Fear is twice as motivating as pleasure and in any deal you need a bit of both to get stuff over the line.
Having said all that. My partner and I run Piehole on completely a profit share basis. We never put any money in and we both work on good faith. It has to be said though – I’ve probably started tens of such projects where nothing has come out of it. Maybe it is a numbers game. Maybe its about the strength of the relationship.
Actually. Now that I think about it. The laptop I’m typing this on came out of the profits or a revenue share idea. Again – I knew the guy real well and there was a lot of implicit trust. I guess one laptop and one lively-hood isn’t bad going.
I have to dissagree in that ice worked in revenue share deals a lot and seen the good and the bad. No matter if it’s apple and the app store or a much smaller proposition, the JV splits should always relflect the amount of work done by each party. From there, you are then in a symbiotic relationship and your chances of making money are 100% reliant on each party fullfilling their obligations to the deal. So we come across common failure no1: where by one of the parties does not follow through with their work. Not a good reciepe for success or making money and thus a bad business model.
The 2nd common failure is that while the proposition may look good on the outside and is a clear winner, it is not always the case when you go to Market, and by no fault of either party, it’s just not a flyer. I think that sometimes it can be hard for both parties to accept this in a JV, but with sense, you just move on.
I still think it’s a great latteral way of doing business, espically when investment of your time and energy is the risk. At the end of the day, focus is what pays off I reckon.
I wrote a rambling blog post about this months ago. In my opinion the most important work you do [reputation wise] is the work you do for free. The reason for this is because nobody values unpaid work. Therefore to impress your “customer” you have to work twice as hard and do twice as good a job. I find you get less word of mouth from unpaid work and you get less respect from unpaying clients. By unpaid I do like you mean money. Trading services is not the same – the other person (and you) see it as free work effectively. Good blog post.
This post made me think of something I have recently been hearing more and more about. Organizations that put people/companies together who are interested in trading services instead of cash. Some of them have been around for many years. These bartering networks offer organization and structure to these types of deals which is something that might be a major culprit in some failed ventures. I found this article in business week about it. http://www.businessweek.com/magazine/content/08_64/s0804021853506.htm. One of the more reputable organizations I was referred to was http://www.imsbarter.com/. I have yet to take part in anything like this but I am very interested on what others think or may have experienced.
I am also interested to hear your response to Rebecca’s query. I take part in some of these bartering networks, simply because it’s quicker. For example: I need a basic website for my career and my friend needs content for his website…since I can write and he can program, let’s just exchange services instead of running around to banks and trying to make money out of thin air. This bartering system seems perfect for the very beginning stages of business activity, but I wonder if there is a place for service trading once a business is off and running?