Month: January 2013

Your Internet Business Probably Isn’t A Startup

We have a big problem: people think that just because their company uses technology or makes sales online that it makes their business a startup. They couldn’t be more wrong. 95% of online or technology business are small businesses. They’re lifestyle business. And there’s nothing wrong with that.

Unfortunately a cadre of investors, successful (and wannabe) tech startup entrepreneurs, Hollywood and the media have bastardized the words entrepreneur and lifestyle business. Entrepreneur now only refers to people working to become the next Facebook and lifestyle business is used as a pejorative by investors who know they can’t get their desired 10-50x returns. People dismissively say, “ Why bother with that, it’s just a lifestyle business?” And entrepreneurs start to think that if they want to start a business, they need to find a way to stretch their small business idea into the box of tech startups.

I see entrepreneurs make this mistake every week. They religiously believe that their small business that happens to use the Internet needs to raise $1m, grow rapidly and get acquired by a tech giant. In reality, they have a small business that could generate a decent profit each year. They could support themselves nicely, but they cling to the idea that they’re a startup. No! They’re a traditional small business that happens to use the Internet.

An entrepreneur is not synonymous with Internet tech startup entrepreneur. Entrepreneurs come in all shapes and sizes: everyone from Mark Zuckerburg to the guy selling tshirts on his college campus. It doesn’t mean taking big investments from well know VCs. It’s not rapid growth to try to take over the world. Being an entrepreneur is creating value and being responsible for the gains and losses.

We got into this mess for two reasons. First, entrepreneurs have been beatified by the press, Hollywood (The Social Network, Shark Tank) and politicians who have fostered a “job creating culture” around entrepreneurs who are now these superhuman people who do incredible things. Now when people think of entrepreneurs, they think of tech startups like Facebook, Twitter and Instagram: companies that took massive investment, grew rapidly and changed the world.

Second, VCs, angels and tech entrepreneurs have pejoratively demonized small business as a “lifestyle business” which makes these potential entrepreneurs feel unworthy unless they’re starting startups. Successful tech entrepreneurs and investors say things like “its hard enough to start a small business, why not aim big?” At best, it’s a confirmation bias because those are the companies that VCs, angles and serial tech entrepreneurs have seen succeed. At worst, it’s because VCs and angels have no interest in small businesses and lifestyle businesses because they’ll never generate the 10-50x returns that these investors need to make money on their funds.

The confluence of these trends means that entrepreneurs who have great small business ideas think that they need to fit into the tech startup box. Instead of growing like a small business, they try to raise money, get rapid growth and delude themselves that someone like Facebook will buy them for millions of dollars. They end up beating their heads against the wall and failing because they’re wasting their time on things a small business has no business doing and wasting their precious money on things a small business shouldn’t ever focus on.

I’ve been advising a small business that thinks it’s a startup over the past two years. They have a great idea, passion and over six figures in revenue each year. But among many other problems, they’ve always thought of themselves as a startup that should have massive growth. They’ve dreamed of an acquisition by a tech giant, raising money and taking out loans trying to achieve this massive growth. It’s been obvious since day one to everyone outside of the founding team that they’re in fact a small business, not a startup. A potentially very profitable small business, but a small business nonetheless.

But the founders won’t give up the startup dream. And they will fail and go bankrupt despite having a small business that should be generating a profit of $250,000 this year because of their inability to admit reality.

This is an extreme, but not isolated incident. I see it every week. As entrepreneurs, we need to stop perpetuating the myth that every business is a startup. We should be encouraging small business creation that happens to use the Internet. We should create more resources for these entrepreneurs to learn about how to grow. And these entrepreneurs should be accepted as the real entrepreneurs that they are. They need to know that they’re not the same as Facebook. They’re closer to a corner store. And that’s just fine.

The US needs small business. They create the vast majority of new jobs each year. And sustain millions of families each year. Internet small businesses are one of the most promising paths to success in our economy. But we need to get this problem under control.

To reiterate: just because your company uses technology or makes sales over the Internet does not make it a startup. There’s nothing wrong with that. Rock it. Embrace it. Earn your money. Live a great life. And stop trying to be something you’re not.

My Tax Plan

Our government is broken. I’ve written a bunch of posts on US government policy but I haven’t put forth many specifics. That’s going to change. This is the first post in a series about how I’d fix the US. Potential political career disclaimer: I reserve the right to change my opinons when presented with new evidence. That’s what smart people do. That doesn’t make them a flip-flopper.

At nearly 75,000 pages and growing, nearly everyone agrees the tax code is broken. But US taxes are one of the most controversial and yet least understood parts of our government. In order to fix our debt problem, we need to address revenue and spending. Anyone who says we can fix our problem with one or the other is just not credible. My plan would raise a bit more revenue for the government and make it more fairly distributed to US citizens. I fully understand it would never pass.

Simplify

At 75,000 pages only those with massive incomes can afford to pay lawyers and accountants to legally evade taxes. My Dad is an attorney and he struggles to make sense of his rather simple tax return. I’ve been assessed penalties by the IRS three times for honest mistakes on my business taxes.

Complexity is why people making $100m a year use offshore accounts and those making $75,000 don’t. It’s one of the reasons Warren Buffet pays a lower percentage in taxes than his secretary . Facebook can afford to take advantage of the rules to save itself money. Complexity helps the rich and sophisticated at the expense of the rest of us.

We also waste billions of dollars trying to enforce our byzantine tax code. Not to mention the millions of man hours per year.

Increase Fairness

Although nearly all of the attention gets focused on the income tax rate, it only makes up 42% of all US Federal tax revenue. We have massive fights over the income tax, but what about the other 58%? Our income tax is progressive, but most of the rest of our taxes are regressive and hurt the poor over the rich.

Promote Investment not Speculation

Our current tax code doesn’t really differentiate between speculation and investment. Our biggest problems have come from speculation at the expense of investment. My tax code gives you promotes investment in our future.

My Plan

1. Income Tax

Our 75,000 page tax code could be simplified to four sentences. Our tax return could be simplified to a post card.

My income tax would have three brackets, 5%, 25% and 35%. The first $10,000 would be free. I’d eliminate all tax deductions. Brackets would be set to get similar revenue to what we have today, plus a bit more to cover our shortfall.

2. Payroll Tax: Social Security, Medicare Tax & Self Employment Tax

I would completely eliminate the payroll tax and raise income tax rates and eliminate deductions to get more revenue from income taxes. Income taxes and reduced deductions would have to rise greatly because payroll tax accounts for 40% of federal revenue.

The payroll tax and self employment tax are two taxes taken out of our paychecks. 15.6% of our paycheck goes to the government to pay for Social Security and Medicare. If you are an employee, you pay half out of your paycheck and your employer pays the other half. If you work for yourself, you pay both halves. This tax is poorly designed for three main reasons.

First, it disincentivizes entrepreneurship and self employment.It punishes self employed people and entrepreneurs. We have to pay 15.6% of our income to the government, whereas an employee only pays half of that. Second, it discourages companies from hiring. Companies are required to pay 7.8% of an employees salary in taxes when they hire them. That’s not good for an economy fighting through high unemployment. Third, it’s incredibly regressive. It only affects the first $100,000 of income, meaning that if you make $400,000 in a year, you only pay an effective rate of about 4% while a self employed person making $40,000 pays the full 15.6%.

3. Corporate Taxes

Flat rate of 10% on all corporate income. No exceptions.

This change would lower the burden on small corporations that are currently paying 15-35% and increase the burden on the biggest companies like Facebook, GE and others who pay 0% because they’ve hired expensive attorneys and accountants to shirk their burden with tricks like the double irish.

4. Dividend income and Interest Tax

10% flat rate on all income from dividends and interest. This income generally comes from money that’s already been taxed from income or other investment taxes, so it’s not fair to tax again at a high rate. It’s also counter productive.

5. Carried Interest

Taxed as normal income.

This is the odious loophole that hedge funds and bankers use to pay 15% taxes on their billions in income each year. It should be a crime, but our government is unwilling to make changes. This is probably the most unfair tax on the books. VCs currently benefit from it, but under my plan they’d go into capital gains since they are investing.

6. Capital Gains Tax

In year one, you pay your income tax rate. In year two, it’s your rate minus 5% points. Year 3, minus 10% points. In year 5 you pay 0%.

Capital Gains are money that you make investing in stocks, companies, real estate and other things that you later sell at a higher price. The current system is you pay income tax rates in year 1, then if you wait more than a year, you pay 15%. The goal is to incentivize risk taking and investment, but holding a stock for one year is not enough. An investment is long term and you should get big benefits if you really invest for the long haul instead of speculating with an under two year time horizon.

7. Estate Tax

25% on all estates over $7.5m.

This is one of the most debated taxes right after the income tax, but it only affects 13,000 estates per year. When someone dies and their total assets (property+investments+cash) is over a certain amount, the estate must pay taxes. The goal is to eliminate family inheritance of billions that create an idle rich class. Many say it’s unfair to double tax the money because it’s already been subject to income and investment taxes while the person was living, but I don’t believe so. 25% on all assets above $10m, indexed to inflation, is fair.

Conclusion

I have not done all of the math to make sure that my rates make sense. If they are too low to get our current levels of revenue, I’d increase the income tax rates. If they are too high, which I highly doubt, I’d reduce them. The goal of this post was to create a framework that makes sense to simplify our tax code and make it more fair.

What do you think?

AT&T Is Firing Me As A Customer Even Though I Want to Pay Them $480 in 2013

I’ve been an AT&T customer since march of 2010 when I first switched from Verizon to get an iPhone. I’ve paid AT&T at least $1500 for my personal cell phone over the past two and a half years and would like to keep doing so. If you include my business accounts I’ve had with them, I’ve paid them over $4500. I’ve always paid on time. I’ve been a model customer. I want to pay AT&T at least $480 in 2013. But AT&T doesn’t want my business anymore. They can only cancel my service.

Here’s the problem: I pay AT&T $80 per month when I am in the US. Whenever I travel abroad, I put my phone service on “vacation suspend” mode with AT&T at a cost of $10 per month. Vacation Suspend means that my phone is not active, but I keep my phone number. When I come back to the US I reactive my plan and I go back to paying full price. I’ve been doing this since November 2010 when I first went to Chile. Here’s my payment history from AT&T:

  • March 2010 to Nov 2010 – $80/month
  • December 2010 to May 2011 – $10/month
  • May 2011 to September 2011 – $80/month
  • September 2011 to December  2011 – $10/month
  • January 2012 – $80/month
  • February 2012 to November 2012 $10/month
  • November 2012-January 2013 $80/month

I’ve had 17.5 months at full price and 17.5 months on the vacation suspend reduced mode for a total of: $1400+175=$1575. AT&T refuses to let me go back on vacation suspend again.

In August 2012, AT&T started charging me full price again because the representative told me that they have a company policy that you can only be on vacation suspend for 180 days in a row. When I called back, he happily put me back on vacation suspend for another three months. When I came back to Chile this month and wanted to go back on vacation suspend, the rep told me it was impossible. The system only lets them put me on vacation suspend one time every 12 months. I talked to a supervisor. Same deal. I talked to their twitter support. Everyone understood my predicament and said they’d love to be able to help me, but they only thing they could help me do was cancel my account.

They claimed that this has been their policy for years. I know, looking at my account history, that it’s not. I’ve been on vacation suspend multiple times in a single 12 month period and for more than 180 days in a year with no problems. This policy is either a recent change to get rid of customers like me or the customer service reps are now lying to me.

I want to keep my plan because it’s convenient. When I go back to the US I get to keep my number and have a functioning phone with a change of SIM cards and one phone call. There’s only two reasons I can think of why AT&T wants to get ride of me: First, AT&T wants to fire me because that I have a grandfathered in unlimited data plan for $30. AT&T no longer offers unlimited data. Second, they are a big company that doesn’t make exceptions and will just let revenue walk out the door.

I’m still hoping for common sense to prevail from AT&T, but if it doesn’t shortly, I will cancel my plan and AT&T will lose at least $480 this year and thousands of dollars in the future.