6 financial facts would-be entrepreneurs need to know

So you’re considering quitting the rat race and becoming an entrepreneur — congratulations. Whether you’re working on a killer startup with a few pals or embarking on a career of self-employment, you’re about to discover what life is like when you have maximal control.

In many ways, it’s awesome. I’ve been self employed, running Tweney Media, for a bit more than a year. It’s not my first rodeo: I was a self-employed freelance writer for about 4 years from 1999–2003. Self-employment is way better now than it was the last time, mostly because of the internet, which gives me access to a kind of social interaction that was difficult to come by in the early 2000s. So, it’s less lonely. It’s also easier to network, find new business opportunities, work with people around the world, and to educate yourself.

Self-employment and early-stage entrepreneurship is also an excellent exercise in self-determination. You realize that everything you do has meaning. If you find yourself doing bullshit, you can just stop. Do something else that’s meaningful, or makes you money, or both. If you find yourself working with assholes, you can stop. Life’s too short. Find different partners or clients. If you have an idea for something amazing, you can do it. Why not? You’re an entrepreneur! This attitude leads me to new realizations about my life, the world, and how they intersect almost every day. I have never felt more awake.

But to be successful you’re going to need to know a few things about financing a life of entrepreneurship. I’m not going to give you the usual crap advice: “Skip the $3 lattes at Starbucks.” If you’re drinking so many lattes that it’s impacting your finances, you have a serious caffeine and foamed milk addiction and you may need medical help. No, the real issues facing you are much more serious: Health care, debt, taxes, and housing are all extremely expensive. Cash flow is a bitch. Doing accounting is necessary and hard. And, unfortunately, the U.S. economic system is not going to help you with any of those. In fact, you could say that the U.S. economy actively discourages entrepreneurship.

Here are some things you need to know if you’re considering becoming an entrepreneur.

Health care will fuck you.

Seriously, the U.S. health care system is a travesty. It is the opposite of a functioning free market: It’s a completely opaque market where you don’t know what you’re buying, you don’t know what it will cost until you get the bill, and you can’t compare options. This is as true for a band-aid in the hospital as it is for the insurance that supposedly covers it. And insurance costs more, and covers less, every year. The result: Everything is insanely expensive.

This is not just an Obamacare problem. This is far deeper than that. And even with employer-sponsored health insurance, you may already be spending tens of thousands of dollars on uncovered health expenses. If you’re self employed, it’s just that much starker.

As an example, my family of four in California spends $20,000 a year on insurance, and about as much again on uncovered health care costs. And we’re fairly healthy people. (So far.)

Credit cards will fuck you.

You’re not going to get VCs to back you at first unless you’ve already had a successful startup under your belt. Banks won’t loan you money unless your business has several years of records to show. Unfortunately for you, you’re going to need to fund your business out of your own pockets. Unless you’ve built up a big nest egg, that probably means credit card debt. Once you have it, credit card debt is very hard to get rid of.

Granted, if you have good credit, you can take advantage of low-interest-rate offers and turn credit card debt into very low percentage loans. Pay attention to when those offers come up and how long they last, and you can move the debt around as needed to keep the rates insanely low (for now). That’s a reasonable way to fund your business at first. But just remember, it’s still debt. You need to pay it back. And as long as you’re paying it off, that adds to your monthly overhead.

Housing costs will fuck you.

Especially if you want to live where the opportunities are, like Silicon Valley/San Francisco, or New York, or someplace else where there are creative people doing interesting things and investors fueling companies that might want to pay for your product or services. But housing costs are insane in these places. A 2-bedroom rental in SF or the East Bay goes for $4,000 a month these days. If you have a family, you’re going to be paying. A lot.

Taxes will fuck you.

I’m not talking about the tax rate, but about the process of paying taxes as a self-employed person. You will need to make quarterly estimated tax payments. That means every three months you need to estimate how much money you’re likely to make for the whole year, calculate approximately how much of that will be taxable, figure out what your estimated total tax will be for the year, and then based on that figure how much you ought to pay this quarter so your four quarterly payments wind up being pretty close to the correct total. And then write a check to the IRS. A big check.

Cash flow will fuck you.

In order to write that check to the IRS (and your monthly rent or mortgage check, and your medical bills, etc) you will need to pay close attention to your cash flow and ensure that you’re saving enough money from whatever you’ve got coming in so you make all those payments when they come due. If you don’t manage your cash flow intelligently, it’s entirely possible to go completely bust even while you are making great money. That’s because it always takes the money longer to come in than you expect it to, especially if you have a service business that involves invoicing people. (This is a strong argument for building a SaaS business where you get recurring monthly revenues without having to send invoices, btw.) Some months the incoming cash will be great. Some months it will be terrible, or zero. You need to plan things out to deal with those lumps. And that brings us to accounting.

Accounting will fuck you.

I would be lost in this whole process if it weren’t for my wife, who is also our CFO. She spends hours with spreadsheets figuring out the optimal tax strategy, the optimal health insurance choices (modeling different policies against what we actually use), figuring out our cash flow, and making sure bills get paid on time. It’s an enormous job that she spends many hours on every week. If you aren’t lucky enough to have a partner like this, you’re going to need to do it yourself, or pay an accountant.

Oh, and by the way? Mint is useless for most of this. There are no financial management systems out there that accommodate self employed people’s needs, such as budgeting for uneven cash flow. As far as I know, there’s no financial management system that can deal with the need to manage significant credit card debt either. If you are self-employed, your finances are more complex than most, and you need to do most of the work manually. Google Sheets is your friend. (Update: a friend tells me that You Need a Budget, aka YNAB, is designed for helping manage credit card debt.)

Accounting may be a pain, but you need to do it. The amount of expenses involved in being an entrepreneur — just to stay alive and keep a roof over your head — are not trivial. The complexity of managing those expenses is a pain. But there are significant opportunities for savings if you’re willing to dive in. Just remember that diving in will take a lot of time, or money, or both.

Like I said at the top, entrepreneurship is great. I’m happier than I ever have been in my career, and I’m building a growing business that is starting to generate work for other people too. I’m making more money (on a gross revenue basis) than I ever earned in a day job. I love the flexibility and the self-awareness. I am proud to be supporting my family.

But it is financially challenging. It takes a lot of determination to fight into the headwinds like this. If you’re considering going independent, you need to know what you’re getting into.

6 financial facts would-be entrepreneurs need to know

Money 20/20 recap: Jack Dorsey, blockchain, and the future of financial services

Also published on VentureBeat and LinkedIn

In the financial services industry, blockchain looms as a large but distant and somewhat mysterious presence. A few forward-thinking bankers take it seriously and are trying to figure out how to turn it to their own advantage. Everyone else has heard about it, knows little about it, and is taking a wait-and-see approach.

The one thing everyone seems to agree on: They don’t want to make the same mistake with blockchain that they did a decade ago with PayPal, which was ignore it completely, wait for it to go away, and then get surprised when it grows up and becomes a threat.

Instead of a single company, blockchain is a whole category of technologies – a movement embraced by thousands of people and hundreds of companies. The threat is actually much larger than that posed by PayPal (which, after all, is just another kind of bank now). It’s just that few in the financial services industry quite know what to do about it yet.

That’s the message I took from Money 20/20, a conference focused on financial technology taking place this week in Las Vegas. It was my first time at the event, which has grown to enormous proportions in the four years since it was founded: 11,000 attendees and more than 400 exhibitors filled up the Venetian and Sands conference facilities. At $3,000 per ticket, roughly, that’s a lot of revenue—even before sponsorships. No wonder that the founders were able to sell the event to i2i a year agofor a reported $100 million price tag.

Most of the event was not focused on blockchain. The transition to EMT (chip cards) and mobile apps are far more top of mind for most bankers. But there were plenty of sessions featuring blockchain companies and discussions of the technology and its future.

Blockchain, the technological concept behind Bitcoin, is real. In many ways, its approach to storing data in a transactional database that is distributed across many machines is reminiscent of the cloud approach to computing, as Square CEO Jack Dorsey noted in his keynote at Money 20/20: Both are “distributed, redundant, failsafe, and ubiquitous.”

People talk about “the blockchain” but unless they’re referring to Bitcoin’s blockchain, there is not one single blockchain. Instead, each cryptocurrency or smart contracts platform uses its own blockchain. A blockchain, simply put, is a public, distributed ledger of transactions. Because it’s public, transactions can’t be repudiated and people can’t spend the same value more than once: The public ledger records it and anyone can check it. Because it’s distributed (copies are maintained all over the internet), there’s no single point of control or failure.

And it’s quite secure—in principle. It’s worth pointing out, as several speakers at Money 20/20 did, that Bitcoin’s own blockchain has never been compromised in the eight or so years it has existed. Applications or exchanges that use Bitcoin have been compromised (and millions of dollars have been lost in the process), but the underlying blockchain has remained online, and intact, continuously. That might sound like a technicality to outsiders but it is significant.

In fact, Bitcoin itself appears to have matured somewhat. It is still a fairly volatile currency, so buy and hold it at your own risk. But as a medium for exchange it seems to be working quite well. Sonny Singh of BitPay, which powers a huge proportion of Bitcoin payments around the world, told me that Bitcoin accounts for roughly 99 percent of the blockchain transactions market, despite the rise of alternative currencies. And many of BitPay’s customers don’t even touch Bitcoin at all: they just use BitPay as a payment processor, like Visa: People pay in Bitcoin, BitPay clears the transaction and deposits dollars into the client’s account. Singh says BitPay’s volume of merchant transactions has tripled in the last year, to one transaction every 15 seconds.

So what does the future hold?

Bitcoin- and blockchain-based stock exchanges. For regulatory reasons, you can’t technically call them “exchanges,” but I don’t know what other word you would use for a place where you can buy and sell equities, like you can on T0. Overstock.com, an early Bitcoin adopter and the creator of T0, announced this week that it would start trading some of its stock on the T0 platform. (I wrote about Overstock’s plansyesterday.) The advantage: Trades can settle in 10 minutes, instead of 3 days, like on traditional equities markets.

Is that a threat to traditional stock exchanges? Absolutely. “We’re taking a burn it down and start over approach,” said Judd Bagley of Overstock.com

Big banks using blockchain for international payments. Visa announced a new product, called Visa B2B Connect, at the show. It’s powered by Chain, a maker of blockchain technologies. Details are fuzzy on how it works, but it is a custom blockchain network, operated by Visa, for corporate clients to conduct B2B transactions across borders.

It’s not just Visa: At least 2/3 of major financial institutions are working on blockchain-based products for deployment sometime in the next three years.

The potential here, of course, is cost savings. Most international bank transfers cost several percentage points of the total transaction value; if you use Western Union, be prepared to pay up to 8%. PayPal itself is about 3.5%. A blockchain-based transaction system could be much, much cheaper. (BitPay, for instance, charges just 1% for any transaction anywhere in the world.)

Companies are working on tying together different blockchains. Bitcoin isn’t the only blockchain out there. Ethereum has sprouted up as a significant alternative, although most people are looking at it as a tool for enabling smart contracts, not just currency transactions. And many other cryptocurrencies exist. How do you facilitate transfers of value between different blockchains? Right now you need to use an exchange, which is a clearinghouse using some intermediary currency or store of value. A better approach would be some kind of protocol that allows blockchains to talk directly to one another. Ripple has created one such protocol, the now-open-sourceInterledger Protocol. But others are certainly in the works. Whoever can decisively solve this ledger interconnection problem will have accomplished something comparable to the invention of TCP/IP–the foundation of the internet.

Ethereum is still a work in progress. Ethereum founder Vitalik Buterin is clearly a genius. He’s also very young and sort of awkward. But despite the scope of his ambitions he’s fairly modest about how far Ethereum has come so far. In an onstage chat with author Don Tapscott, Buterin was sanguine about the controversial patch he made to Ethereum in order to reverse the weakness that allowed someone to hijack $50M of a decentralized $160M investment fund called the DAO. Critics viewed that as an assault on the immutability of the blockchain, thus compromising the trustworthiness of the Ethereum system. But for Buterin, “immutability is not absolute,” and needs to serve a social purpose. At present, the need to evolve Ethereum is a greater good than the need to preserve its blockchain unchanged, he said. Ethereum will eventually mature, he said, but “until then it should be viewed as an evolving ecosystem, not a fixed work of art.”

Governance is a grey area. Buterin seems to be coming around to the idea that some kind of governance—by groups of people working together—is necessary in any system. You can’t just create the perfect protocol and assume that it will take care of everything from that point on. Politics is necessary and unavoidable, he acknowledged. Like others in the blockchain space, he is coming up against the real world: One in which regulators may eventually catch up to what’s going on and impose real restrictions.

What’s more, it’s important to note that anonymity is not one of the essential properties of blockchain transactions. In fact, the immutability of transactions in blockchains works against anonymity, as the operator of the Silk Road, Ross Ulbricht, discovered to his regret a few years ago. The blockchain is a paper trail. That cuts in multiple directions, as Jamie Smith of The BitFury Group pointed out in one panel: “If you have an immutable record, authoritarian governments might find that very interesting, too.”

Still, while regulators around the world are generally far more enthusiastic about blockchain than they were about earlier cybercurrencies (like E-Gold), there will come a time when the world’s financial regulations start to impinge on the blockchain world. Operators of cross-border transaction platforms, for instance, will need to provide the same assurances as banks do that they’re not being used for drug deals, money laundering, etc. At least, they will have to do this if they want to remain operating within the law.

The opportunity is huge. “Every 20 years, something really cool comes along, and this is it,” said BitFury’s Smith. In the next few years, everyone on the planet will have some kind of mobile device. And there will be some kind of ubiquitous, planet-wide internet access. Combine those two things, she said, and why wouldn’t the world gravitate towards fast, convenient, low-transaction-cost payments?

As for Bitcoin itself, who knows? One panelist, Eric Martindale of Blockstream, predicted that Bitcoin would increase 10x in value, to more than $6,000, in the next 12 months. (The current value of Bitcoin is about USD $653.) I don’t know if he was joking, trying to hype up the value of his own holdings, or if he really believe that. It seems unlikely to grow that much. Bitcoin itself could in fact wind up getting bypassed by more flexible, more scalable blockchains. But the underlying technology seems sound, according to many who have looked deeply into it, and there seems little doubt that there will be more many more blockchain-based companies in the future, with or without Bitcoin in their business plans.

The biggest obstacle is usability. Bitcoin and blockchain have a long way to go before they’re easy enough to understand and use for the majority of bankers, let alone consumers. But with lots of people working on tying them into existing financial systems, that’s the direction that they seem to be headed.

Photo: Bobby Lee of BTCC wears a hat that says “Make Bitcoin Great Again.”

Money 20/20 recap: Jack Dorsey, blockchain, and the future of financial services

Overstock.com could begin first Bitcoin-based stock trades

I’m a stringer for VentureBeat this week at the #Money2020 conference, looking for good stories about blockchain. Here’s one about how Overstock.com is about to offer stock (in itself) via T0, its Bitcoin-based equities trading platform. (Just don’t call it an exchange, even though it is.) Official news announcement to come tomorrow.

Overstock.com could begin first Bitcoin-based stock trades

 Overstock.com has had it with the inefficiency of today’s equity markets, and it’s not going to take it anymore.

The company announced a new blockchain-based platform for trading equities(stocks and bonds) called T0 last year. Today, at the Money 20/20 conference in Las Vegas, Overstock.com’s communications director, Judd Bagley, detailed T0’s advantages over traditional equities trading systems and made statements that lead to the conclusion that a company — likely Overstock.com itself — would soon begin selling its stock on the T0 platform.

While other financial technology innovators might tread lightly for fear of offending the Wall Street types they eat lunch with every day, Bagley said Overstock is not going to hold back.

“We’re from Utah. We don’t care. We’re really taking a ‘burn it down and start over’ approach,” Bagley said.

After the panel, Bagley clarified that for regulatory reasons, T0 cannot be called a “stock exchange.” It is, he said, a platform for trading “widgets,” and the first use case will be equities (stocks and bonds).

Bagley did not actually say that stock trading would begin on T0. All he said onstage was that T0 would be in operation some time this year, and pointed to an upcoming Tuesday morning announcement by Overstock.com.

However, circumstantially, it seems quite likely that “being in operation” means trading stock, and that it would likely start with the stock of Overstock.com itself, which started accepting Bitcoin as a payment method a couple of years ago and has received SEC approval to sell stock for Bitcoin via T0.

Overstock.com’s beef with current equities trading processes came about a few years ago, when the company was on the receiving end of some stock market manipulation. Investigating the problem, it found that the trouble came in part because of the complexity of settling trades. This is a complex process that involves many intermediaries and is aimed at ensuring that the transaction is legitimate. However, the complexity introduces vulnerabilities — and also means that trades aren’t fully settled for three days. (After the Trade is Made describes the process in detail, although Bagley said the book is unreadably dense.)

“It shouldn’t take three days in this day and age,” agreed panelist Emmanuel Aidoo, who heads up cryptocurrency and blockchain strategy at Credit Suisse.

By contrast, blockchain-based equities transactions can complete in 10 minutes.

Yolanda Goettsch, a VP and associate general counsel at NASDAQ, begged to differ. “Our markets are very liquid, very efficient,” she told the panel, pointing to the extreme speed of the exchange’s electronic trading system. However, she did seem to acknowledge the three-day span required for full settlement, when it’s necessary to validate that the parties to a transaction have the funds, have the rights to the stock, and are meeting regulatory requirements.

In other respects, all of the panelists agreed on one thing: Banks and exchanges can, and should, take blockchain technology very, very seriously.

“Everybody’s in active trials,” said Jacob Farber, general counsel for R3, referring to financial services companies testing blockchain technologies. “There’s an assumption now that it will be deployed. The question is how and when.”

R3 is a consortium of 75 financial institutions and is building an open-source platform for distributed ledgers, called Corda.

NASDAQ, for its part, is testing a blockchain-based proxy voting system in Estonia, a country noted for its openness to fintech and digital identity technologies.

The panel reflects a broader trend. There’s robust interest in blockchain in the financial services industry, according to a recent study by IBM, which found that15 percent of top global banks plan blockchain products in 2017. Sixty-five percent are planning blockchain products within three years, IBM’s study found. And 80 percent of exchanges are testing blockchain, Goettsch noted.

Updated 10/24/2016 to clarify details about T0 launch.

Overstock.com could begin first Bitcoin-based stock trades

Happy Sukkot.

Today I learned about Sukkot, the Jewish holiday celebrating agriculture and … living in huts? As I was walking up to the pool today I saw a U-Haul pickup with a big wooden structure on the back of it. Coming around, I saw it was open to the back, and there was a semicircle of folding chairs facing the back of the truck. “Putting on a show?” I asked the man standing inside the hut. No, he said — he was there to celebrate the holiday with a few Jewish students from the high school. He was still waiting for them to arrive when I walked by. His hut, I learned, is called a “sukkah,” though I am pretty sure I am both spelling it and pronouncing it wrong. I think I’ve seen them before, but never on the back of a pickup truck, and I told him so.

“Are you Jewish?” he politely asked me, though I’m pretty sure my total ignorance gave me away. “No,” I said. “Well, happy holidays!” he said to me. “Happy holiday to you too,” I said. And off I went to swim.

My takeaway: There is always more to learn about Judaism. And there is no end of useful things you can do with a pickup truck. crossposted from Facebook
October 19, 2016 at 02:48PM

Happy Sukkot.

The South End Rowing Club (review)

The South End (aka SERC) is one of two swimming-rowing clubs that share a building in Aquatic Park, right next to Hyde St. Pier. It’s a terrific group of welcoming, fun-loving people who are into all things aquatic. What’s more, it’s a San Francisco institution, dating back to 1873. Serious history here! Visitors are welcome for a day use fee of $10. Membership is about $400 for a year, which is an incredible deal.

For occasional bay swimmers, the chief attractions are the warm showers and toasty sauna. But once you join, the real benefit becomes clear: It’s a welcoming community with incredible depths of knowledge about the Bay and a willingness to share their experience with any and all.

If you’re have trouble telling the difference between SERC and the Dolphin Club next door, here’s my take:

– SERC’s building is a bit “saltier” (though a new wing is under construction). The Dolphin Club has a prettier interior, with lots of wood paneling and more of a “clubhouse” feel.
– SERC members tend to be a little more wild and fun loving; Dolphins are more concerned with rules and tradition.
– SERC organizes more swims outside the cove (i.e. outside Aquatic Park).
– SERC has a vibrant handball program. I don’t think the Dolphin club offers this.
– SERC was founded by Irish Americans; Jameson’s whiskey often shows up in the sauna after swim events. Dolphin Club was founded by German Americans and doesn’t allow drinks in the sauna.
– It’s easier to join SERC. Dolphin Club only accepts members at specified times.

Both of them have tons of members who are into swimming in the Bay (both with and without wetsuits, but mostly without), kayaking, rowing, and running. Both have excellent athletes in all of those sports. Both have good safety records and take care to run their events responsibly.

I’m biased, as I’m a South End member — but then, I joined because the Dolphin Club wasn’t accepting new members and I didn’t know the difference anyway. Over time I’ve realized that I was lucky to join the group that suits me best. But at the end of the day, both clubs are great stewards of the Bay and Aquatic Park.

crossposted from Facebook
October 17, 2016 at 09:21AM

The South End Rowing Club (review)