No Revenue? No Business Model? No Problem!

There’s a lot of capital getting thrown at early-stage startups.

Good morning! And welcome back!

Here are today’s highlights:

• These days, the customer definitely is not always right.

• A business owner rewards his employees with “life-changing” bonuses.

• A new tax rule will affect businesses that use digital-payment services.

• A restaurant owner asks how much more restaurants can take.

CUSTOMER SERVICE

Customer behavior really has gotten worse: “At a specialty grocery store in Traverse City, Mich., a manager named Shea O’Brien was recently accused of being unable to read by a customer enraged that a kind of fish advertised as being discounted had sold out. In another instance, Mr. O’Brien said, a man who did not want to wear a mask verbally assailed another employee, interspersing personal insults with an impromptu soliloquy about liberty and tyranny until the employee began to cry. ‘He kept shouting, The governor said we no longer have to wear masks,’ Mr. O’Brien said. The woman’s response — that they were still required in places with a certain number of workers — only made him angrier. Finally, the owner arrived and ‘told the customer never to return,’ Mr. O’Brien said.”

• “If employees are now having to take on many unexpected roles — therapist, cop, conflict-resolution negotiator — then workplace managers are acting as security guards and bouncers to protect their employees.”

• “‘Have you seen a man in his 60s have a full temper tantrum because we don’t have the expensive imported cheese he wants?’ said the employee, Anna Luna, who described the mood at the store, in Minnesota, as ‘angry, confused and fearful.’”

• “You’re looking at someone and thinking, ‘I don’t think this is about the cheese.’” READ MORE

FINANCE

There’s a lot of capital getting thrown at early-stage startups, even those without revenue or a real business model: “Blank Street has a simple business: It sells coffee—sometimes in carts, usually in small stores. It launched its first location 17 months ago, before it began dotting Manhattan and Brooklyn with baristas. Even a couple of years ago, a rapidly growing chain of no-frills, low-cost coffee shops might have had trouble finding interest from tech investors. But in today’s booming market for early-stage startups, the New York-based company has received commitments for its third funding round in a year. The $35 million investment comes just three months after the still-fledgling company received $25 million, said Vinay Menda, Blank Street’s chief executive. ‘We live in a world where capital is available,’ said Mr. Menda, a 29-year-old former venture capitalist ...”

• “Fred Wilson, a partner at Union Square Ventures and early backer of Twitter and Coinbase Global said in a November blog post he had seen quite a few investment rounds in which companies were valued at $100 million before they had a sustainable business model.”

• “‘They are being delusional, comforted by the likelihood that someone will come along and pay a higher price in the next round,’ he said of the investors. ‘The numbers just don’t add up.’”

• “Mark Suster, a partner at Los Angeles-based Upfront Ventures, said the average early-stage company he looked at in the mid-2010s was valued around $15 million, while today it is around $25 million—and the companies often have yet to generate revenue.” READ MORE

Chris Herd, whose business helps companies go remote, says private equity firms are looking for companies to take remote-first: 

Chris Herd @chris_herd

💰 Private Equity: the hottest trend of the next decade for private equity will see them purchase companies, make them remote-first The cost saving in real-estate at scale will be eye-watering. The productivity gains will be the final nail in the coffin for the office

SEE THE THREAD

TAXES

Gene Marks explains a new tax rule for businesses that use digital-payment services: “Let’s suppose you’re a small business owner or freelancer, and you get paid from a digital-payment service like PayPal, Venmo, Zelle, Cash App or any third-party settlement provider that’s accepting credit cards on your behalf and putting money into your bank account. If those payments were for goods and services that you sold to customers, it was previously up to you to make sure you were reporting that income on your tax return. But now, beginning in 2022, if you receive more than $600 in total during the course of the year—regardless of how many customers are paying—your payment service is required to report that amount to the IRS.”

• “Let’s be clear: you should be reporting those amounts as income anyway.”

• “But the reality is there are 30 million small businesses, freelancers, solopreneurs and independent contractors in the U.S. and—if my client base is any indication—many of them who receive a number of small payments from many customers throughout the year may, well, forget.” READ MORE

A tax break aimed at small businesses is being exploited by Silicon Valley investors: “The tax break is known as the Qualified Small Business Stock, or Q.S.B.S., exemption. It allows early investors in companies in many industries to avoid taxes on at least $10 million in profits. The goal, when it was established in the early 1990s, was to coax people to put money into small companies. But over the next three decades, it would be contorted into the latest tax dodge in Silicon Valley, where new billionaires seem to sprout each week. Thanks to the ingenuity of the tax-avoidance industry, investors in hot tech companies are exponentially enlarging the tax break. The trick is to give shares in those companies to friends or relatives. Even though these recipients didn’t put their money into the companies, they nonetheless inherit the tax break, and a further $10 million or more in profits becomes tax-free.”

• “The maneuver, which is legal, is known as ‘stacking,’ because the tax breaks are piled on top of one another.”

• “‘If you walk down University Avenue in Palo Alto, every person is involved in tech stacks,’ said Christopher Karachale, a tax lawyer at the law firm Hanson Bridgett in San Francisco. He said he had helped dozens of families multiply the tax benefit.”

• “Stacking has become so common that it has spawned other nicknames. One is ‘peanut buttering’ — a reference to the ease with which the tax benefit can be spread among the original investor’s relatives.” READ MORE

HUMAN RESOURCES

A departing business owner surprised his employees with “life-changing” bonuses: “Three days after Christmas, Michael Gartner summoned the employees of the Iowa Cubs minor league baseball team to a staff meeting at Principal Park, the team’s stadium in Des Moines. The team’s sale to a global sports and entertainment company had closed that day, and Mr. Gartner, 83, said he wanted to give the employees their new business cards. But there were no business cards in the envelopes that he handed out. Instead, inside were checks worth $2,000 for every year each employee had worked for the team — $600,000 in total for the 23 full-time workers.”

• “Mr. Cohen described the checks as ‘a life-changing gesture’ for some longtime staff members. ‘Seeing all the people who had been there for two decades, three decades, tears streaming down their faces, it was a very special, emotional day,’ he said.”

• “‘We’ve had above-standard health insurance and 401(k) contributions, and we’ve always been the organization that people looked at and said, Gee, I wish everybody did that,’ Mr. Wehofer said. ‘That’s always been his way, as long as I’ve been part of the organization.’”

• “In a list of the 30 most valuable minor league baseball teams in 2016, Forbes placed the Iowa Cubs at No. 22, and estimated the team’s value at $30 million. Mr. Gartner declined to disclose the sale price.” READ MORE

More companies are putting their 401(k) plans on autopilot: “About 62 percent of businesses with a 401(k) plan used automatic enrollment in 2020, up from 60 percent the year prior and 46 percent a decade ago, according to the Plan Sponsor Council of America, a trade group. This feature lets an employer divert a portion of workers’ paychecks into a 401(k), either immediately or after a few months, if that worker hasn’t signed up voluntarily. Auto-enrollment leverages worker behavior (inertia, in this case) to their advantage. Workers receive a paper or digital notification ahead of time and can opt out — but most do not.”

• “Vanguard Group, one of the largest 401(k) providers, found that 92 percent of new hires were still saving in the 401(k) plan three years after being automatically enrolled; in plans with voluntary enrollment, just 29 percent were still saving.” READ MORE

THE COVID ECONOMY

Omicron is taking a toll on staffing: “The rise of U.S. Covid-19 infections to record levels in recent days has driven thousands of canceled flights, prompted retailers to train available employees on new jobs, and closed some stores altogether, companies said. The rapidly spreading Omicron variant is hitting businesses at a time when consumers’ demand for products and services has surged, and many companies already are struggling with staffing and supply-chain challenges.”

• “Supermarket operators said they anticipate the Omicron variant’s spread will drive increased absences among cashiers, stockers and other employees in the days ahead, deepening staffing problems the grocery sector has faced for months.”

• “The deepening challenges that Omicron’s spread poses for businesses have led some economists to cut their growth forecasts for early 2022, anticipating continuing worker shortages for companies and reduced consumer spending on travel and entertainment.” READ MORE

U.S. companies are mostly thriving, although bigger companies are doing better than smaller ones: “The rebound is real for smaller companies, but it is the biggest companies that have fared the best, a Wall Street Journal analysis of corporate financial data shows. For large-capitalization companies in the S&P 500 index, profits and revenue were hurt less by the pandemic’s initial economic slowdown. The biggest companies also rebounded more quickly than smaller ones, even as uncertainty deepened over Covid-19 infection rates and the spread of variants, rising inflation and supply-chain woes.”

• “‘The larger firms are able to navigate the supply-chain issues a lot easier,’ Ms. Bostjancic said. ‘They have scale and additional resources that the medium-size to small-size firms are going to find more difficult.’” READ MORE

But businesses of all sizes are still struggling to make plans: “Take Daily Harvest, the food-delivery service. It had a major advertising campaign ready to begin [last] week. In the works for months, it would highlight the problems with the global food system and invite customers into the woes of modern farming. Then, days before Christmas, Rachel Drori, the chief executive, considered scrapping the campaign. ‘A week ago it felt right,’ she said. With Omicron cases surging, the stock markets tanking and a pall cast over the holiday season, ‘it’s definitely not the right moment,’ she said a few days before Christmas.”

• “The Daily Harvest team began a frenzied attempt to create a new set of advertisements that spoke to the nation’s unease while also encouraging potential customers to buy premade mulberry oat bowls and turmeric soup.”

• “Then Ms. Drori reconsidered. The original campaign would continue, after all.” READ MORE

Gyms were just starting to recover before Omicron hit: “A number of states and cities, including New York, Boston and Chicago, have implemented mask advisories and vaccine mandates for indoor activities including gyms to protect people from what is now the dominant variant of the coronavirus in the U.S. The new restrictions are setbacks for an industry that had just started to see foot traffic and leasing activity recover from the deep losses inflicted by the pandemic.”

• “In California, gym developer Marc Thomas said membership and revenue at even his strongest-performing gyms are still 30 percent lower than pre-pandemic levels.”

• “Mr. Thomas, who owns and operates 40 Orangetheory Fitness locations, has opened two new locations since the pandemic hit. But that is 10 fewer than the dozen he had planned to open over the past two years, he said.”

• “Because of Omicron, Mr. Thomas said he is considering scaling back a big marketing and sales effort he had been planning for early in 2022.” READ MORE

A chef/owner of an upscale restaurant in Atlanta asks how much more restaurants can take: “We’ve been making it work. But with Omicron’s arrival, we’ve been forced to rethink what it will take to keep the business alive each day while keeping both our staff and our diners safe. Without more help — both from the government and from guests — we won’t make it, nor will countless other independently owned restaurants around the country.”

• “The week before Christmas, one member of our 41-person staff tested positive for Covid, forcing us to close for the weekend. Over two days, our restaurant lost over $38,000 in revenue.”

• “Lazy Betty is primarily a reservation-only restaurant — so when we were hit with a slew of cancellations in that pre-Christmas week, we feared the worst. Every caller said they had an emergency Covid case. Many asked if we could waive our cancellation fee.”

• “On that recent weekend we closed because of the positive Covid case, only five of our employees could secure an appointment for a Covid test. After a long search, I wound up with a cart full of at-home tests and a new membership to Sam’s Club. All told, my chef-partner Aaron Phillips and I spent just shy of $800 on 106 tests.” READ MORE

If you see a story that business owners should know about, hit reply and send me the link. If you got something out of this email, you can click the heart symbol, you can click the comment icon below, and you can share it with a friend. Thanks for reading, everyone. — Loren