Saturday, June 01, 2013

Don't "manage earnings." Instead, "build value."

I continue to get great insights out of the life of Warren Buffett.

One of Buffett's famous principles is the story of Mr. Market.  Here's an excerpt from his 1987 Berkshire Hathaway shareholder letter:
http://bit.ly/11jHDaG
"Without fail, Mr. Market appears daily and
names a price at which he will either buy your interest or sell
you his.
 

Even though the business that the two of you own may have
economic characteristics that are stable, Mr. Market's quotations
will be anything but.  For, sad to say, the poor fellow has
incurable emotional problems.  At times he feels euphoric and can
see only the favorable factors affecting the business.  When in
that mood, he names a very high buy-sell price because he fears
that you will snap up his interest and rob him of imminent gains. 
At other times he is depressed and can see nothing but trouble
ahead for both the business and the world.  On these occasions he
will name a very low price, since he is terrified that you will
unload your interest on him.

Mr. Market has another endearing characteristic: He doesn't
mind being ignored.  If his quotation is uninteresting to you
today, he will be back with a new one tomorrow.  Transactions are
strictly at your option.  Under these conditions, the more manic-
depressive his behavior, the better for you."
Buffett wanted his shareholders to take a long term view and focus on building value (in his case, "book value") rather than getting caught up in the latest Wall Street earnings release.

Some companies, like Coca-Cola, managed their earnings with accounting tricks to "make the numbers" (quite literally, in some cases!).  Even though Buffett owned Coca-Cola, his approach was to focus on increasing the long term value of Berkshire Hathaway, regardless of the short term somersaults of the market.

The same is true of startups.  Instead of quarterly earnings, you have board meetings.  But you should still resist managing earnings.  Instead, focus on building things of real value: A great product and happy customers.

Why most startups have to fail, and why that's a good thing

Some people think I'm a pessimist for pointing out the long odds against any particular startup succeeding.  It's not fun to hear that even venture-backed startups have a 90% chance of failure.

But startup failure isn't just reality; it's also a necessity...and even a benefit.

1) The number of companies getting started far exceeds the potential market.  Long-term success is generally spelled "revenues of $100 million."  The GDP of the entire United States was roughly $15 Trillion in 2012.  Each year, 500,000 new businesses are started in the United States.  If each one were to become a $100 million success, that would mean adding $50 Trillion in ultimate revenues.  Clearly, those numbers don't add up.  Mathematically, most companies have to fail.

2) Market failure, while painful, plays an important role in the economy.  We're not smart enough to allocate people and resources; the failures of all those startups let us reallocate their people to the companies that are succeeding.  If startups never failed, every other type of company would run out of good people!

3) Failure is a sign you're trying.  It's a truism among folks in the enterprise software world that a win rate that's well above 50% is a bad sign.  That's counterintuitive to most folks, who assume that winning all the deals you go after is the best possible result.

Au contraire--a high win rate indicates that you're not in enough deals.  You're people aren't trying hard enough to get you in the door.

Failed ideas, even "nutty" ideas, are a sign that we are collectively trying new things, rather than simply rehashing the conventional wisdom.

I've failed plenty of times in my career.  It was seldom fun.  But the people from the companies I worked with have gone on to do great things.  And I've succeeded enough to keep me excited about trying that new new thing.

What to do when you're wrong

When you work in the startup world, you're wrong a lot.

I'm an investor, and I assume that only 10% of the companies I invest in will make it.  That means I'll be lucky to be wrong less than 90% of the time.

So why do so many people suck at being wrong?

I see it all the time; someone made a bad call, and the results prove it.  But instead of admitting the mistake, that person will try to pretend it didn't happen.

For entrepreneurs, this takes the form of changing the subject.

For investors, this takes the form of engineering an acquihire.

But pretending you weren't wrong when you were is a bad strategy.  Like bullshit, refusing to admit mistakes carries a cost:
http://bit.ly/12o351k

Here are the three steps I think you should follow when you're wrong:

1) Admit you're wrong.

Lightning won't strike, nor will people think worse of you.  In fact, they'll probably think better of you.  And if you're always wrong, at least admitting it makes you look incompetent rather than completely delusional!

2) Apologize for the mistake.

Love may mean never having to say you're sorry, but being wrong definitely does.  Apologize to the people affected.  Trust me, they haven't forgotten, and apologizing is the best way to get them to forgive.

3) Explain how you'll do better.

Some people apologize to a fault.  The thing is, at some point, it doesn't matter how nice someone is when they fuck up, they are simply a fuck-up (albeit a likeable one).  You need to make clear what you learned, and what you're changing for the future.

Success comes from phase changes, not incremental improvements

In chemistry, the concept of a phase change refers to the transition between different states of matter, like ice melting into water, or water boiling into steam:
http://bit.ly/1aQ23cz

I believe that the same principle applies to startups and entrepreneurial careers.  Success comes from phase changes--truly discontinuous shifts--rather than simple incremental improvements.

One such phase change is starting your first company.  Once a founder, always a founder.  Even if your startup fails, you're a member of an elite club of people who dare to swing for the fences.

Another such phase change is raising outside capital.  Raising angel or VC money changes the dynamics of your company--and not always for the better.  But this is generally a permanent shift--you don't raise VC, then go back to bootstrapping.

The implication of the phase change principle for entrepreneurs is that you need to focus your attention on truly discontinuous shifts--what my friend Ben Casnocha would call "breakthrough opportunities."

Transitioning from one state of matter to another requires tremendous energy, and truly changes everything.  But you need to make that transition if you want to achieve success.

Be careful what you measure

Back in the 1990s, when I started my first company, I recruited Jim Fitzsimmons to take over as CEO so I could finish my MBA.

(Side note: Jim was an All-American basketball player in college, when he starred for Harvard along side future broadcasting legend Jim Brown.  Jim and I would occasionally play ball together at the YMCA by our office; his knees were shot and he was in his 50s, but he still had a sweet stroke on his shot)

I learned a ton from Jim, who shared a lot of hard-won wisdom with me.  One of the sayings I remember most was, "You get what you inspect, not what you expect."

Jim's point was that unless you measure performance and manage accordingly, your startup's performance is likely to disappoint.

I've tried to follow his advice ever since, but I've also learned to value the corollary, which is to be careful what you measure.

Take Klout, the most prominent measure of social media influence.  It takes a highly complex thing--the nature of influence--and reduces it to a single number.  This leads to what I call the US News & World Report effect--students think whatever school is higher in the rankings must be better, rather than doing the hard work of assessing actual fit.

I know this, yet I'm still aggravated when I compare my Klout score to various friends, or when it mysteriously falls.  And I'm pleased when it rises, even though I have no idea why, or what it means.

Be careful what you measure, because you'll almost always end up judging performance based on that measure--whether or not it's a valid one.

When in doubt, try something

Like millions of people, I recently read the New York Times article about the 7-minute workout:
http://nyti.ms/18IjmzB

This workout, which originally appeared in the American College of Sports Medicine's journal, consists of 12 simple exercises which, when performed at a high intensity for short periods with even shorter rest periods, provide a comprehensive whole-body workout.

Sounds great, right?  And boy, do Americans love 7-minute workouts.  But how many people actually tried the workout?

You could probably spend an hour or two simply researching the subject to decide whether or not it was scientifically valid.  Or, you could take 7 minutes and just do it.

I printed out the exercise guide and gave it a shot.  It was exhausting.  But that meant it was working.  I then took another 5 minutes to install a HIIT (high-intensity interval training) app.  I went with Simple Interval Timer, which was simple and free:
http://bit.ly/11eSzTG

Since then, I've run though the workout dozens of times.  I even convinced one of my co-workers to try it with me (his comment: "That kicked my ass.").

It's usually pretty hard to try something the first time.  But it gets easier each time.  And in my case, that quick decision may very well impact my fitness level for years to come.

It's easy to read about cool new things.  But reading about cool things isn't the same thing as doing them.  When in doubt, try something.

Productivity Hack: Do 1st Whatever You're Most Likely To Forget

Most entrepreneurs get accused of having a short attention span.  There's something about the willingness to pursue new ideas that seems to go hand in hand with a restless mind.  The result is that follow-through can be a big issue for entrepreneurs.

I've adopted a simple hack to address this issue: Do first whatever you're most likely to forget.

This approach (which you can think of as a variation on "Eat That Frog," has a number of benefits.

1) You make sure you actually accomplish that task.  This can be especially important for entrepreneurs, because they, more than anyone else, drive the progress of their startups.  Each task is often a prerequisite for a host of other actions, which makes procrastination especially deadly for startups.

2) You stop worrying about remembering the task.  We all have limited executive function; why spend it on something as useless as trying to remember a task when you could simply finish that task and move on?

Now what was it I was going to do again?  Oh yeah, publish a blog post.

Enterpreneurship is a grind, not a gas

I've written before about the value of being willing to do what others find unpleasant:
http://bit.ly/hppiIQ

That advice applies tenfold for entrepreneurship.  Entrepreneurship is rewarding because it's a grind.  If it were simply a gas, everyone would do it.  Om Malik recently wrote eloquently about this on GigaOm:
http://bit.ly/11MtYKP

"The positive reviews and the buzz of the new release are going to last a few days, and then it will be back to the grind for him. The grind that consumes all founders completely. The grind that means managing a big company. The grind that means parting ways with your co-founder. The grind that means dealing with constant naysaying, haters and giants who exist to copy your ideas, poach your people and generally make you miserable.

Building things that are different, inventing the future and creating a real business is a long and often very lonely slog. But you don’t hear about that. Instead what you get is a lot of babble about startups from so-called mentors, advisors and startup gurus. Peel away their sharkskin and you find they have never started a company, and they continue to live in the reflective glory of the company that once employed them. Others are the creation of social media, having struck a pose. And some are born consultants. They find willing listeners among a growing army of entrepreneurs who like enterpreneurship as a lifestyle. Sorry guys, entrepreneurship isn’t a lifestyle, it is life."
If you don't find entrepreneurship a grind, you're not doing it right.  The whole point of entrepreneurship is finding ways to do things that others consider impossible.  That's never a walk in the park.

This isn't to say that misery = success.  There's a whole host of miseries that will hurt--rather than help--your chances.  Infighting and wasting money are great ways to get miserable, but crappy for success.

Your influence comes from your content

A final "Friday Night Writes" piece from the redoubtable Brian Reese...

Brian asked:
"What makes you (or anyone of influence on Twitter...aka thousands/millions of followers) follow someone or re-tweet something from someone less influence?  For example, do you look to further your own "brand-you" from a re-tweet, thereby decreasing the likelihood of re-tweeting something from someone less influential?"
First of all, I'm quite flattered that Brian considers me a "person of influence" on Twitter.  After all, I have less than 8,000 followers (though of course those 8,000 followers represent an incredibly brilliant, accomplished, and sexy group of people!).  But I suppose to someone with 100 followers, that does seem influential.

Here's my thought process--I will reply or retweet for one of three reasons:

1) I'm responding to a friend.  The reply or retweet is a way for me to show my appreciation and friendship.

2) I really liked the content.  The reply or retweet is my way of "paying it forward" by spreading something that's worth spreading.

3) Someone really pissed me off, and I posted a riposte before I thought better of it.

I'm not really fond of the third reason, and try not to indulge in it, but it does happen.

I suspect the same is true for other people, including actual influencers.  I have friends like Hiten Shah who retweet my posts when the content matches the interests of their followers.  And there are other folks like Joel Gascoigne, where we've never had the chance to meet, but our mutual appreciation of each other's content results in our commenting and retweeting back and forth.

The conclusion then is simple: Your influence comes from your content.  Produce great content, and you'll develop relationships with folks who will want to spread that content.

To make a difference, you have to write

Another "Friday Night Writes" post, as requested by Brian Reese.

Many people are afraid of writing.  The thought conjures up bad memories of school assignments and term papers.  But if you want to make a difference you have to write.

Brian asked me what I thought of his philosophy, which is, "Writing equals thinking, which drives understanding and focuses actionable ideas."

I agree; writing is a powerful tool for thinking.  Writing forces you to fill in the gaps in your thinking because it makes those gaps impossible to ignore (at least for the intellectually rigorous and honest--never underestimate the ability for people to fool themselves when it's convenient).

But the power of writing is even greater.  Brian focused on the internal impact.  I'd argue that the external impact is even greater.  Writing is uniquely privileged on the Internet; it's searchable, it's permanently archived, and it's easily shared and consumed.

A ho hum blog post of mine reaches a couple hundred people.  A popular blog post could reach thousands, or in rare cases, tens of thousands.  For example, my "Founder Non-Admissions" slide deck has been viewed 32,000 times.

In contrast, I might get the chance to meet with 5-10 entrepreneurs per week.  By reaching several thousand people per week with my writing, I expand my influence by several orders of magnitude.  The influence of a single blog post is far less, but not that much less.  My writing definitely makes a greater difference than my speaking or my meetings.

Thursday, May 30, 2013

Great White Furry (a Jason Yeh story)

To celebrate the end of the school year, Jason has graced us with another of his stories.  Apparently, he is not a fan of Twilight.  Presented here without further comment.


Great White Furry

"Oh, Jacob, your man boobs are so sexy and pulsing."

"You can forget about those vampire bastards, Bella."

"The f#*$ is this? Why is that werewolf dude throbbing his hairy chest to persuade a girl to marry him?"

"Chad, I don't know. Maybe this movie sucks so bad that one of their own actors is that sexy guy Taylor Lockner."

"Well, he wasn't that bad, Mike. Remember him from Sharkgirl and Lavaboy?"

"It's called Sharkboy and Lavagirl, Chad. Shut up and lets watch NBA. At least the Lakers don't have sexy goth werewolves on their team, though that would be pretty cool.Or we could go to Long John Silver and get fish and fries, which are somehow chips and real chips are called crisps."

"Mike, we don't have any money!!!"

SO Mike and Chad went to the bank and became unstoppable  criminal masterminds until:

"Mike, there's a shark running after me, help for gods sake!"

"How much smuggled crack were you smoking,Chad?"

Apparently the shark was just a furry/rapist that escaped from an insane asylum. Chad never was seen in San Francisco again. Mike was arrested and died in jail. Many people in Oregon have seen Chad playing spin the bottle with Bigfoot. Other people have seen leftovers of Long John Silver meals and broken Twilight DVDs. People say that Chad is still out there, wearing a shark costume. During spring break, I saw a Twilight Saga DVD. Could this be the work of Chad? If it is, I hope he dies soon.

Tuesday, May 28, 2013

The Coming Robopocalypse

As a long-standing Cassandra warning of the upcoming robot rebellion, I felt a chill today when I read the following two stories:
It doesn't take much imagination to see how the combination of 3D printing and autonomous weapons could eventually become the Von Neumann machine of our nightmares.

I feel very confident that I'm going to win my apocalypse bet (that the robot rebellion comes sooner than the uplifted monkey uprising).  Too bad I'll be too dead to collect!

Monday, May 27, 2013

Entrepreneurs are from Mars, VCs are from Venus

I have an inordinate fondness for outdated references.  Just one of the pleasures of getting old!

Yet while the famous bestseller, "Men are from Mars, Women are from Venus" was a cringe-inducing self-help book, it did touch upon a theme of gender differences that later, better writers tackled.

More recently, I read the fascinating book, "A Billion Wicked Thoughts":
http://bit.ly/18n7jrc

This book uses recent science (and a detailed statistical analysis of 1 billion pornographic Internet searches) to develop a model for male and female sexual behavior.

Don't worry; this post is SFW.  The "money shot" of the book is this insight:
"The female brain is designed to play it safe because the odds of a woman reproducing are very good.  Today's human population is descended from twice as many women as men.  Historically, 80% of women reproduce, versus only 40% of men.

In other words, men who don't take chances, are likely to end up childless.  Men ought to be willing to risk their lives to boost their reproductive odds, because if they don't, they won't reproduce anyway.

Women face a different problem--the odds are good that men will offer sex.  All that matters is choosing the best offer.
All of this makes me very glad that I already have two kids!  But back to entrepreneurs and VCs.  The divergent evolutionary pressures are quite analogous to those on men and women.

Let me rephrase the words above and apply them to a different context.

"In other words, Entrepreneurs who don't take chances, are likely to end unsuccessful.  Entrepreneurs ought to be willing to risk their professional lives to boost their odds, because if they don't, they won't be able to build a successful startup anyway.

VCs face a different problem--the odds are good that Entrepreneurs will offer to take their money.  All that matters is choosing the best offer."

I think this is a pretty apt description. An entrepreneur who sits around waiting for VCs to pursue him is likely doomed to failure.  And a VC who is unselective and says yes to everyone gets called...Dave McClure (I kid, I kid!).  The broader point is that most of the time, with the exception of the hot deals (in this analogy, the Brad Pitt of startups), entrepreneurs chase VCs, and not vice versa, with predictable results for the relationship dynamic.

Cutting the Bullshit

The world seems to be full of bullshit.

Everyone has an agenda, and is spinning away like a whirling dervish.

In politics, pundits and strategists try to help candidates win the news cycle.

In the news, every story--like an anchor's hair--is teased to within an inch of its life to keep viewers tuned in.

On social media, people make outlandish statements to attract attention and reactions.

Entrepreneurs torture their numbers to come up with hockey stick charts so they can pretend they have traction.

VCs quietly bury their failures and then pretend that they never happened.

Every startup is "a leading player" in their field.

The problem with all this bullshit is that it's inefficient.

You know people are lying, but you don't know by how much to discount their statements.

To be conservative, you discount heavily, which tilts your stance towards passivity.

In other words, all this BS has a price.

You may think that you can't cut the bullshit, because it will leave you vulnerable.

One of my VC friends once asked me, "Chris, aren't you worried that you're missing out because you're not always spinning?"

In a word, no.

Cutting the bullshit means that I don't have to remember what story I told to whom.  Cutting the bullshit means that when I say something, people know they can actually believe it.  Cutting the bullshit means that people would rather work with me than with other people, even when those others' bullshit makes them seem more successful.

Cutting the bullshit won't hurt you; it will help you.  And if we all cut the bullshit, we'll all be better off.

Dear Entrepreneur

Like many investors, I was entertained by Andy Dunn's recent rant, "Dear Dumb VC"
http://bit.ly/12bW9UY

His essay lays out his criticism of VCs by citing the following facts:

* You don’t realize you are going out of business
* You think you can help entrepreneurs
* You spend a ton of an entrepreneur’s time before deciding
* You have lots of advice about what entrepreneurs should do
* You never tried the product
* Your portfolio sucks
* You are late

I wasn't too offended because A) I'm not technically a VC, B) I've experienced many of the same things, and C) It's clear that Andy is taking a stance for effect (something I know a little about), and he criticizes his own failings in other posts.

The always thoughtful Mark Suster penned a detailed response to these criticisms from a VC's point of view, which is well worth reading:
http://bit.ly/12bX0VV

Mark lays out a persuasive case for why VC as an asset class is actually positioned well to profit over the next decade (hint: Compare the number of Internet users in 1999 to the number in 2013) and points out that while Andy's criticisms are true of some investors, the many good investors (including the ones Andy thanks in his essay) act far differently.

Rather than re-treading Mark's arguments, I just want to take Andy up on his suggestion and lay out the equivalent criticisms of entrepreneurs.  This is actually something I've done before!

You don’t realize you are going out of business:

99% of startups will fail, including 90% of VC-backed companies. 80% of entrepreneurs believe they will succeed (which begs the question, why are the other 20% entrepreneurs!).

You think you don't need any help from VCs (other than their money):

Imagine you had a friend who never called you except when he needed money.  The rest of the time, he talks trash behind your back.  Would you still like him?

You don't give VCs the full story before asking them to make an investment decision:

I have to drag financials and customer testimonials out of most entrepreneurs. These facts should help you get investment. And investors who don't bother with the details that matter to building a business aren't going to be able to help you build a business.

You ask for advice, but don't intend to follow it unless it backs up your existing mental plan:

People think asking for advice helps investors to buy in. Yes, but only if you actually listen! I put entrepreneurs who want me to be an advisor on a "probationary" period to see if they actually want my advice, or just my imprimatur. Do you know anyone who's eager to pay to be a figurehead?

You never investigated my investing style:

My Angel List profile is public and states exactly how much I invest. Yet every entrepreneur still asks me that question. How do you think that makes me feel?

Your portfolio sucks:

If you think a VC is terrible at picking winners, why are you pitching him or her?

You are late:

Yeah, there's no excuse for this one!  Investors are terrible at being on time, and it's both disrespectful and eminently avoidable.  I feel bad every time I'm late or have to reschedule (though both happen from time to time).

Sunday, May 26, 2013

If Tumblr is worth $1.1 Billion, is Pinterest worth $19 Billion

My friend Adam Rifkin, who runs the awesome PandaWhale (where I get a ton of my news), recently wrote about the Tumblr acquisition for AllThingsD.  It's a smart and well-reasoned essay, which is well worth reading:
http://dthin.gs/113xmz8

His basic argument is that Tumble is valuable because it is a massive interest graph:
"Tumblr is one of the most fully realized interest graphs built to date, and full of commercial potential that can be best unlocked by Yahoo. Interest graphs are more valuable insofar as they:
  • Allow for the expression of extremely specific interests
  • Cater to more readers than writers
  • Host content that is valuable without any specific social, temporal, or platform relationship between readers and writers
  • Capture intent, particularly commercial intent.
Tumblr is in an excellent position to fulfill all of these strategic goals, and as such must be considered among the most valuable interest graphs. If properly managed, Yahoo just made a game-changing acquisition which was well worth the $1.1 billion in cash."
All of this may very well be true.  But if it is, then these factors apply even more to Pinterest.

Pinterest does all of the above even better than Tumblr.  The interests expressed are even more specific with clear commercial intent.  And the crazy thing is, Pinterest has even more traffic to monetize than Tumblr:

Take a gander at Quantcast's rankings:
http://bit.ly/11ppl9o

Pinterest ranks #7 overall, with roughly 77 million monthly visitors.  Tumblr is #24, with roughly 44 million monthly visitors.

Let's say that Pinterest visitors are 10X as valuable as Tumblr users (sorry, FuckYeahRyanGosling, I don't think you're going to be able to monetize as well as Pinterest boards).  If we gross up the $1.1 billion to account for that 10X value and the greater traffic, we end up with a value of about $19 billion.

If Tumblr is fairly priced, the $2.5 billion valuation for Pinterest earlier this year now looks like a steal.

Why I'm not worried about "political entrepreneurs"

I recently read a Washington Post editorial by Francisco Dao, "The terrifying rise of the political entrepreneur":
http://wapo.st/13WViC5

Dao argues that we've seen the rise of a new breed of entrepreneurs, who manage to be successful despite not building real businesses:

"There seems to be a new breed of entrepreneurs whose greatest skill is playing the political game. We now have “golden boys” who get funded because they’ve mastered the politics of the startup ecosystem. This group never appears to fail because even when they do, they deftly maneuver a face saving acqui-hire that lets them spin it as a win. Venture capitalists overfund them at unjustifiable valuations and tech giants buy these startups based on perceived talent even when their companies are on the path to becoming a total bust."
I understand the frustration that Dao feels.  I too have seen plenty of lower-quality entrepreneurs luck their way into large sums of cash.  I have also seen how the Silicon Valley hype machine makes people seem "successful" even when they aren't.  This was one of the sad factors behind the death of my friend Jody Sherman.

But the fact is, this is no different than any other era.  The startup world isn't perfect or perfectly fair.  The undeserving get rewarded.  The deserving get the shaft.  But thank goodness, those are still exceptions, not the rule.

If I were to draw up a list of golden boys (and girls), I could easily come up with several dozen names.  But you know what?  Silicon Valley rewards far more entrepreneurs who are actually deserving.  Someone like Mark Zuckerberg deserves his wealth because he created a real business (the ethics of some of his actions along the way are a subject for another time).

We investors aren't dumb.  If someone keeps losing us money, or requiring us to work like hell to bail them out via acquihire, we're going to stop giving that person money.  The same is true for any employees who have ever had the misfortune of working with a lower-quality entrepreneur.  They'll never work with that person again.

You may be able to fool some of the people some of the time, but Silicon Valley is small enough that the people you burn will eventually catch up with you.

Yes, Android is winning (at least by what Google cares about)

John Kirk recently took issue with the spate of stories about Android's increasing share of the smartphone market.  In his polemic, "Android’s Market Share Is Literally A Joke", he argues that Apple is actually winning the smartphone battle because it has a majority of the profits:
http://bit.ly/11pl4CN

"Not only do the high priests of market share have it wrong, they have it exactly backwards. The company with the lower market share and the higher profits has all of the leverage. The goal is to INCREASE, not decrease, the ratio of profits to market share. Increasing market share at the cost of profits is a recipe for disaster, not a formula for success.

Apple may or may not do well in the future but right now, and contrary to popular belief, they are winning the smartphone wars and winning them handily."
While this view may be tactically correct, at least in terms of short-term financial performance, it is hopelessly naive strategically.

If smartphone profits were the primary source of investment cash for players in the market, yes, Apple would have an overwhelming advantage.  Its ability to invest more money into product refinement would allow it to outdistance its competition handily.  This is the dynamic that applies in consumer packaged goods.

But the fact is, the players in the Android ecosystem (Google, Samsung, et al) do not rely on smartphone sales for the majority of their profits.  For them, the smartphone is a strategic investment, and is judged internally on strategic, rather than financial grounds.

At the end of the day, market share is the best measure of market control.  Smartphones are valuable inasmuch as they help capture the other spending of their owners; if Android were able to control 90% of the market, it wouldn't matter if Apple made more profits than any other handset maker.  Google would have what it wants, which is its web browser and search engine and cloud services in the vast majority of hands.

Back in the mid-1980s, Apple under Sculley pursued profits rather than market share.  That shortsightedness nearly killed the company, which was only saved by Steve Jobs' return.  If Apple lets the same thing happen again, Steve won't be able to ride to the rescue.

Steve Jobs, Master Negotiator?

The late, great Steve Jobs will almost certainly live on as one of the most famous businessmen of all time, on a par with titans like John D. Rockefeller and Henry Ford.  He revolutionized industry after industry, and built the most valuable company in the world.

That's why I was fascinated to read some of the emails Jobs sent while negotiating with News Corp on the launch of iBooks.  It's an opportunity to observe the master at work:
http://bit.ly/14SvvOp

In the weeks leading up to the launch of the iPad, Jobs engaged in a high-stakes negotiation with James Murdoch over HarperCollins' participation in the iBooks program.  The entire article is fascinating, but I'll focus on the email Jobs sent to "go in for the kill":
"As I see it, HC has the following choices:

1. Throw in with Apple and see if we can all make a go of this to create a real mainstream ebooks market at $12.99 and $14.99.

2. Keep going with Amazon at $9.99. You will make a bit more money in the short term, but in the medium term Amazon will tell you they will be paying you 70% of $9.99. They have shareholders too.

3. Hold back your books from Amazon. Without a way for customers to buy your ebooks, they will steal them. This will be the start of piracy and once started there will be no stopping it. Trust me, I’ve seen this happen with my own eyes.

Maybe I’m missing something, but I don’t see any other alternatives. Do you?"
Perhaps I'm also missing something, but from what I can tell, all Jobs does is clearly state the alternatives facing News Corp.  There's no rhetorical flourishes or neurolinguistic programming.

And yet, this is exactly the secret of being a master negotiator--take positions that are unassailable.  Murdoch blinked, not because of the power of Jobs' words, but because he knew Jobs was right.

The origin of his negotiating power was his ability to see how the world actually worked.  Can you apply this insight to your own startup?

Once you take everything away, what's left?

I was struck and touched by a recent post I read by entrepreneur Chris Granger, who wrote movingly about dealing with his mother's partner's terminal cancer, and trying to build a company at the same time:
http://bit.ly/13TKS9B


"And this is the stark truth of startups: you are the last and only line of defense against doubt. There's no one else to give these questions to. They are yours to stew in. They are yours to try to answer, though they're unanswerable. They are yours to overcome. And the Fear that they represent is what keeps you up at night, what will make you wonder if this is really the "right" thing to do. I'm not sure anyone can truly explain what that kind of doubt is like and if they did it would likely only hint at the reality. But believe me that when people say startups are hard, they are woefully understating the truth. Yet I'm still doing one, and the reason why is rooted in the answer to the question my cousin asked. I'm doing this because I believe that this is the greatest contribution I can make."
This is stark, unvarnished truth.  Being a CEO often feels like being an animal caught in a trap.  You know everything that's wrong with your company, while reading flattering stories about your competitors.  You're constantly full of doubt, but you can't turn to anyone else in your company because you know that the only benefit of sharing your fears is the chance to feel a little better yourself...by dumping your problems on someone else.  You feel responsible for everything, but powerless to dictate the outcome.

And yet, that same difficulty is what makes starting a company so great.  If it were easy, everyone would do it.

If it were easy, your co-founders, investors, and employees wouldn't follow the path you're painfully breaking through the wilderness of uncertainty.

If it were easy, you wouldn't be doing anything special.

The instant I read the quote, I flashed back to the Season 2 finale of Joss Whedon's first great creation, "Buffy the Vampire Slayer."  The titular heroine is fighting the Big Bad, who happens to be her great love, turned evil by magic, who is trying to destroy the world. She is alone and seemingly overmatched:
Angelus: No weapons, no friends, no hope. Take all that away, and what's left?
Buffy: Me.
When you take away all the trappings of the startup world--the press, the parties, the speaking gigs.  All that's left is you.  That's pretty scary.  But you know what?  That's your chance to show your true power.

Three foolproof ways to price your startup's product

One of the big questions entrepreneurs ask me about is how to price their product.  99% of the time, I tell them that their product is underpriced.  But this begs the question, how should I price my product?

The advice I tends to be very specific to the product and industry.  For example, I urge entrepreneurs (who are very smart and creative) to resist the urge to get smart and creative when it comes to pricing.  Prices are the way they are for a reason, and it's usually a good one.

Pricing "on the nines" (e.g. $19.99 instead of $20) seemed like an arbitrary, transparent, probably ineffectual practice...until scholarly research showed that it worked.

The meta-advice I give is to price the way that customers are used to.  For SaaS, it's per month or per user per month.  For mobile apps, it's a single up front charge.  For hardware, it's a simple purchase price.

So assuming you've figured out the shape of the price, how do you figure out the quantity?  Here are three foolproof ways:

1) Powers of 10

My first shortcut is always to ask the entrepreneur to react to different orders of magnitude.  Would people pay $1? $10? $100? $1,000? $10,000? $100,000? $1,000,000?

Even people who claim they don't know how to price can pinpoint a power of 10 that represents the ballpark price.  A Nintendo game, for example, ought to cost something like $10.  $1 is insanely cheap, and no one would pay $100.  Simple, right?

2) Powers of 2

Once you've established a ballpark, you need to figure out an optimal price.  This technique is taken from Nathan Berry's guest post on A Smart Bear:
http://bit.ly/12WylRI
"I always ask myself, “If I were to double the price (from $0.99 to $1.99), would I lose more than half the sales?”
If the answer is no, then I double the price. Fewer customers can often be a good thing, especially when it comes to fewer support requests. Also, a higher price tends to attract a higher quality customer."
This is great advice.  Whenever one of my guru friends complains to me that his/her speaking schedule is too busy, I simply tell them, "Double the price and cut the number of gigs in half."  I even applied this technique for myself recently.  I'm on my friend Dan Martell's service, Clarity.fm:
https://clarity.fm/#/chrisyeh

When I decided I wanted fewer calls, I simply doubled my price.  If that doesn't work, I'll double it again.

3) Flinch pricing

This only works when you're face to face.  The idea is to keep ratcheting up the price until the customer visibly flinches.  This was made most famous by Oracle.  "The cost is $1,000...per application...per CPU...per month."  Just make sure you're not too obvious about it!

Silicon Valley isn't about the money...it's about the money

Superstar science author Steven Johnson (I'm a big fan of his book, "Where Good Ideas Come From") recently wrote a critique of claims that Silicon Valley is turning into Gilded Age America--a land of unfathomably rich oligarchs that are oblivious to the poverty around them:
http://bit.ly/11ouEWF

Johnson points out that the Valley's love of open source and collaboration, as well as the way its political dollars go overwhelmingly to Democrats, belie the notion that the Valley is the land of free-market fundamentalists.

What's interesting is that Johnson theorizes that the reason Silicon Valley isn't about the money...is the money:

"The defining difference between Silicon Valley companies and almost every other industry in the U.S. is the virtually universal practice among tech companies of distributing meaningful equity (usually in the form of stock options) to ordinary employees. Before companies like Fairchild and Hewlett-Packard began the practice fifty years ago, distributing stock options to anyone other than top management was virtually unheard of. But the engineering tradition that spawned Silicon Valley was much more egalitarian than traditional corporate culture.


There’s a great book on this topic, called In The Company Of Owners, that documents just how distinct the Valley is from the rest of U.S. corporate culture. The top 100 tech companies granted 19% of their total ownership to non-senior-executive employees (i.e., everyone excluding the CEO and four lieutenants.) For the rest of corporate America, that number was 2%. In other words, when it came time to share rewards with ordinary employees, the Tech 100 were ten times more generous than low-tech firms. This is actually one of the hidden strengths of the tech sector in the US: its companies are much more competitive precisely because they are much more egalitarian in how they share their wealth internally. I would be surprised if there were any new industry in the history of capitalism that distributed its economic rewards to its employees as widely as Silicon Valley has."
This is simply the logical extension of the startup model.  There are many reasons that founders work insanely long hours and are far more dedicated to their companies than the average employee.  They feel passionately about the problem they're trying to solve.  They have a strong sense of responsibility.  They enjoy the freedom of running their own business.  But the money matters, no matter how much we pretend it doesn't.

For example, almost every young founder I know worries about valuation when selecting investors.  This is dumb, for reasons I've repeatedly explained, but it's seems like an unchanging fact.  I can only conclude that either they're insecure egomaniacs that base their self-worth on a meaningless number, or that they want to make as much money as possible.

The money is necessary, but not sufficient.  Without the motivation of getting rich, Silicon Valley wouldn't exist (which is true even in a historical sense--California became California because of the 1849 gold rush).  Yet as Johnson points out, the strength of Silicon Valley is that it blends greed and equality.

By making more people owners, startups enable people to tap their passion, responsibility, and freedom to change the world.  Fictional Wall Street villain Gordon Gekko said, "Greed, for lack of a better word, is good."  He's right, but incomplete.  Wall Street itself offers greed without the other ingredients, and the results are far less beloved by the American public.