There is No Replacement for Physical Presence

I watched U2 3D at the Simons IMAX Theatre near Chinatown, Boston on Central Wharf. Watching them on screen reminded me of the rock concerts I experienced in high school and college, and the people I was with at those times. This type of recollecting life events is probably very common. However, why didn't I flash back to times when I watched music videos of live concerts, or times at a club or a party?

It's because there is no replacement for presence. The combination of the senses with location, time, age, who else you're with all combine to make the recollection of physical life experiences much easier than in virtual or online worlds. When was the last time a thought of an IM conversation came up, or you remember a WOW character instead of your friend playing that character? The closest thing we have been able to accompish with technology is video chat, or chatting in virtual places like Second Life or Qwaq.

Social networking helps us stay in touch with fringe contacts. Now, with the Facebook newsfeed, we can keep up with the goings on for 300-500 friends, effectively shattering Dunbar's 150. With all of this enhanced communication, physical presence becomes more expensive. The next enabling social technologies will likely come from mobile phones, which can incorporate location and match making. For instance, if I were looking for funding, it would be nice to know mutual contacts with a VC at some event, or that we both share an avid passion for white water kayaking.

MIT Concept Clinic Event

I went to the MIT Concept Clinic for the first time last Thursday.

The team presenting was Rob, working on an mobile advertising start up, Brring.com, where you can earn money every time someone calls you. When people call you, they will listen to a 10-15 sec advertisement, and you get paid. They have been running since September, and are pretty much all sweat, running on friends and family money for now. This specific clinic focused on their primary problem: how to quickly and cheaply prove their concept.

The layout of the event was really good. The event went from 6pm to ~8:45pm. The founders get to present their idea for 1 to 1.5 hours, then break up into groups focusing on different topics (product, raising money, marketing, etc). Then we regrouped for comments from the panelists and general audience.
The panelists present seemed to have varying backgrounds, with
many of the local venture groups represented, people tapped into the Boston start up scene.

The overall tone was people trying to give suggestions to help get Brring to the next level. The consensus was that they are trying to fight two problems at the same time:
1. get users
2. get advertisers

If I were in their position, I would try to simplify the situation to solve only one problem, and then look for the quickest way to get cash flow. One of the key points Rob indicated was that advertisers want a minimum of 1 million impressions per month before they start testing things out. I would try to locate different sources for users in large volumes, and then find advertisers. This makes the advertiser problem much more easy to manage.

I think Brring really needs to hone in on an initial niche market, and figure out what they want. For instance, they could spread this service very quickly across college campuses to offer local restaurants a convenient way tell college kids about their promotions. Imagine around dinner time, you call a friend, and hear a local advertisement about $5 specialty pizza at Papa John's for the next hour only. Or, because business is slow on a Tuesday night, a bar owner advertises "1st drink free, no cover" to get more bodies. Getting college students should be pretty straight forward, using internet marketing, or on-campus recruiting campaigns.

Another suggestion I thought would get much better reception is monetizing wasted "on hold" time. If you need to hold to get Verizon customer service, and you don't really have many other options, they might as well be selling that hold time to advertisers. The same thing could be done with call centers. Even though this is not the ideal market, it is readily available, and you can start making money right away.

I wish I had these types of panelists questioning me during my real estate start up. Getting grilled by a bunch of bright, experienced people is not the most pleasurable activity, but you really come out better from that experience. I am really looking forward to the next one.

The Dreaded Elevator Pitch

I attended the SCNE Elevator Pitch event tonight, which was held in Suffolk University, downtown Boston.

An elevator pitch is a quick 20-30 second summary, used to explain your business idea. It is unlikely that a VC will give you any useful assessment after hearing a 25 second elevator pitch. Slimming down your pitch is still a useful and practical exercise in understanding your differentiating factor.

You do not have time to say:
- any facts about the market
- anything about the problem you are solving
- any details about business
- any information about yourself

In 25 seconds, you only have time to deliver your value proposition, and a quick question. The value proposition is meant to immediately catch the listener's attention. The question is an invitation for additional conversation. For simplicity's sake, it may be easier to say "imagine x, but z." So if I were to describe an iMac, "imagine a Windows PC, except secure, friendly, and fun." This shortcut allows people to access things that they are already familiar with, and easily make a comparison.

For my pitch, I said, "You can get property values on broker's websites, and our website, and we make money by selling leads to realtors. How do you brokers get your listings right now?" It would have been a lot easier saying "think Zillow, but 50% more accurate."

Business Model Innovation

This is an argument for studying and understanding how different markets make money and solve problems.

Gift certificates must be one of the easiest money making opportunities for retail stores. You trade real dollars for dollars that will be spent at a later time. In the insurance industry, this money is called float and is a source of additional revenues. For gift cards, not only do you have float, but there is also some likelihood that people lose or don't spend their gift cards before they expire. There have been several times when I just plain forgot to go to Best Buy with my $100 gift card until after it was expired. Best Buy makes tens of millions from unused gift cards. Business schools call this "breakage."

Being a curious cat, I looked at other places for business model innovation. I found three fascinating online companies that borrow business models from other industries to develop new sources of competitive advantage and significant revenue opportunities: BountyJobs, PatientsLikeMe, and uProdigy.

BountyJobs
This startup creates an online interface between recruiters and HR Departments. Recruiting results in large dollar transactions, with fees that could amount to tens of thousands of dollars for placing executive positions. BountyJobs uses the internet to access and manage more applicants and also leverage the concept of float. When HR departments choose to hire an applicant, BountyJobs holds the bounty for several months before paying recruiters to affirm the performance of the employee. They have access to:

$5,000 held per bounty x 2 bounties per day x 90 days holding period = about $900,000 float.

With access to this type of free working capital, they have opportunities to create substantial streams of additional revenue.

PatientsLikeMe
This healthcare startup tries to solve the problem of information asymmetry among patients suffering from similar diseases, which goes one level beyond traditional support groups and online communities. With active and developed communities, they have opportunities to aggregate and sell anonymized information to third parties. Additionally, they are uniquely poised as a new channel for the traditionally expensive and time consuming process of clinical trial recruitment.

uProdigy
This startup is creates an online marketplace for tutoring. Most other online and offline businesses use a cost per hour pricing model. Instead, uProdigy has implemented an "all you can eat" monthly subscription. Why?

There are several different elements that they are using to their favor. The most obvious element is the 3x to 10x labor arbitrage between the cost of local tutors ($20-40/hr for college students) and the wages of masters and PhD students. Also, the people that pay for the service are different from the end users. Parents can pay a low monthly fee thinking that their children will use the service all the time, but in reality, only a small fraction of students will fully utilize uProdigy's resources. There are a lot of moving parts, but these three elements combine to create a unique and compelling value proposition to parents.

By incorporating models from other industries, these startups substantially differentiate themselves from the incumbents in their markets. This is one effective way to slay giants in mature markets, and a great reason to stay abreast of the inner workings of seemingly unrelated markets.

Babson Talk

My friend Li Hong pushed me to attend a Babson University event last Wednesday, and I'm glad I went. Mike Michalowicz was speaking on behalf of Obsidian Launch, which is a type of early stage incubator for first time entrepreneurs.

He started out with a lot of inspirational/motivational comments, which reminded me a lot of Rich Dad, Poor Dad lessons. These type of pep talks about attitude adjustment are commonplace in the real estate industry. There was not much new information, but it was good to remind myself to be cognizant of self-limiting beliefs.

There were several points in his talk that piqued my interest. One unique aspect of Obsidian Launch was the incorporation of a sports psychologist. In retrospect, it actually makes a lot of sense. The difference between a good and bad day can be as simple as an attitude adjustment. And when those bad days come, involving professionals can potentially help accelerate the recovery process. In addition, a lot of people may not realize how powerful words and beliefs are. I am typically not the type to believe in psychological "feel-good" techniques, but there is so much that we do not understand about the human mind. He also mentioned that they only accept single founders in their program. Because they offer a support system of staff and mentors, it doesn't feel like you are starting and running a company by yourself. Another point that caught my interest was defining a 10x differentiator between you and other competitors. This is just another way of describing an unfair competitive advantage. Either you offer some unique feature, ease of use, price difference.

What interested me the most was when he talked about the "Gathering of the Titans" which is an event sponsored by MIT. He spoke of how one guy ran up from his seat and out of the room to the closest Staples. There, he bought a voice recorder, copy paper, and started sketching. After he finished, he immediately faxed his sketches to the office, got on the phone to organize an office meeting the next day. Why did he do that?

He was in the lawn care industry. Typically, home owners give you a call, sets up an appointment, someone comes out with a van, measures the lawn and gives a quote. The cost of these quotes was substantial, taking about six months before lawn care companies could recoup the costs of giving estimates. When he was sitting in the conference hall, playing around with his laptop, he realized that with Google Maps, he could measure the lawn size via the internet from his office instead of giving out estimates. This key insight changed his business, and gave him a key competitive advantage over his competitors.

All in all, pretty interesting.

7 Steps to Selling Vaporware

Far too often, as a consultant for government funded medical technologies, I have found technologies looking for market applications. Also, I have observed many hackers that have the philosophy of developing and releasing fast, trying to get customers to use their product/service, and iterating from there. This works only in a subsection of opportunities, such as programmers developing stuff where they are end users, the problems only need simplistic solutions, or it is a web application which requires marginal fixed costs. When end users are not tech savvy, when the technology aspect is complex and requires substantial thought, the quick prototype and iterate philosophy breaks down. When you need an interdisciplinary team that requires substantial investments in time and money, up-front market research pays off in spades. In these cases, I suggest the alternative approach of "selling vaporware."

In this way, you benefit by:
-quickly distinguishing what users want from what users want and will pay for,
-wasting less development time
-ensuring a better product/market fit (in reference to a previous pmarca post)
-acquiring a ready list of customers that you can show to investors

The steps to selling vaporware are:
1. Figure out the group you want to target, and think of a couple different problems you could potentially offer.
2. Get a list of people you can call or meet.
3. Test one value proposition at a time.
4. Interview them and try to sell them your vaporware.
5. Listen carefully and understand their responses during your interviews. Figure out what issues they care about most, and restructure your pitch.
6. Figure out if you could potentially make a profit by building what users want.
7. Iterate 3-6 until people like the idea and have people that are willing to pay.

1. Figure out who you want to target.
When you first come up with an idea, figure out who your likely users are, and try to make it as niche as possible. Examples could be real estate agents that gross over $1 million per year, travel agents listed in the yellow pages in the New England area, or accountants that do not yet have web presence. It is likely your first idea sucks and won't work. That's ok. Just come up with a couple different ones that you can try out.

2. Get a list of people you can call or meet.
Look for a concentrated list of contacts. You can typically find them in the yellow pages, trade associations, blogs, websites, forums, trade publications, research institutions. You want to contact them in person or on the phone because you want to have a conversation with them to figure out what issues are on their minds. E-mails don't tend to elicit as much useful responses.

3. Test one value proposition at a time.
You don't want to start out with something you have no chance in delivering. Try to pitch something that differentiates on an aspect of performance, ease of use or price. In different types of markets, different value propositions will work. Also, different people have different pains. Some pains are so great that people don't really care how much the cost is as long as the product works well, such as effective diagnostics or treatments for early detection of esophageal cancer, sepsis, heart disease, etc. Some things are commoditized such that you can only compete based on brand or price such as tooth paste, paper, soap. You get the idea. Think of how you can compete, and try out one thing at a time.

4. Interview them and try to sell them your vaporware.
The point of this is to try to make a sale, or at least progress the sales process. You can't just get people interested, but figure out if they will pay you for your efforts. "Would you pay $20 per year if you could get online e-mail service with 50 gigs of storage and keep your old e-mail address? Why/why not? What if it was 100 gigs? What if it was $5/year? What if it had no ads? What do you use now? What do you like/dislike about it? What kind of service/product do you think we should focus on? What do you think people will pay for?" This is the most useful step to figure out what their priorities are, and reaffirm that your assumptions are correct.

5. Listen carefully...restructure your pitch.
Mostly this is looking at notes from previous interviews and trying out different value propositions and pitches for the next interviews.

6. Can you make a profit?
This is not just Price - Cost of Product = Profit. Many entrepreneurs forget distribution costs and cost of acquiring new customers. If distributors typically get 50% for a $300 product, can you let distributors make more so they're more incentivized to sell your product over others? Exact numbers are not necessary, but it is good to understand how profitable it could be. Also look at the number of sales you need to break even, profit margins to see how feasible your business is.

7. Iterate 3-6 until people like the idea and have people that are willing to pay.
You're not going to get it right the first time. Or probably the second time. Keep iterating through your contacts and ideas until your vaporware sells. You should have at least 5-10 people willing to pay. By this time, you'll know what makes the end users tick, what they value most, and have a good idea of why they want to pay to use your vaporware.

While this certainly does not apply to every start up, it's something to keep in mind.

How well do you know your interviewees?

How much can you know about your job candidates? Looking at the cover letter, resume, a couple phone interviews and in-person interviews later, you have spent less than 8 hours in total with that person. Can you really figure out if someone is great and a good fit just from this?

For start ups, it seems trite to say that you only want to work with the smartest, best people, and accidentally turn down really great people on occasion because of the high screening process. Google seems to skew heavily towards people with high GPA's from prestigious schools, and screen with notoriously difficult questions. I tend to believe that companies like Google are looking at the wrong stats. It appears that in one study, a typical job interview improved chances of selecting the best candidate by less than 2%. Sabermetrics, as described in Moneyball is really a great read on this topic.

For start ups, it's more important to know what people have done during school than what they've studied. Also, an interview can not replace or guide people to figure out the performance of a particular candidate. I think trial hirings make much more sense than locking into a full year with someone. Marc Andreessen states that you're doing great if 70% of your hires work out. Wouldn't it be better if you gave people a baby several week project to test them and make sure you're hiring the right person?

The only thing you need is PSD

There is a time and place when degrees are necessary. I have mostly seen these necessary in large companies, science businesses and consulting. However, in most disciplines, what matters above all else is execution. In these cases, having a bunch of Ph.D.'s in a room can actually hinder your performance. Come to think of it, there seems to be no correlation between advanced degrees and career advancement.

I share with you an alternative model for hiring. Instead of MBA or PhD, look for the PSD. PSD standards for poor, smart, and driven. There are winners and losers in life. At the risk of sounding cliche, knowledge can be acquired but attitude can not. The message from entrepreneurs consistently states that persistence is a key trait for success.

So how do you test if someone is PSD? Well, there are actually a couple ways to tell. What's the candidate's work history? Have they run a paper route for at least a year's time? Did they work for a family business when they were younger? Have they done anything to demonstrate hard work ethic, and a scrappy, results oriented nature?

There is nothing that can not be accomplished if you are PSD, and not afraid to make a bunch of mistakes.

Google: It's not the Search, but the Ads

Everyone knows Google from its search capabilities. However, Google has made nearly all of its money from advertising. "Advertising revenues made up 99% of our revenues in 2004, 2005 and 2006. We derive the balance of our revenues from the license of our web search technology, the license of our search solutions to enterprises and the sale and license of other products and services." -- page 40 of their SEC filing. Eric Schmidt states that Google's core competency is advertising, and hopefully they can leverage their experience in data mining to other forms of advertising.

Google's margin for Adsense is between 22% and 18%[1]. From the 2007 Q1 revenues, Google Network websites running AdSense accounted for 37% of total advertising revenues. So online advertising is a big market, but how lucrative is it? How much could a start up expect to take in this market? What is the best approach to taking marketshare? From O'Reilly:
"In addition, there's still a huge amount of room for growth in internet advertising. Paul Kedrosky's been studying the latest reports from the Internet Advertising Bureau, which show internet advertising at $16.8 billion for 2006. If I recall, tv advertising is at about $80 billion, so there's considerable room for growth as the internet continues to draw attention away from print, tv, radio, and other old media." -- http://radar.oreilly.com/archives/2007/03/the_economics_o_3.html

There are a couple key points where ad networks compete against each other. Several of these are listed by Josh Catone:
- good advertiser campaign management and bidding tools - Google has a large amount of advertisers. Keeping the ROI's for their campaigns is what will keep them coming back. Advertisers will need to be shown that their ROI is better on another ad network before they switch. Campaign management and bidding tools for advertisers are a must, and Google has this end covered well.
- good publisher management and reporting tools - Publishers want to earn money right away, and they want to know how to improve their advertising income. AdSense has done an ok job, but this is where someone can really introduce some real innovation. For a start-up, adoption from top publishers will be a turning point for success.
- great contextual ad matching technology - AdSense is good, but not great. I believe OpenAds, an open source ad serving technology is trying to compete in this avenue.
- high paying advertisers - You need to develop some sort of higher value advertisement that advertisers will pay.

Stay tuned for an analysis of behavioral advertising.

[1] Taking the Advertising Revenue from Google network sites, and dividing it by the Traffic acquisition costs, interpreted as Adsense publisher payoff.
Advertising and licensing revenues (2002-2003) page 15 http://www.sec.gov/Archives/edgar/data/1288776/000119312504074059/d1012g.htm#tx84790_13
revenues and cost of revenues 2002-2006 page 36 http://www.sec.gov/Archives/edgar/data/1288776/000119312507044494/d10k.htm#toc70021_21
advertising and licensing revenues (2004-2006) page 42 http://www.sec.gov/Archives/edgar/data/1288776/000119312507044494/d10k.htm#toc70021_21
traffic acquisition costs from page 45

blogs on software

I've been hardpressed to find any software blogs that aren't in their start up phases.  
I'm looking for blogs with some history.   In Google terms, I'm looking for authoritative sources of
useful information on best practices of software design.  

My intent is to be able to learn the right way of doing things, and practicing these skills on my internet website project until they become an inate way of life.  
I have located two sources of information.

One is by a guy that's been in software since 1998.  Joel is the owner of a software consulting company located in NYC.  Even through the net bubble, and the mass outsourcing going on, 
Joel seems to be plugging along quite nicely.  

Another source is the book, Getting Real.  It's more about keeping light, building limited software quickly, and involving your target market from the get go.  It's a design philosophy that basically states that any problem can be solved on budget and on time if you properly phrase the problem.  It's basically keep swinging at every pitch, and you'll hit the ball some of the time.