Designing a simple business part I: Working that idea

This is the first in a series of posts I plan on the topic of designing a simple business. The idea for the series started when I realized simplicity is a common feature of many of the great startups that are out there. If you can visualize a business it’s easier to evaluate it, and improve the individual parts. This first post deals with the initial idea, and the main message about your initial idea is to get you to simplify your idea - don’t bite off more than you can chew.

What is a business idea? - The three components.
A business starts off with an idea. The idea should be something that creates value for someone, said value must be deliverable to whomever it creates value for, and there should be some way of capturing this value (including protecting it). If this process seems simple for a particular idea, it’s easier to think of it as good.

A good idea exemplified
Imagine you’re the inventor of corrective eyewear (i.e. glasses). Until now there has been no product which deals with bad sight. You can probably pretty quickly see roughly how you could go about making money on this idea. Corrective eyewear creates value for people that have poor eyesight, it can be delivered through for example pharmacies, and you can capture the value through charging money on the spot. Additionally it is likely that you could protect the idea with patent, for instance the use of optical lenses for correcting eyesight should be patentable if you are the first to think of it.

The simplicity that makes this idea good comes from three aspects. Firstly, the idea deals with a specific need. Secondly, there is a clear path to market which may not cost you too much (i.e. it’s “doable”), and lastly there is a clear way to make money, as well as a clear model of how you can protect the idea (patent) while you build a strong market position.

Simplify your idea!
Too often entrepreneurs pitch ideas that are just too complex, and it comes from the typical business/engineering school instinct of wanting to cover everything. Every customer, every need that customer have/will come across in the foreseeable future. Every possible product that can cover these needs, and every application of said product. The reason we do this is that we think there’s more money in more customers, and more products. Which of course there is. However, very few companies end up where they thought they were going. Starting a business is all about adaptation. And to be successful, you need an idea that you can test systematically and improve upon.

Note that it’s not always that complex ideas are bad. They’re just hard to test objectively, because you cannot separate the issues. For this reason I propose that the first thing to do when starting a business is to simplify the business idea.

A complex idea
The other day I met a young aspiring entrepreneur. He was full of life, and eager to tell me his idea. I paraphrase:

“So what I was thinking was to automate grocery stores, so customers can just make a shopping list online, say when they want to pick their goods up, and just appear at the store. Also there would be no one working in this store, so you would check out everything yourself. Furthermore all inventories would be updated at the suppliers, so everything would always be in stock, but just enough to handle the daily demand”.

Ok, I thought, as he continued:

“Now I’m into automation, so I would make a system where deliveries would be made at the back and everything would be tagged with RFID-chips,( there’s so many cool things you can do with those), robots would then sort the goods and pick out what people order into bags. So everything’s ready when the customers appear!”

So what’s the need anyway?
This idea is so complex, and includes so many different aspects, that it's really hard to understand even what the actual need is. At first it seems the need is for a simpler shopping experience. But is it really simpler to go to a website and pick everything you need? How would you pay, do you need to enter your credit card number or would you pay on pick up? Do you need an account? How do you verify that the person that picks it up is the right person? What if someone else picks up your groceries after you paid for them? It could be a simpler shopping experience, but maybe it’s really just a faster shopping experience? Maybe removing the need for staff is a significant cost reduction for a store? Or is it just a cooler shopping experience?

In any case simpler and faster in this context are secondary needs. The consumer’s primary need is for groceries. Imagine the complexity of creating a grocery chain in and of itself. Imagine to then try to make it simpler and faster! Indeed you would have to compete on a lot of other factors as well. Would you for example be equipped to keep the salad green? And I'm not even going to attempt to comment on the capital needs to make this happen.

Let’s simplify!
Creating a new grocery store is very complex, and I think we can agree that doing so is probably not something you'd want to do. And if you are not deterred yet, let me assure you that you will not have an easy time raising funds for such a venture.

But there's a silver lining, because surely there are great ideas within this idea. From the idea, we can find many smaller ideas. The point is to start with something simple, something that you can easily test against the market. One way we can go about extracting ideas from his idea, is by looking at the needs, and finding solutions to service them. Let’s look at the need for lower costs for grocery stores, and see if we can extract something simpler. Now I’m not claiming that this is a good (or new) idea - just that it’s simpler, and therefore easier to understand and test in a structured way. Let us then ask the question, "how can we use automation to cut costs in a grocery store?"

A simpler idea to lower costs for grocery stores
One of the main drivers of costs for grocery stores is the staff. The main bulk of people working at grocery stores are those that scan items and receive payment. So if we could automate checkout it would represent a clear cost reduction. One way to do this is by allowing customers to do this job themselves. Self-checkout would be presented in stations, each station consisting of 5 registers, each with a scanner and a system for payment. At each station one clerk would be stationed to help customers that need help, to receive cash payments (if this is important to incorporate of course), and to make sure everyone is using it correctly (e.g. so they don’t leave without paying). The solution could be delivered on a store-by-store basis, so that a chain of stores would try it out at some locations first, and then scale it up when they were comfortable using the system. Value could be captured through a leasing based plan, and the idea would be protected by moving quickly to gain a first mover advantage (for those that believe in that sort of thing).

Evaluating the idea
Regardless of whether the idea above is good or not, we certainly understand better what it’s all about now. If we decided to start a company commercializing this technology we could write down hundreds of clear and testable hypotheses about the market, which we could then proceed to test, for instance:
-    Grocery chains wish to reduce costs by replacing staff
-    Customers are willing to check out their own goods
-    Cash payments are important for customers
-    Customers will generally be honest when scanning their merchandise

Some things would be confirmed, and some things would be completely different from expected. These things would have to be sorted out. This is where the real innovation lies. For example, if customers are dis-honest, how can you make the check-out desks verify that all goods was scanned, and that the correct goods was scanned?

Of course it’s not that straight forward in real life, you still need to consider your competitors, make a strategy to avoid being copied too soon, facilitate production, consider your costs and pricing structure, and so on. However, you can now visualize how the business might look. This is a necessary first step to formulating the hypothesis that needs to be true in order for your business to flourish. The next step would then be to start testing these

The next post will look more closely on evaluating your idea, and deals with the 10 questions you should spend 15 minutes asking yourself before you move ahead to more advanced and time consuming analysis' of your idea.

Lessons learned:
-    Ideas should ideally include how your business might create, capture and deliver value.
-    When you see how an idea might work, it’s easier to formulate testable hypotheses about the product.
-    Complex ideas, that are hard to visualize can and should be simplified.

Free-ranging skilled laborers

Whenever I have my hair cut I adhere to two rules. Firstly, I try to switch between hairdressers which I know and new ones, and secondly I give the hairdresser free reins. The first rule is really just in case there are better hairdressers out there than the ones I've been using, it’s about discovery. The second rule is the one that’s the most fun. It's worth noting here that I've been in college for the past five years, so it’s never really been a big problem if my hair was a bit weird. There has been no boss to send me home should I suddenly have a green mohawk, and thus I have been in a position to take high risks with my hairdo.

This is how it works; I go to a hairdresser and get seated. The hairdresser will ask me how I want my hair, and I’ll say something like ‘Oh, I really hadn't though of that…. What do you think? Ok, I trust you. Do what you think would look awesome!’ The reason of course is this: I am not an expert on hair, hair dressers are. They cut hair al day, they know what's cool! Imagining and describing new hair styles and judging their awesomeness is way outside my field of expertise. I trust experts to do this for me.

The really surprising part of the story is that I have never experienced, in five years of doing this, a truly horrific haircut. No green mohawks.  And what’s more is that I can see the hairdressers faces light up when I tell them. Apparently, this is not a common practice. Normal customers just want the handiwork, not the creative part, yet hairdressers are often times really good at that. I believe that if you free skilled and creative people, that they will sometimes do awesome things. This, I think, begs the question, ‘do we do this in other situations?’ I mean, when we hire ad agencies, do we bring a slogan, and an idea for how the final print media should look? Do we say, ‘Yeah, you guys should just design this…’ Because that seems like a really bad idea, right? Or do we go to architects get them to draw the exact house that we had already decided on. I think we do, and i don't think it's a smart way to buy services from skilled people. I think we need to let go, and trust that professionals are good at what they do.

It’s important, I think, to be aware that you have people around you that are good at things you aren't, and it’s even more important to utilize these people. When you micromanage people that knows what they’re doing, you get sub-par results. Letting people do what they do best will often give the best outcome. But yes, it does entail a risk. You don’t always get exactly what you wanted, and you won’t always have control over every part of everything you do.

If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.

What does “make each other good” mean?

Part of my philosophy about teams is that each member should strive to better the other members, even at his own expense. This may sound weird, and in most cases it is in fact counter intuitive. That’s also why it deserves its own wording – making each other good, as well as its own blog post.

Let me give an example: consider two classmates that are applying for jobs after finishing their studies, they both have a lot of the same interests as well as the same educational background. This is a good example, because these individuals are not in a team, in fact they are competitors, it’s likely that they will apply for many of the same jobs. And just like them quite often team mates may find that what is good for one may not be so good for the other. Otherwise of course they would make each other good because there's no conflict of interest. But back to our example: So should they tell each other about interesting job postings they find? The intuitive answer is of course no, after all they are competing with each other for most of these jobs. Hmm, let’s look at some simplified math.

Let’s say these two have very specific interests, so that there’s not a whole lot of jobs, and they have to shift through a lot of information to find good prospects, now let’s say both find 10 jobs that are not overlapping, and that there are on average 30 applicants for each job (which I would say is a conservative estimate for good jobs these days). If they don’t tell each other they have a 1/30 chance to get each of their 10 jobs (assuming all candidates are equal of course) which means:

      1-(1- 1/30)^10 = 0,29

29 % chance for each of them to get at least one of the jobs. If however they share their information so that both apply for all 20 jobs, they only have a 1/31 chance for each job:

      1-(1- 1/31)^20 = 0,48

48 % chance each to get at least one of the jobs. The math here isn’t that important, it’s the principle that cooperation beats competition that is. This is transferable to other situations, but the issue however is how not to get locked in to a prisoner’s dilemma game where everyone wants everyone else to share but doesn’t share anything themselves. Nobody wants to share with people that don’t share back, and thus a negative spiral can reinforce itself until everyone walks around paranoid and keeping everything they do a secret. Sharing is a learned skill, one that involves reciprocity – quid pro quo. Teams and companies should be built on trust, we all know that, and one of the best reasons is that trust enables sharing, and sharing at (or despite) the expense of one individual creates synergy for the entire group.

Edit: I just thought of a little digression I should have included: When I was in the army I remember our sergeant would always ask for volunteers, and when nobody out of the 30 soldiers in our troop raised their hands the tension got so thick at times that you could cut it with a knife. One day we all decided that the next time he asked for volunteers we would all raise our hands, and the odds of having to do something would still be the same. This became a habit and later that summer it must have looked pretty neat when the officer in command of the entire base asked for a volunteer and saw 30 young boys eagerly raising their hands in the middle of about 1200 recruits that didn’t. We made our sergeant look extremely good that day, and that was not a bad thing for us.

If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.

16 One-liner lessons about entrepreneurship

I came over this post where Pam Moore (@pammktgnut) asks entrepreneurs to share their most important lesson in less than 140 signs. There certainly were a lot of great answers, but I have selected 16 one-liners that I thought was the best. So in descending order, building up to the best quotes, I give you 16 one-liner lessons about entrepreneurship:

#16

“Cash flow, cash flow, cash flow – never as much or as quick as needed; and, the more successful your company is, the more critical cash is.”

(Marshall Maglothin - Owner of Blue Oak Consulting)

#15

"Only buy from manufacturers that treat customers like you treat your customers. (...) find manufacturers that appreciate your business.”

(Julie Walbrun - Owner of YellowBearShop.com)

#14

“Most of your initial business will not come from where you expected. Have alternatives for those who promise to deliver – they often let you down.“

(Diarmuid Sexton - Director at Adroit People  )

#13

"Your principal competitor is typically not another company like yours; it's often your client deciding to do it themselves without you."

(Bob Kenney - President at Kenney Marketing & Advertising)

#12

“Persistence is the key to longevity, and I have learned quickly not to take ‘No’ personally.“

(Ned Van Riper – Director at Finetooth Consulting)

#11

“The simple stuff is so important.
Answer your phone when it rings.
Be early to every appointment.
Always be positive... even when it’s a bad day.“

(Paul Gruenther - Senior Real Estate Consultant)

#10

"Have passion! It's contagious."

(Lisa Chang - Director at Yenius Interactive Marketing and at inTouch Broadcast)

#9

"Networking is not about selling - it's about contributing to others, building relationships and being authentic at all times."

(Debra Brown - Director at Mastery Path Community Interest Company and at Global Hugs Ltd)

#8

"Identify what critically needs to be done and get on with it without delay."

(Mark Ridgwell - Business Strategist at Knowledge Genes)

#7

“Realize what you think is your business could possibly change, don't be afraid to adjust the mold. It's your mold so bend it as you please.”

(Lisa Cash Hanson - President / Owner at  Blueberry Baboon  )

#6

"Never take Business advice from a lawyer - Take legal advice from a lawyer."

(Tony Robinson - President/CTO at Pioneer Technology)

#5

“Take responsibility for failures just as you do successes.”

(Thomas Rees - Founding Manager at Rees Networks, LLC and SoberLivingSearch.com)

#4

"I've learned to add in a fudge factor to estimates so I can under promise and over deliver."

(John Gilbert - Consulting Entrepreneur and Owner at Add-Options)

#3

"Be ready to shift your position and stance. Rigidity is equivalent to rigor mortis."

(Kalpesh Desai - Advisor to the Board at Columbus IT Middle East and Chief Executive Officer at Agile Financial Technologies)

#2

“The most important factor in any business is connecting with customers. Without customers, you don't run a business, you have a hobby.”

(Donnie Bryant - Owner and Direct Response Copywriter at Donnie Bryant)

#1

"Be humble and patient, but bold and aggressive, know your plan always and update daily."

(Kyle G. Porter - Founder at Sports Bar Digital and Principal at KGP Consulting)

So there it is! If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.

"It’s all about making each other good"

When I was a kid I followed football (or soccer as some would have us believe it’s called), and as any kid I was cheering for my local team - Rosenborg. As faith would have it Rosenborg was by far the best team in Norway, and I’m not saying that just because it was my team, they actually won the Premier Division every year from 1992 – 2004, exactly when I was growing up. They were world class, yet they were comprised of mainly local heroes. It would almost be an exaggeration to say they were a professional team, I mean Norway is small and the town I’m from even smaller, so that the pool of players that could be recruited locally were limited. In fact it’s said that when Rosenborg played Milan (a game which they won 2-1) in the 1996-97 season of the Champions League, that the captain of Rosenborg were so psyched to meet these “real” players that he asked them all for their autographs before the game started. So how could this little team of local heroes win against teams such as AC Milan, Olympiacos or Borussia Dortmund?

The coach of this particular team was another local hero that had in his days been a pretty good player and had played for Rosenborg and Vålerenga in the 1960’s. To this day I’m convinced that it was he that made Rosenborg so great and that it to a large part was two things that he firmly believed. Firstly he believed in always being offensive, under his reign Rosenborg consequently followed a 4-3-3 formation, which for those of you who don’t know the sport that well is a fairly offensive set-up. Secondly, and maybe more importantly he believed in having each individual tone down for the good of the team, he meant that if everyone tried to get the team better the team would be better than the sum of the talent. I remember hearing him speak once, I must have been about 10 years old, and he said this, he said “It’s all about making each other good”. And that’s a sentence that has resonated with me ever since. A week or so later I saw a game they played and I noticed that two of their players had played their way past the goal keeper, which had given up about 10 meters or so behind them. They were both at the goal line and one of them has the ball and could easily have put it in, but he didn’t, he passed it to his friend and let him score the goal. This so drove home the idea that it’s all about the team and not about individual glory.

I think we all have something to learn from this, if you make those around you shine they might shine on you next. In fact it’s inevitable. I try to make this my philosophy to, when we have exams at school I don’t mind sharing my thoughts on how to read or how to write assignments, when I work somewhere I don’t mind sharing my expertise with others and when I have a business idea I tell everyone I know about it. And if someone asks if they can have it, or use it, or even just tell someone else about it, I say “of course – go crazy”. Why do I do this? Well, firstly I don’t think anybody will steal my ideas without my permission (they’re honestly not -that- great), but more importantly I wouldn’t mind it if they did. How could that be bad for me?

If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.

Are you a bottom-up or a top-down thinker?

It’s such a cliché that entrepreneurship and innovation is dependent on creativity. Personally I think creativity is a good thing, but generally I think people attribute the success wrongly to creativity. What’s really the reason that creative thinkers succeed, it seems to me at least, is not so much their creativity but what causes it. Creative thinkers are relentless bottom-up thinkers and it’s this bottom-up thinking that causes them to be both successful and creative.

So what is this notion of bottom-up and top-down thinking? Well, imagine that you are writing your business plan and you come to the part where you need to estimate sales, this should be a well known situation for most entrepreneurs. A top-down thinker will start at the top, he will say something like, well, the market for my product is a $4 billion market, and if I get 1 % of that I’ll make $40 millions. A bottom-up thinker will start at the bottom, he will say something like, I know I can sell my product to these 15 companies, which means I’ll make $2 million. Then when I have those as references I believe I can get those other 100 companies, and then I’ll get those 1000 over there.

This is a mindset that works in many situations. In product development the top-down thinker will start by looking at what the product will look like when it’s done. The bottom-up thinker will start by looking at what is at his disposal, and then try to see what can be achieved. A similar notion has been termed effectual reasoning versus causal reasoning. Causal reasoning is the kind of reasoning thought in business schools. Student’s get to start with pre-determined goals, often set in the text of an assignment and some knowledge or assumptions that they are given, from this point they need to navigate their way, using theory, to the correct answer. The sad part is that causal reasoning is also thought in elementary schools and up, so by the time we get to university level most remnants of effectual thinking has disappeared. Is this why entrepreneurs such as Richard Branson, Steve jobs, Michael Dell, Coco Channel, Walt Disney, Henry Ford, Bill Gates and Ty Warner all dropped out of school?

Effectual thinkers don’t necessarily start with a predetermined goal, they start with what’s available to them and look at what they can achieve using those resources. When you think like that you also become more creative. A good example is an assignment some students got at Stanford. They were divided in to 14 groups and each group received an envelope with $5 in seed capital in it, they were told that the assignment was to make as much money as possible until next week’s class. They could plan as much as they wanted, but when they opened the envelope they would only have two hours to complete the task. Interestingly, none of the three top groups used the seed funding. But that’s another story. The winning group made $600 in 2 hours. Such an assignment, though it had a predefined goal of making money, is a practice in effectual thinking because they had no limitations on what to do. The students were only given the resources ($5 and an Ivy League education) and had to come up with ideas as to how to act themselves.

I see way too little of this kind of thinking going around. Business managers do stay away from this kind of reasoning, and in many situations rightly so. I wonder however if there is a way to switch between the two sets and use whatever is appropriate for the situation? The really sad part is that we don’t teach our children and our future leaders to think bottom-up or effectually. In fact we teach them not to. The ideal thinking in the civilized world is causal and top-down, firmly founded in the scientific method. Maybe it’s time to see what would happen if we let children talk back and challenge our ideas? Maybe we would be surprised, and maybe they would turn in to decent human beings anyway? Well, I’m digressing, but in any case I think that we need to rethink. The lesson from this was meant to have you think about what kind of thinker you are. In many cases it seems to me that each way of thinking has its pros and cons, but if we can learn to use both sets of thinking we can surely be much better thinkers.

If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.

How to deal with uncertainty - the maximize options approach

In a recent blog post I wrote that it is becoming increasingly difficult to forecast the future. As I imply, the problem is choice: Lower distances between people increases the ripple effect of individual choices, and technology together with consumerism increase the sets of choices, and options available to each choice to create an exponentially growing possible futures.

"Difficult to see. Always in motion is the future.” (Yoda)

Simply put I would claim that the uncertainty of the future is a function of the number of people that make choices, times the number of choices available, times the number of options available in each choice, times a coefficient for the impact of each choice. As all the factors that go in to the function have higher values now than they did earlier the uncertainty increases. What I don’t mention is how to cope with the increasing uncertainty; this is what I will address here.

Economists love choices, because they apply math to find the “right” choice. Consider that you’re in a TV game show, you get presented with two choices, a) 100% chance of $ 10 000 or b) 50 % chance of either $0 or $50 000. Any economist will tell you that the options are worth respectively $10 000 and $25 000, so you should choose b) (this is because given enough similar choices the average outcome would be those numbers). Now, if however, you chose b) and you lost and had to go home with $ 0, did you make the wrong choice? Many will say yes, because you lost all the money. These people think that a good choice is a choice that you would not change after you see the outcome; this seems to me like it is a bad definition. I think that you always have to judge a choice based on the information that was available at the time, thus it was still the right choice! If you are presented with a choice of this type, you should follow this procedure.

The problem, as the clever reader has already deduced, is that you rarely know the numbers. And this is exactly what forecasting has been occupied with since the beginning of the industrial era; how can we put numbers on stuff that we know very little about? There are tons of books on this subject, so I won’t go in to it, but rather utter my proposition on how to deal with uncertainty in choices in these days, and especially in the years to come. First, let me repeat myself, in instances where numbers are available or could be attained, follow the above procedure. This is for all those other instances.

I already professed my love for platform technologies, but I haven't explained why, so here goes. The more malleable a technology is, the more uses it can have, thus the more ways it can be successful should it fail in its intentional use. The more adaptable a technology is (Cēterīs paribus), the higher is the probability that its owners will find an application that is profitable. Consider a hypothetical example, two companies are specializing in medical technology, both companies have a development cycle of 15 years, and neither has any information about what its competitors are doing. One company is certain that it can make a cure for let’s say AIDS, and the other is certain that it can make a platform that will cure every bacterial infection known to man, but would only be able to market it for one use at a time. Assume that the technical challenge is equal, and that the main risk is that competitors beat them to market. Which company would you invest in? Since neither has any information about what their competitors are doing (the premise of uncertainty), I would invest in the bacterial platform company. The AIDS company has one chance to succeed, if someone else beats them to market they are dead, finito. If someone else makes the bacterial technology, the company can just change its marketing to target another disease, because the drug can target all diseases, but just market towards one at a time.

By the same principle, even if I don’t believe in global warming I believe in environmentalism, because an earth with rainforests have more options that an earth without them. A country with a highly educated workforce has more options than one without it. A company with several paths to market has more options than one with only one path to market. A technology with many uses has more options than one with limited use. A user friendly computer has more options than one that’s not. A diverse education gives more opportunities than one that’s specific. This principle is universal.

But, you may ask, how does this relate to forecasting the future? Well, the concept I’m trying to explain has two implications for you. Firstly, it means that if there are high uncertainty go with the option that leaves more options open. Secondly, when creating something, try to leave as many options open for as long as possible. If you don’t know how things are going to turn out right now, maybe you will have a better understanding in the future, thus closing doors prematurely is extremely dangerous and will become even more so in the future.

To wrap it up, here are some simple predictions made following this principle:

• Mobile phones that allows anyone to create uses will have more uses than a mobile phone that don’t, thus cell phone producers that have open platforms will outlive those that don’t.
• Countries that have an adaptable workforce will be less affected by upheaval, because they can shift the workforce over in other industries temporarily or permanently should disaster strike in a specific industry.
• Renewable energy producers that use existing infrastructure, such as oil from algae, will be more successful than those that gamble on technologies like hydrogen that requires major rebuilds of gas stations etc, because they have more potential customers, quicker.
• On demand television will outcompete fixed programming, because people will have more options on when and where to watch. On demand television also have more options on how to make money - the business model.
• The deck of cards will survive Monopoly, because you can play many more games with a deck of cards. Also you can do magic, tell someone’s fortune or even use them for a raffle.

The point is that the more adaptable you are, the more likely are you to survive turbulence or achieve your goals in an uncertain world. Forecasting is great, but when that fails, you should try to keep your options open. Even when traditional forecasting is a possibility you should consider looking at what has more options that are favorable to your goal. It’s always better to have two ways to success than just one, especially when the probabilities of each way actually leading to success is unkown.

If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.

The five year forecast problem: A reason it’s becoming impossible.

Imagine for a second that you lived 4000 years ago, how difficult do you think it would be to forecast with some degree of certainty what the world would look like in 20 years? A fair bet would be that it would look very much like it did at the time of the forecast. If however you imagine yourself back in our time, it’s fair to say that such a 20-year forecast would be largely inaccurate. I think we all agree that forecasting has become more difficult and I pose that it just keeps getting worse. Why is this so?

I believe there are three driving forces to this. Firstly, the earth is finite; it has a fixed size, when population increase in a finite space, the distance between people decrease, and each person can reach more people. The direct effect of this is that there are almost no isolated pockets of people in the world, as opposed to 4000 years ago when there were almost only isolated pockets of people. This means that ripple effects of choices reach longer.

Secondly, the numbers of choices we are presented with are increasing, something that is reflected accurately in the movie Trainspotting: “Choose Life. Choose a job. Choose a career. Choose a family. Choose a fucking big television (…)” and so on. While most of our newfound choices are trivial in nature, such as what brand of cereal you want for breakfast, also the number choices that have severe effects are increasing.

This leads us to the third force, technology, which is more of an enabler of the second force. As technology gets more sophisticated, and more accessible, more people have access to items that they can use to affect the world in the direction they please. With more people, more choices and larger ramification of each choice, the equation that would accurately predict the future becomes immensely complex.

To illustrate this we can look at the incident at the WTC in 2001, how do the three forces affect this event? Firstly, the fact that people live closer (globalization) caused friction long before the bombing, as we all know, many people in the Arabic world were growing more hostile to western interference, while the west was growing more hostile to Arabic hostility, though one may put forth hundreds of arguments of race, religion, oil and so on, there can be little doubt that globalization and the shortening of distance played a crucial role. Secondly, not only were there a number of people with motivation to do something, there was a significant number of people with the possibility. Advents in travel and technology made it possible to get to the US, and the vast number of targets available to the terrorists made it impossible for the Americans, even if they knew that an attack was imminent, to predict where. The sets of choices of how and where to strike was so vast that prediction was nearly impossible.

The WTC bombing is but one example, if you compare the financial crisis of 1929 and 2008 you will find that the ripples of the latter traveled much further, faster. However the effects were less significant because more people had thought about how this could be handled, more choices were available. Also more people were in a position of power to induce a financial crisis, experts are still at it about what caused the crisis, was it a bubble? Was it the sub-prime market? Was it regulation? Or was it corrupt bankers? The fact that more people can willingly or unwillingly cause crises of various sorts, also leads to the inevitable fact that the future becomes more uncertain, because it’s not only determined by measurable events, but also by random choices made by people not on anyone’s radar.

The point here is that there are so many options, that however unlikely one isolated event is, it is extremely likely that several extremely unlikely events will occur. It’s not very likely that a specific fortune 500 company goes bankrupt in the next 20 years for example, but it’s very likely that at least one of them does. When there are several thousands of large events like this that will without a doubt happen, we can be certain that the changes in the next 20 years will be profound (so gambling on status quo is the bet with the worst odds), but since we don’t know which immense and unlikely changes will occur, just that some will, we have no way to know in which direction the world will shift. So we are left with the certainty that things will change, and the certainty that we don’t know in which way the world will change.

This also raises another concern. If the forces I have mentioned have driven our path to uncertainty, then we can expect the future to become even more uncertain in the future as these trends continue. Technology continues to evolve, the population to increase, and more people are getting the ability to make greater choices. So what will happen to our ability to predict the future? And what consequences will this have?

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Thoughts About Way Too Needy Products or The Microwave that Went ”Me! Me! Me! Me!”

We have so many manufactured items around us that we often forget they are manufactured goods that at some time got bought, paradoxically we rarely think about many of these products. While we live in a mutually dependent relationship with these items, some product developers don’t understand that new products have to fit into the already existing eco-systems that are our lives.

In our everyday lives we interact with hundreds and maybe thousands of products, in fact mostly anything that we use are products of some sort, (look around you now, how many things that’s not some sort of a product can you find?) We once created all these items, but they also influence us back. I like to think about manufactured goods, services and anything that for some reason can be called a product as living in a symbiotic relationship with mankind, we depend on them, they depend on us. The reason we keep them around is because they (help) perform small tasks that makes our lives easier, for example a door can be opened or closed – a very practical notion that allows us to separate rooms and give them different functionality, different rooms are equipped with different products that perform tasks that naturally occur in that room, for example toilet paper, one of my favorite products, belongs in the bathroom and makes the tasks performed in there easier to handle.

The paradox is that we rarely think about how many products we are surrounded by in our lives, if you ask people how many products or items that was once manufactured they own, most people would grossly underestimate the number. This is because we only think about our iPhones and laptops and televisions or whatnot, we don’t think about door handles and the paint on our walls, we don’t think about that stack of newspapers or that jar of jam in the fridge. The fact of the matter is that we have so many things around us that are products that we can barely wrap our minds around it, which is a good thing. If we constantly went around being reminded of all our products we wouldn’t find time to do anything, and that’s why most products are made to blend in to our lives. So why does some product developers feel that their products are so important that they can disrupt the natural flow in the eco-system of man and his creations?

Let me give a couple of examples: Fire alarms beep too often and too loudly when the batteries go out, I get it! It’s important, but seriously, it can wait until morning. Some microwaves do the exact same thing, every 10 second it will let out a beep until you have opened the door. Why? Maybe the stuff I was heating said to let it rest for a few minutes, can’t I watch TV until then? Yet another example, to quote David l. French: “My Pantec phone...is so needy that in addition to sucking down juice like a college kid on St. Patty's day it makes you press 3 buttons before it even allows you to make a call.” Facebook e-mails you each time something barely happens, and it’s too damn hard to turn off (I just set my spam filter to catch *@facebook.com), I had to delete iTunes, because it kept downloading updates the size of entire musical albums every month, and frankly I don’t use it that much. And what’s with trying to force me to install Safari? I don’t want it!

Needy products are becoming an epidemic, and it needs to be stopped. If you are a product manager, try to think less about how important your specific product will be and more about how your products can fit into the lives of your customers. Products exist to make our lives easier or better, and people making products need to realize this and start focusing on the users’ interaction with products within the context of their lives. Products should not act as high-maintenance girlfriends or drama queens. Get serious guys; start making products that I want to keep around me.

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Why brands matter

I came across a quote the other day, and I’ll poorly paraphrase it here. The quote explains why the Coca-Cola Company and many other firms have market values that are way above their physical assets and reminds us all that brands matter. Allegedly the brand manager for Coke in the 80’s said that, and I paraphrase to the best of my ability, “if all the factories and inventories of the Coca-Cola company burned down tomorrow, we would be back in business in 2 months, making just as much as we do today, if however, all knowledge of Coca-Cola disappeared from people’s minds tomorrow it would take us 100 years to come back”.

Building a brand may often seem costly and pointless, but keep in mind how important the brand has been for companies that target consumers directly. A brand may not always be the right solution, especially in cases where you only buy once (like building a house), or where the market is driven largely by price (like aluminum), but when it is the solution you had better take it seriously!

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Crowdfunding: An Idea for a Business

I recently came across a guy named Gijsbert Koren from Netherlands, which introduced this idea of “crowdfunding” to me. He explains:

“Crowdfunding, inspired by crowdsourcing, describes the collective cooperation, attention and trust by people who network and pool their money together (via internet) in order to support efforts initiated by other people or organizations.”

Though his question was more in the direction of what could go wrong, I started thinking about it, and realized this could be made in to a lucrative business.

Mission: To bring together people that want to invest small amounts of money in entrepreneurial firms and entrepreneurs that need early stage funding.

Concept: A webpage with an auction-like system that allows entrepreneurs to post their business together with funding needs, and let small time investors “bid” on pieces of a company. For example an entrepreneur would say what his company was doing, at what stage it was, how much funds it needed, how much of the company it would be willing to give away for that amount and other relevant information. Let’s say he needed $50k and would be willing to give away 30 % of the company, an investor willing to invest $100 would then be able to post a bid for 0,06 % of the company. When and if the entrepreneur reached $50k, the bid (along with the other bids) would get accepted.

Business model
There are many ways to make money on this, some alternatives are:
- 1 % of the money invested or the of ownership of the start-up could be retained by the site
- 1 % of the returns could be retained by the site
- The site could provide services, like board members, to help develop the firms that are invested in
- Books and other relevant material could be sold in a related webshop (it is likely that not only those that use actual the services of the site would visit the site)
- Posting a firm could cost a small amount
- Placing bids could cost let’s say 0,1 % (so $10 out of $10 000 should be bearable)
- If you receive funding it cost 0,1 % of the funds received ($ 50 in the case above)
- Public support?

Marketing
Would you need investors or entrepreneurs first? And how would you reach and recruit them? This is of course a difficult issue, maybe you need some funds? (Can it be crowdfunded?) I’m sure that getting in touch with entrepreneurs should be easy enough, you can use personal contacts with incubators and such, most entrepreneurial districts have emerging technology funds, technology transfer offices and incubators that can point you in the right direction. Investors would maybe have to be reached through some sort of viral marketing? Or would ads in newspapers do for this kind of service?


Problems:
Some issues deserve some attention here, even if I don’t like to consider the problems the first day of a new idea.

How would you avoid scams?
In a small country like Norway it would be possible to only allow entrepreneurs to post after meeting them, and talking to them, a sort of due diligence light. In larger countries, like the US, this would of course be difficult, but maybe you would have to send in some paperwork or letters of recommendation?

How would investors get their returns?
A bid could be posted in a number of ways, the entrepreneur could say that he accepted that people would bid for the company, and get a share of it. That way, the investors would get dividends and profit from a potential exit. The entrepreneur could also chose to look for loans, that way the investors would get their money back at a certain date with the interest that was agreed upon. If there are 500 investors that has invested $100 each and they all have different terms, this could obviously offer some difficulties, this could be solved by the site acting as a proxy. Meaning, the site creates a fund for each entrepreneurial venture that gets funded and the site technically owns the small-investors part of the start-up. The dividends and money from the exit is then paid to the site, which forwards each parties money back to them.

How would the investors get a voice in the company?
If, as suggested in the previous part, the investors are represented by the company, board decisions could be done through a proxy that is the site. By investing through the site you agree that the site, as the technical owner, has a representative on board whose job is to represent the small investors.

But what about taxes?
These laws probably are different between countries, and I’m not an expert. I would however imagine that this would be double taxed, first a tax when the site collects dividends, and then a tax when each investor receives their money.

If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.

How to decide the size of your marketing budget? or Viewing marketing as an investment instead of cost let you make a better decision

I, and I suppose most of us, have often heard people asking questions along the line of “What is a reasonable marketing cost as a percentage of revenue?”, which is an interesting angle to determining marketing spending. I would argue that if marketing only represents a cost for you then you might as well cut it out. The purpose of marketing, as I am sure most people would agree, is to make more money. Thus, marketing should be viewed as an investment. Marketing as an investment is difficult to understand, partly because the long term effects are hard to measure.

I would pose that if you knew exactly how much you would have to spend in marketing to get one extra sale then you would be able to determine your marketing budget quite easily and logically. This however, to the dismay of many marketers, is a difficult and often impossible task. But if we stick to the economic assumption that the first marketing activity you buy is the one that gets you the highest yield/cost ratio, and when that resource is exhausted you move to the next best, then the marginal returns of marketing does decline. In this case the marginal ROI (the derivative of ROI)  will eventually reach a point in which adding extra money to marketing, is equal to adding that extra money to the second best investment (let’s say new production facilities, or a better webpage or whatever). Identifying this point is of course impossible for most businesses.

One way to approach logical thinking is to ask, if I add x money to the budget, how many more customers will that buy me? And if so, what happens if I add 2x, and so forth. Correspondingly, you should ask, if I don’t add x, what else could I use that money on, and how would that effect the value of my business? What if I remove x? The problem with this approach is that it may to some extent be based on a gut feeling rather than on actual performance metrics, in a scientific sense, but still this may be a better way to think about marketing. I would also like to note that the practice of assigning a given percentage of revenue, or budget or whatever to marketing is one that is widely criticized, because it does not look at what your business actually needs. The main lesson here is to think “what does that next dollar buy me?” and “what else could I have bought for that dollar?”.

Fu the FAQ - or do it right!

If you own a website, my challenge to you is that if you ever create an faq, don’t guess what people would ask. That’s just stupid. Wait until you actually get questions! I’m so incredibly tired of clicking the faq link and getting to a site where the first 50 questions was probably never asked. Your faq is a place to go to get answers, not another advertising channel. If your most frequently asked question is “Why is *** better then everyone else?”, then something is wrong, ok! No one has ever clicked a faq link to get that answer. You see Microsoft does this right. On the IE8 faq the most asked question is “How do I uninstall IE8?” isn’t that just honest?