Business

Startup School 2012 Themes

/ Nathan Guo / Leave a comment

After having some time to decompress and re-digest my notes from Startup School 2012, I’ve collected my primary takeaways in the form of themes echoed by multiple speakers. There were many interesting anecdotes and nuggets of advice that I have not attempted to list. Note that these are my subjective views and it’s likely different people gained different insights from the speakers.

1.   There are still many opportunities for startups to leverage the Internet

Ron Conway believes that the Internet is still in its infancy. When asked about whether he felt Facebook could have been founded earlier, Mark Zuckerberg pointed to university e-mail addresses as necessary to its early success. Zuckerberg speculated that there is some social-networking equivalent of Moore’s Law that dictates the long-term, exponential growth of sharing. Mark pointed to Wikipedia as an example. In his eyes, Wikipedia was able to achieve success earlier than Facebook because it needed less sharing to sustain itself. Thus, as more sharing occurs in the future, there will be new opportunities for startups that did not exist before.

2.   Big growth opportunities in eCommerce

A few speakers pointed at eCommerce as an example of a space now reaching the sustainable sharing threshold necessary for success. Hiroshi Mikitani cited Rakuten’s rapidly growing mobile revenue, currently growing 300 to 400 percent year-over-year. This point should certainly be taken with a grain of salt, as several of the speakers addressing this topic have vested interests in this industry that could affect their objectivity. Both Mikitani and Ron Conway have made substantial investments in Pinterest, whose success is certainly tied to the success of eCommerce. On the other hand, the fact that Mikitani and Conway have made a number of substantial investments in eCommerce shows that they are willing to put their money where their mouth is when it comes to eCommerce.

3.   Technology as an extension of fundamental human wants and needs

To Mark Zuckerberg, Facebook is a natural extension of the fundamental human need to connect with other people, noting that humans are highly geared toward social interaction. To that end, Facebook extends the number of meaningful social relationships humans can maintain beyond the Dunbar number of 150. In the same vein, Ben Silbermann stated that Pinterest is not just about eCommerce; Pinterest is about helping people find others that have similar interests and helping them find their passion. Ben Horowitz noted that the line between wants and needs is not real. Many people have made statements to the effect that technology development was at its end as people’s needs had been fully met. Ben pointed out that over time “wants become needs.”

4.   Startups are difficult

Many speakers described long, arduous journeys to success. Ben Silbermann challenged the commonly used maxim that startups are like running a marathon, stating that there was much more uncertainty in a startup than a marathon. Speakers identified several common difficulties:

i.  Gaining traction. David Rusenko related how weebly did not really gain traction until 48 months after the first line of code was written, in spite of early publicity from TechCrunch, Newsweek, and Time. Patrick Collison of Stripe recounted long hours spent coding and an alert system that guaranteed someone would be available to provide customer support at all hours. Ben Silbermann stressed how important it was for startups to “be great one thing,” and to ship when they have their “one thing.” He also related how long finding that “one thing” can take.

ii.  Funding. Many speakers including Ben Silbermann and David Rusenko related personal stories of investor rejection.  Jessica Livingston of YCombinator and others described a common “herd mentality” problem whereby investors refused to fund “ugly duckling” startups due to other investors not having funded them already. Ron Conway acknowledged this challenge and cited several successful startups he had failed to fund when given the opportunity including salesforce.com, Pandora, Palantir, and Kickstarter. Amusingly, even Mark Zuckerberg said that Facebook’s early growth was limited by the number of $85 servers they could afford.

iii.  Unique problems. Several founders described non-technical problems that were crucial to the success of their startups. Travis Kalanick of Uber discussed process management and operations problems that required logistics expertise not typically necessary for most startups. In addition, he touched on the regulatory issues facing Uber, stating that all truly disruptive startups would face resistance from entrenched, outdated industries, and the governments supporting them. Ben Silbermann described how Pinterest focused on marketing campaigns like “Pin it Forward” and user meetups to tackle non-engineering problems necessary for Pinterest’s success. Patrick Collison said he feels empathy for business people attempting to break into tech because he felt similarly out of his element working with the financial industry to build Stripe.

5.   People are important to a startup’s success

Ron Conway described how he funds people and not startups. His practice of following founders regardless of whether or not their last startup succeeded allowed him to get in on the ground floor of Twitter after following Evan Williams from Odeo. Unfortunately for most, Ron also said that within 10 minutes of meeting someone, he has already decided whether he would invest in them. Tom Preston-Werner described how a company’s people, product, and philosophy were all interconnected and necessary for success. Jessica Livingston stated that incompatible co-founders was a common reason for startups to fail. Ben Horowitz said he looks for “Founders with courage and skill to build.”

6.    There’s more than one path to success

While founders described common themes, their startups addressed very different needs and markets. Joel Spolsky related two very different personal success stories in Stack Exchange and Fog Creek Software. He described a dichotomy of startup growth options:

i.  Get Big Fast. These are startups like Facebook and Stack Exchange, which rely on network effects and lock-in to be successful. Because success is market dependent, it is important to grow rapidly. As a result, problems are solved with money from venture capitalists. Quantitatively, expected value could be viewed as a 1% chance of a 10 billion dollar valuation.

ii.  Organic Growth. These are startups like Ben & Jerry’s and Fog Creek software, which develop products that are valuable to even just one customer. These companies must focus on being frugal because mistakes can kill you. For these startups, it’s important to bootstrap and break even quickly, rather than taking outside funding. Joel expressed the expected value of an organic growth company as a 90% chance of a 10 million valuation.

While the media focuses on the success of “Get Big Fast” companies, millions of companies go the route of “Organic Growth.” Ultimately, Joel said said that failure to choose one of the two methods of growth kills startups.

Business Negotiations – Parallels with Texas Hold’em Poker

/ Nathan Guo / Leave a comment

Recent lapses in blog posting have been a result of traveling overseas. I’m currently in China participating in some high level business negotiations. As a former semi-professional online poker player, I’ve found a number of parallels between business negotiations and poker.

1. Both are games of Partial Information

At the inception of any new business relationship, there will always be some hesitancy in the sharing of information. As the relationship deepens, more and more information is shared. However, at no point will all information be shared. In both scenarios, parties playing optimally will make decisions based on a limited data set, making assumptions for information which cannot be confirmed. Poker players do this by analyzing a hand range, or a set of hands that the opponent could possibly have.

Extra information can be gained in a number of ways. In business negotiations, parties may choose to perform due diligence to gain an information advantage. Quid pro quo information exchanges can help one party gain an advantage if the information being given has less value than perceived by the other party. In poker, players may analyze previous hands to determine betting and sizing patterns, or physical tells. Poker players often engage in ‘table talk,’ the use of speech to elicit a verbal or physical reaction that may cause the opponent to unintentionally reveal information.

2. Information Valuation is essential

While the scale of the information may be different, it is crucial for successful players to understand the value of their information. In a business negotiation, falling revenue streams would be extremely valuable information that should not be relinquished easily. A poker player making a bluff certainly would not reveal his cards to his or her opponent.

Information valuation extends beyond valuation of your own assets. Parties must successfully evaluate the value of their opponent’s assets as well. This may seem obvious in business, as many deals involve extensive valuations of the other party’s assets. Poker players attempt to judge how valuable their opponent thinks their hand is.

However, this is still a very shallow view. Experienced poker players will understand not only their opponent’s valuation of their own hand, but the relative value of their chips relative to the value of their hand. Different players will have different views of chip values. Wealthier players may value their chips less than poorer players. This analyses is important for successful negotiations as well. The other party’s valuation of its own assets should be the basis of negotiations, not your own valuation of their assets. If my desire for your asset is high but your desire for your own asset is low, I would be remiss to to pay a high cost for your asset.

3. Empathy allows parties to gain more information

To fill in gaps in information, assumptions are made in unclear areas. These assumptions can be sharpened by evaluating the situation from the shoes of the other party. In both business and poker, it’s important to understand the thought processes of the other parties in order to understand how they value different assets. An obvious empathetic gain would be to understand that a drunk poker player is likely to value his chips more for their entertainment value than their monetary worth. A prudent poker player would realize that his opponent may be less risk adverse and try to give opportunities for the opponent to gamble at a lower expected value.

While drunk businessmen may be a common sight, prudent businessmen will obviously avoid situations where their judgment will be impaired. Nonetheless, crucial pieces of information can still be gained. As business negotiations deepen, parties will find themselves more and more familiar with other parties. An indication that one party may be fired if a deal does not go through is an obviously valuable piece of information that can only be gained through empathy.

4. Emotional Detachment is important to success

Human beings naturally incorporate emotions into their everyday decisions. While some are certainly more easily influenced by emotion than others, any claiming immunity from emotion in decision-making are delusional or some sort of advanced robot. In the previous discussion of empathy, the employee who may be fired if a deal does not go through should not allow this information affect his decision in the negotiations process. In the same vein, a poker player should not allow his or her anger at a previous hand to cause him to gamble out of frustration.

This emotional detachment is obviously difficult for all humans. At the poker table, there are few mechanisms that will help deal with emotional stresses.When I was playing online poker extensively, I would change my computer background to simple text such as “Relax, poor decisions will lose money in the long run.” To disconnect me from the value of the money, I would surround my monitor with sticky notes with notes like “A big blind is just a tool.” However, the most important tool by far was my network of friends, poker playing and otherwise who would provide support during runs of bad luck.

While emotional impact on business negotiations is generally more subtle, it is still important to build teams who will be capable of preventing you from allow emotion to affect your decision-making. This can only occur through the allowance of open, honest discourse. If a team member fears your wrath, he or she may neglect to alert you of a bias that you are not accounting for in your own decision-making.

Information comes through diligent research. Understanding of value comes through extensive experience. Empathy and emotional detachment however are human traits. Some are of course naturally better than others. Nonetheless, these abilities can be strengthened through practice and team-building. Ultimately, these traits must be carefully balanced. The more empathy you have for someone, the more difficult it will be to make a decision that may harm them.

While all analogies are imperfect, there are many valuable lessons which can be learned at the poker table, although they may be more expensive then they are worth.

Chinese Consumerism – Death of the Knockoff Culture

/ Nathan Guo / Leave a comment

A recent LA Times article explores the phenomenon of plummeting knockoff phone sales as the number of smartphones skyrockets. While this article examines the economics of this shift, it fails to capture the shift in Chinese culture that has led to this outcome.

Anyone who has visited China is familiar with the 山寨 (shan zhai) culture. The clothes that most lower and middle class Chinese wear are simply imitations of Western styles from 5 years ago, made in local shops and sold at significantly lower prices. Popular tourist destinations include places like the Museum of Science & Technology subway station in Shanghai. Here, vendors hawk row upon row of knockoff goods.

“Hello friend! We have special deal for you! Gucci, Prada, whatever you want, we have!”

The products they sell are as fake as their enthusiasm and English abilities. Out of curiosity, I purchased a fake IWC watch for $10. What a surprise it was, when it stopped ticking and the minute hand became dislodged less than a month later.

However, the Chinese knockoff culture extends beyond just fake luxury goods. It permeates throughout the Chinese lifestyle. Fake food scandals are seemingly a daily occurrence, with news stories about tainted milk and reused cooking oil dominating the news. When Chinese people encounter a good deal, it is assumed that the deal is fake in some form or fashion. The inevitability of these scandals in daily life is deeply rooted in the frustration of a populace unable to accomplish social change.

The shift from acceptance to avoidance of the knockoff consumer culture stems from the differing viewpoints of Chinese society. The younger generation, brimming with optimism from increased opportunities, is no longer willing to accept the fake culture their parents resigned themselves to. While the stratified social classes still promote the worship of big brand names, the willingness to accept substitutes has all but disappeared.

I traveled to Shanghai for the first time in 2010. During this trip, it was plain to see the awe on the locals’ faces when they saw my authentic iPhone. When I lost my phone in a cab, I was distraught. However, I was somewhat mollified by the recognition that the relative value for me was significantly lower than its value to whoever found it. For many (such as a taxi driver), the value of this item was equivalent or greater than an entire year’s salary.

When I returned in 2011, I noticed the googly eyes I once got using the iPhone in public had all but disappeared. Many of my friends in Shanghai had purchased their own authentic iPhones and looked forward to their next luxury purposes. One thing the LA Times article fails to capture is the level of sacrifice made by many of these people to afford these items. One lower-middle class friend of mine spent over 1/10th of her annual salary on an iPhone. This shouldn’t come as much of a surprise, as China’s GDP per capita was approximately $7,500 in 2010 according to the IMF.

While it is true that the relative price of smartphones has dropped over time, the insistence of the younger generation for quality over cost is a marked departure from Chinese culture which has dominated in the past. Expect the youth of China to affect social change in all of China over the next decades through traditional capitalist means, their wallets. As China continues to embrace consumerism and capitalism, expect a resurgence in use of the Chinese idiom,

一分錢一分貨。

Simply put, you get what you pay for.