Lies, damn lies, and statistics

TAM-SAM-MarketThe saying “Lies, damn lies, and statistics was popularized by Mark Twain, who attributed it to the British prime minister, Benjamin Disraeli. The actual origin of the phrase isn’t clear and doesn’t really matter – it’s as true today as it was in Twain’s day and far more relevant in a world flooded with statistical analyses derived from reams upon reams of data.

But what does this evergreen phrase have to do with founders and mentoring? Increasingly in our data-driven world investors and business partners are insisting on quantitative evidence of both a new venture’s market opportunity and the size of the problem it is trying to solve. Thus many founders need to rely on third party research to buttress their arguments, as they don’t have the resources to do in-depth primary research themselves. Typically the sources of the data they rely upon – government and market research analysts – have far more credibility than the founders do.

I came across a perfect example of the perils of “data risk” for founders in The New York Times article Digital Divide Is Wider Than We Think, Study Says by Steve Lohr. It describes how Microsoft researchers did a study on the actual use of high-speed internet in the U.S. They concluded that 162.8 million people do not use the internet at broadband speeds. However, the Federal Communications Commission (FCC) claims that only 27.7 Americans lack broadband access!

If you are a company like Microsoft that is interested in profiting by solving the so-called digital divide – the large gap between the many millions of U.S. residents who have broadband access and those who don’t – you have to have the correct data to act as foundation for your business. Microsoft, of course, has far more resources than ever available to a startup, but the discrepancies found by their researchers between FCC findings and their’s are dramatic. This gap is most striking in rural areas of the U.S. For example in Ferry County in northwestern Washington, the area highlighted in the  Times article, Microsoft estimates that only 2 percent of people use broadband service, versus the 100 percent the federal government says have access to the service.

It turns out that the FCC relies on simplistic surveys of internet service providers that inherently overstate coverage. For example, if one business in an area has broadband service, then the entire area is typically considered to have broadband service available. You can get the full details of how Microsoft generated their data in the article, which I highly recommend, but suffice to say that they did not rely solely on ISPs for their data – they performed primary research.

There are several lessons for founders who are relying on government or other sources for data that may be the foundation of their business case.

  • Consider the source of the data. In this case one would expect the FCC to have accurate data. But anyone who has been following the politicization of the FCC would realize that they are very biased: it’s in the FCC’s interest to show that they are doing a great job by making broadband universally available through their policies that favor ISPs.
  • Try to learn the source behind the source. The FCC did not do any primary research into broadband access, they totally relied on third parties – ISPs – who like themselves, were biased towards showing universal data access.
  • Find out the foundational definitions.  Nowhere in The Times article is broadband defined! Access speed can vary exponentially from 100 mbps to 1 gigabit service.
  • Learn how the data was gathered. The FCC relied on simplistic surveys of ISPs rather than performing rigorous surveys of consumers’ access to broadband. The best data is gathered from primary – firsthand – research.
  • Find multiple sources for the data. One way to factor out bias or poor data collection techniques is to find more than one source for the data. Just as it’s a risk for manufacturing companies like Apple to rely on a single vendor, if your venture is relying on just a single source for foundational data you are exposing yourself to the risk that your data may be in the “damned lies” category.
  • Verify data sources with your own research. Let’s assume you were looking to start a business to serve a rural area, for  example, an internet-connected animal tracking service for cattle ranchers. Rather than just basing your total addressable market on a single, potentially biased source like the FCC, do your own primary research.  By interviewing just a few ranchers you would probably find that most lacked internet service or relied on very slow satellite systems for their internet connectivity. Others might even have to drive to their local library to access the internet. Hard to get real time location tracking by relying on your local library for broadband access!
  • Understand that there is no such thing as “objective data.” No matter how rigorous the statistical methods used, biases of the researchers will seep into the data. Microsoft has its own bias, as it is trying to convince the FCC to allow them to use the “white space” between TV channels to deliver internet access to rural areas. So it’s in their interest to show very low levels of internet access – just the opposite bias of the FCC (and big ISPs and broadcasters, both of which are dead set against Microsoft’s initiative).

The bottom line is that secondary market research that has value in determining your total addressable market may be necessary, but not sufficient. Supplement that research with your own primary research, as cash-constrained as that research may be. A good question to ask during your customer discovery process is to ask your potential customers how big they would estimate your market to be and what, if any data, they rely on themselves. While not all data is lies or even damned lies, it may well be tainted by bias – it’s up to you understand and account for the biases and assumptions of your market research sources.

There’s no success like failure and failure’s no success at all

dylan

I doubt Bob Dylan had entrepreneurs in mind when he wrote that lyric in the song Love Minus Zero/No Limit. And I’m not sure I understand what he’s saying either, but Dylan’s great at creating enigmatic aphorisms, as well as song titles that are inscrutable at best.

But Bill Gates, who I doubt was the Dylan fanatic his competitor Steve Jobs was, came up with a great quote that every entrepreneur should take to heart: “Success is a terrible teacher.” Jean-Louis Gassée, in his Monday Note #519,even improved on this quote when writing about Steve Jobs:

As Bill Gates once felicitously said, “success is a terrible teacher”. (The French translation, maîtresse, is even better as it combines knowledge and infatuation.) The success of the Apple ][ might have seduced Jobs into believing that he knew while he might have simply been a kind of Chauncey Gardner: At the right place at the right time.

I was a victim of the success syndrome myself, thinking that after starting two companies backed by a host of blue chip VCs and corporate venture arms of companies like Apple Computer, that I could start a third company by myself, based on my own idea. You can find the Throughline story elsewhere on this blog, so I won’t repeat it.

Startups are hard and just because you have done one or two before doesn’t mean you’ll succeed again. Mitch Kapor, did a brilliant job of creating Lotus 1-2-3, the spreadsheet that succeeded VisiCalc and preceded today’s standard, Microsoft Excel (which may in turn be superseded by Google Sheets) and Lotus Development Corporaton. But he could never match the success of 1-2-3, though he tried mightily with Symphony, Agenda, and Jazz at Lotus. In fact Jazz, a Macintosh variation of Symphony, was such a turkey that Jim Manzi, who took over from Mitch as CEO of Lotus, joked that “We got more returns of Jazz than we shipped!”

Mitch went on to try more companies and yet more products, On Technology being one company I recall, before hitting his stride as an angel investor, where he has probably made far more money than he ever made at Lotus or elsewhere.

Silicon Valley likes to focus on failure and how it’s a great teacher and how successful entrepreneurs just fail harder the next time. But not enough attention is paid to the perils of success!

If you are interested in a computer industry veteran’s view of today’s tech world you can subscribe to Gassée’s weekly Monday Note newsletter, as I do, for worthwhile insights as well as interesting historical tidbits from his fifty years of experience in the computer industry.

 

 

The pros and cons of “defaults”

badge

I first came across the concept of a default in a computer program when product manager for VisiCalc, the first electronic spreadsheet. The idea that a programmer could pre-select a setting or option for the user seemed very powerful to me. Having options is always good, except when too many options can either become annoying or result in “paralysis by analysis” or cognitive overload.

The art of choosing defaults or what are now commonly called “preferences” is a balancing act between annoying or confusing the user and providing them with the ability to personalize the app to meet their needs.

It’s been a few years since I’ve been involved in designing software, so I hadn’t given the concept of defaults much thought, if any, until recently. Like a good Apple user I dutifully downloaded and installed the latest version of iOS for my iPhone. All seemed fine until I noticed that the icon badges for email and messages had disappeared from my iPhone! Icon badges are very useful, as they inform me not only if I have new mail, but how many unread messages I have. This is the first thing I check on my phone after coming out of a meeting.

I turned to my universal tech support provider, Google, to find that iOS has a preference to turn off badges, not only for email but for text messages as well.  Somehow the new version had reversed the icon badge setting. I had to dig into my iPhone’s preferences to change the badge icons from “Off” to “On” for mail and messages. Not that difficult, but annoying, and I found that a change that had been made for me without notification a bit disturbing. What other defaults might be reset by new versions of iOS, with no notice, choice, or notification?

Those of you designing software for smartphone apps, give careful thought to what features have default options and how you set defaults. Those choices can result in either a smooth, streamlined user experience or one marred by an annoyance. And changing defaults without notice to the user can tend to erode trust in your app or operating system.

The concept of defaults can also be used in other contexts than computer user interfaces. For example, in my first startup we decided that everyone should get stock options, depending on two parameters: when they started with the company and what level of position they held – VPs got more than directors who got more than managers, who go more than staff (though star individual contributors could demand and merited more stock options). But we soon learned that the default of granting everyone options was not a wise move. It turned out that a significant minority of our hires would have preferred a higher salary in lieu of stock options. This group tended to be the family breadwinners (what a strange archaic phrase that is!) who needed more cash to pay their bills. Young, single people with no family to support and no mortgages preferred stock options. So we redesigned our compensation plan to give new hires an option: take a higher salary with no stock options or opt for a lower salary with stock options. Our CFO calculated the trade-off numbers for new hires and we found that new hires were now more satisfied with their compensation plans.

Note we only offered two choices, for simplicity’s sake. While some people might have wanted a slight salary decrease in exchange for some stock options, it is hard enough managing your employee compensation plan and cap table without having an infinite number of combinations of salary and stock options.

Going beyond a simple “on”or “off” or “opt in” or “opt out” risks generating needless complexity. Thus the brilliance of Facebook’s Like button vs the typical five stars used for ratings on other platforms, such as Amazon. Facebook makes the decision very easy, “Like” or don’t. And for the generator of the content they can simply measure the number of Likes, rather than attempting to compute their average star rating. Or should that be the median number of stars? Or maybe the mode?

There’s another term I like to borrow from software engineering: combinatorial explosion. A combinatorial explosion results from the multiplier effect of having choices or options on top of options such that the number of options the user had grows exponentially. That’s what our CFO would have faced had we offered new hires any combination of salary and stock options that struck their fancy.

As Einstein is reputed to have said, “Everything should be made as simple as possible, but not simpler.” I’d say that applies well to options or preferences, whether in technology or business.

 

When it comes to building companies, Waste is good!

arts-hs-insider

The common maxims of startups are that “cash is king” and you must “stretch the dollar.”  And that conventional wisdom is just that, conventional. But there’s another side to spending, as the editorial director of Conde Nast, Alexander Liberman, the mentor of the owner S.I. NewHouse, oversaw ballooning editorial budgets and the lavish image of Conde Naste.

You may recall Gordon Gecko in the film Wall Street proclaiming in stentorian tones,”Greed is good!” Well he had nothing on Alexander Liberman, who summed up the company’s ethos when he said: “I believe in waste. Waste is very important to creativity.” And he should know something about creativity, as Liberman was a success in painting, sculpture, and photography before joining Conde Naste.

And as many music and film fans know, a single song or single scene may be redone dozens and dozens of times until the creative person in charge  – the record producer or the movie director – is satisfied. No one cared how many reels of tape were wasted by the Beatles in recording the Sergeant Pepper’s Lonely Hearts Club Band – it was a massive hit, just as no one was counting up the thousands of feet of film left on the cutting room floor by George Lucas, director of Star Wars.

I was taught by VCs that spending should be an investment in the company and should be carefully monitored by management for its ROI. But I was also told by an early investor and mentor after raising many millions of dollars from is firm that, “You’re going to waste a million dollars launching this company. You just don’t know which million.” That advice gave us the freedom to experiment, to fail, and then fail harder the next time, until we finally did get it right and the company became a hit.

As Apple Designer Director Jony Ive points out, problem solving is necessary in creating a great product, but it is creativity that’s the spark that ignites the development process and fuels the fire.

So does that mean founders should add a new line item to their budgets labelled, “Creativity” or “Waste”? Probably not, but I wouldn’t rule it out. What founders do need to do is to make creativity and problem solving the first duties of their staff, not toeing the line in a line item budget. I learned this lesson the hard way. I started Throughline, Inc. as a way to help founders save time and money on the necessary infrastructure of their companies: office space, furniture, servers, telephone systems, etc. I mistakenly thought VCs would love me and promote Throughline to their portfolio companies.  And one VC did buy the story and invested half a million dollars to start the company. And we did acquire a great strategic investor, Silicon Valley Bank – the go-to bank for founders.  But Throughline did not succeed. What I learned post-mortem, and should have learned pre-mortem through customer discovery, was that VCs could care less about operating expenses. What do they care about? Growth! Growth in eyeballs, users, customers, market share, brand, and a talented staff – the top line, not the bottom line.

Management is doing things right, leadership is doing the right things. Leave cash management to your bookkeeper or contractor CFO. As a founder, your first duty is not cash management it’s customer acquisition. Look no further than Uber, which is losing billions of dollars, but has grown faster in both customer acquisition and revenues than almost any other startup in history. As a result, even as a massive money-loser to the tune of one billion dollars a quarter!, Uber is valued at as much as $120 billion.

The true bottomline is that building companies and building products is an art, it’s a creative endeavor. Companies have announced this in their names: Software Arts, Electronic Arts. If you have a great idea, start building!

 

Plan for success – because failure will take care of itself!

glasses

This is just another way to say that More companies die of indigestion than starvation. The classic example being Friendster, the first social network, pre-dating Facebook and MySpace. It became so popular that its servers crashed constantly and its users became totally frustrated and moved on to MySpace or Facebook. As Yogi Berra once said, That place has become so popular nobody goes there any more.

I was reminded of  both sayings when reading The Sunday New York Times Corner office interview by David Gelles of Jeff Raider on Founding Warby Parker and Harry’s First, eyeglasses. Now, shaving. Mr. Raider, a co-founder of two powerful direct-to-consumer brands, says change happens faster than we think

Jeff Raider’s first company almost met the same fate as Friendster:

When we launched Warby Parker, we were still graduating from business school. It was just four of us, and we were working part time. When we turned the site on, we thought we’d get 20 or 30 orders, but we were getting hundreds and thousands of orders. We’d get as many glasses in as we could, sell them all, go out of stock, take the money and buy a bunch more, sell them, and go out of stock again. We didn’t presume a lot of success, and had to play catch-up. It was frenetic.

What I’ve been seeing is that the traditional 25-page business plan with its five-year financial projections is long dead, replaced by the 10-slide pitch deck, one slide of which might address the size of the market opportunity and top down financial projections. (The market for doohickeys $25 billion a year, so if we just get 5% we’ll be a billion dollar company!) Teams don’t seem to plan past raising capital. The best do have a product roadmap and a very few actually have a plan encompassing milestones and dates. But I think the pendulum has swung too far. We’ve gone from the extreme of the lengthy business plan which was probably obsolete when it came of the printer to no plan at all.

Jeff Raider learned from his experience at Warby Parker when he started his next company, Harry’s:

At Harry’s we presumed more success. We raised a bunch of capital ahead of our launch. We built a team of 11 people before we launched. We made our own custom razor handles, custom blades with a factory in Germany, made our own shave cream. We had forecast more sales at Harry’s than we did at Warby Parker, and we still sold out. But we were better prepared to absorb the shock.

Another issue I face mentoring entrepreneurs at MIT is that all of the Sandbox founders are students. Being an MIT student is a full-time job. Which results in virtually every team member working on the venture only part time. Which doesn’t jibe with Jeff Raider’s advice to aspiring entrepreneurs: You’ve got to be all in, and you’ve got to love it.

However his other advice jibes with my own, that startups are learning machines: … be humble enough to learn along the way. 

His anecdote on starting Warby Parker is a great example of not only learning from feedback, but making a major change to its customer experience model:

When we started Warby Parker, we asked all of our friends, “What do you think, would you buy glasses online?” They were like, “No, I don’t think I would. I’ve got to kind of touch them and feel them and experience them in person before I buy.”
At that point, we could have just said, “That feedback doesn’t make sense.” But instead we said, “That’s a really important thing that we just learned. How can we evolve our business model to account for that?” And so we ended up with this home try-on program where we let people try on glasses at home for free and then send them back to us.
Learning is necessary, but not sufficient. You need to know how to apply what you’ve learning to making changes to your business that increase your odds of success.
I’ll leave you with a great quote from Jeff Raider which explains why you must plan for your startup to be wildly successful. Jeff answers my canonic question to founders: What keeps you up at night?
I think that the world’s going to change a lot faster than most people do, that disruption happens at a geometric pace as opposed to a linear pace, and that pace is only going to increase. If you think about our industry, a couple years ago it was 0 percent online. Now our market is 10 to 20 percent online and growing really fast. People incrementalize change when actually, change happens exponentially.

 

“Mentor” now chasing “Innovative” as most used and misused business term

 

ellison

I was dismayed by the use of the word “mentor”  in the Business Insider article by Rosalie Chan Larry Ellison says that Oracle was once a week away from not being able to pay employees — here’s the lesson he learned from the experience.

Ellison hosts a cocktail reception to mentor startup founders each year. Last week, he hosted the founders of 22 startups at his San Francisco home — and eWeek was in attendance to report on the advice he gave.

First of all it is impossible to mentor 22 people at once! Second and perhaps less obviously, mentoring is not a one-time thing, it’s relationship between the founder and the mentor that can last months or even years. Larry may well be advising 22 startup founders and perhaps he mentors a handful of them – the article doesn’t say. But mentor is starting to get overused just as the words innovate and innovation have before it. This blog devotes an entire category to mentoring.

However, the article does include two good lessons learned by Larry Ellison when Oracle was a startup, not the behemoth it is today, 40 years later.

First, is to balance doing whatever it takes to pay the bills with whatever it is that you actually want to do. One of my newest mentees is struggling over earning money from a first client, but a client that’s a real outlier on the distribution of target clients. The number one need in all startup is cash. Even if you are sharing an apartment with six other engineers and living on ramen noodles you still need cash. So I totally agree with Larry’s advice – do whatever you need to do to earn cash even if it’s NRE – non-recurring engineering. 

Second, once your startup crosses the chasm and becomes an on-going concern you can’t get complacent. As Ellison says:

The old solution to customers’ problems may no longer be the best solution. When you see that, it’s an opportunity—or a threat,” Ellison said, according to eWeek. “It’s our job as founders and developers to constantly change our companies based on technology available today that wasn’t available yesterday.

And like every other company, Oracle is realizing that AI is not just a science experiment any longer, Oracle has been focusing on its autonomous, AI-powered database and its cloud solution.

As a mentor I hope that the it remains a term of art, unlike innovative, too often used and misused as in “new, innovative” which is redundant, as the very definition of innovate includes the word new.

innovative |ˈinəˌvādiv| adjective(of a product, idea, etc.) featuring new methods; advanced and originalinnovative designs | innovative ways to help unemployed people.(of a person) introducing new ideas; original and creative in thinking: an innovative thinker.

Well I’ve hit my pedantry quota for the day!

 

 

Why everyone needs a sounding board!

sound board

If you aren’t familiar with the term sounding board here’s the dictionary definition:

2. a person or group whose reactions to suggested ideas are used as a test of their validity or likely success before they are made public: I considered him mainly as a sounding board for my impressions.a channel through which ideas are disseminated.

Ever since my very first startup, providing sound reinforcement services for local bands, my wife has served as my principle sounding board. What I’ve learned over the years is that having a sounding board is very important to founders for several reasons:

  • Running your ideas by your sounding board forces you to work on articulating those ideas clearly and concisely.
  • If you have a non-technical partner like my wife, you will be forced to put your startup ideas into a format that any intelligent, but non-technical, person can understand – a good thing!
  • My father always used to say You don’t really understand something unless you can explain it to someone else. I’ve found that to be true!
  • Sounding boards are a facet of mentoring and mentors do act as sounding boards, but a sounding board is a much more lightweight role, as experience and knowledge of the startup world aren’t required.
  • My  wife is a great editor so often I would run documents like an executive summary of my startup business plan by her – sounding boards don’t always rely on sound!
  • You do have to be careful in choosing a sounding board, as family and friends can easily tell you want they think you want to hear, which is worse than not helpful, as it can let you go off in the wrong direction. Skepticism is a baseline requirement for sounding boards.
  • Acting as a sounding board for others can help you hone in on what you need as a sounding board for your own ideas.
  • Too many sounding boards can end up creating confusion, like the old saw Too many cooks spoil the soup.
  • Don’t  wear out your welcome. Use your sounding board sparingly, if you need deep and frequent feedback seek a mentor.
  • At the end of the day you own the decision or the work you’ve asked your sounding board to  weigh in on. Under no circumstances should you criticize your sounding board for the feedback they gave you.
  • Finally, I’ve used this quote before, but it applies directly to sounding boards: Perspective is worth 80 IQ points, according to computer scientist Alan Kay.

If you have mentors that’s great, a sounding board can be another source of feedback for you. But if you don’t have a mentor, a sounding board becomes more important and may be a first step for you on your way to engaging in a mentoring relationship.

According to the dictionary defintion sounding board is another term for soundboard, which I found amusing as when I worked in the sound reinforcement business that’s what we called our mixing desk. But feedback – of the screeching audio variety – was most definitely not that we wanted from our soundboard!