Come back when you have a demo

“Many VCs tell entrepreneurs to ‘come back when you have a demo.’  They aren’t wondering whether your product can be built – they are wondering whether you can build it.” – Chris Dixon.

Taxicabs in San Francisco

There are 1200 taxi cabs in San Francisco, and 6000 drivers (according to my driver today).

You have to wait on a waiting list to get your “medallion”, which allows you to own your own cab. If you choose, you can sell that medallion to a cab company, who will give you a car plus cash. My driver had been waiting 6 years for a medallion; he expects to wait another 4 to get it.

On New Year’s Eve in San Francisco, a cab driver can expect to make $600-700. All the cab owners are driving that night because it’s a big one; regular drivers need probably 20 years driving experience to have seniority enough to get a spot that night (due to scarcity–the 1200 cabs for 6000 drivers thing).

Outside a 15-mile radius from San Francisco International Airport, drivers are required to charge 150% of the metered rate. My driver once had a fare of $299 to go to Stockton’s University of the Pacific because of this.

Acumen Fund talk

* Founder of Acumen was in marketing at Cisco

* Malaria nets imperilled by sole buyer’s (UN) discrestion

* So they are building new business models, with local salesmen

* Water in India was always free and always dirty. Monetizing clean water was accepted and in fact changed the economy–men went to get the water instead of women, and then they created a delivery service so no one carries it on their heads anymore!

Trust in Nations and Companies

From my 2002 notes of the _Becoming Human_ conference at Stanford:

> In the Soviet Union, everyone believed in an unjust society, so you’d better take advantage of that or you’ll be left behind. In the U.S., society is based on trust, so you can’t have cheating because it breaks down the trust.

Reminds me of different ways to run companies today: trust the employees or not? If you don’t, they’ll know it and try to pillage the company quickly before everyone else does. Treat them well and they’ll self-police (like Ricardo Semler in Brazil)

Tom Peters, Master of Quotation

Tom Peters may write in an unconventional manner, but it allows him to get ideas across in a remarkably concise fashion, as he does in his This I Believe! manifesto at ChangeThis. He reads a huge amount, and I found some valuable tidbits within for design inspiration:

### Quoted in This I Believe

* “The problem is never how to get new, innovative thoughts into your mind, but how to get the old ones out.” — Dee Hock, Visa founder

* “Reward excellent failures. Punish mediocre successes.” — Phil Daniels

* “You can’t be a serious innovator unless you are willing and able to play. ‘Serious play’ is not an oxymoron; it’s the essence of innovation.” — Michael Schrage

* “Leaders achieve their effectiveness largely through the stories they relate” — Howard Gardner

* “We shape our buildings. Thereafter they shape us.” — Churchill

* “I never, ever thought of myself as a businessman. I was interested in creating things I would be proud of.” — Richard Branson

* “There’s no use trying,’ said Alice. ‘One can’t believe impossible things.’ ‘I daresay you haven’t had much practice,’ said the Queen. ‘When I was your age, I always did it for half an hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.'” — Lewis Carroll

* The greatest danger for most of us is not that our aim is too high and we miss it, but that it is too low and we reach it. — Michelangelo

* “Nobody gives you power. You just take it.” — Roseanne

* “You can pretend to care. You cannot pretend to be there.” — Texas Bix Bender

* “You must be the change you wish to see in the world.” — Gandhi

* “The deepest human need is the need to be appreciated.” — William James, psychologist

* “The two most powerful things in existence–a kind word and a thoughtful gesture.” — Ken Langone, co-founder of Home Depot

* “You must care.” — Melvin Zais, General, U.S. Army

* “A leader is a dealer in hope” — Napoleon

### And a few words of his own:

* Question authority! (And hire disrespectful people!)

* It is the foremost task–and responsibility–of this generation to re-imagine all of our institutions, private and public.

* Action…ALWAYS…takes precedence.

* Do…NOW. Think…later. At the very least, you’ll have something to think about since you’ve just done…something.

* He who makes the quickest, coolest prototypes reigns!

* Two Trends Worth Trillions, as in Trillion$$$. Namely: (1) Women buy All the Stuff (2) We’re getting older!

* Powerlessness is an advantage, not a disadvantage. Why? Because “powerless” people work in nooks and crannies, and are invisible enough to be able to surreptitiously pursue contrarian strategies.

* I once watched a highly energetic chief ripped asunder by a senior member of his board. “Richard,” the determined board member almost shouted, “you are smart, energetic, creative to a fault, perhaps even a genius. But much of your ‘genius’ is dissipated because you apply it to ten different things at a time, albeit with great skill.”

“Let me tell you what you need,” he concluded. “A ‘to don’t’ list.”

* Major change takes…30 days…or 3 Years. Your choice!

* Fun is not a Four-Letter Word

Notes from The Corporation

Notes from The Corporation, part of my movie binge week a while back:

• Corporate charters were originally a “gift from the people” to serve the people, for instances like building a bridge for a city, which could not be done by a smaller company
• The 14th Amendment (which gave all men equal rights) was also invoked in the name of corporations, who argued that they too were “individuals” under the law, and thus had the same rights and protections afforded to them.
• Noam Chomsky: Corporations are a special type of person, designed by law to be concerned only with their shareholders
• Externalities: the “can’t somebody else do it?” philosophy
• Intergenerational Tyranny: “Taxation without representation” of future people

• Every one of us, depending on circumstances, could be a gas chamber operator or a saint.Noam Chomsky

• Protesters at WTO, etc., tend to be frustrated because they feel they have no effect on the corporations through normal methods (no democratic voting, only through buying shares).
• Disney’s Celebration town, mentioned as an example of corporations extending their grasp into everyday life, reminds me of the Walmart’s All-You-Can-Live township spoof
• States still have the right to revoke corporate charters; this was done often in the 19th century (at the beginning of the corporate era), but today it is rarely invoked and even more rarely successful, due to corporate lawyers fighting hard.
• Corporations’ goal of optimizing profit demands that they also “optimize” consumers’ buying practices; marketing tactics manipulate buyers to act they way corporations want them to.
• Alternatives? The public could control corporations more, though state-enforced democratic methods–this seems to be the argument of the filmmakers, especially with the “Commie Red” backgrounds to all the titles…Kurt K. mentioned that no top-down policy will ever make up for bad people filling the ranks; the only way to ensure quality is with quality people.
• Other metaphors we could use for corporations that don’t have to do with success (“a few bad apples” mentioned; means they reduce success of the crop)? Family Unit; sports team; phone system; eagle all mentioned. Reminds me of linguist George Lakoff and his book Metaphors We Live By
• 1712 began the Industrial Age, with the steam engine providing increased “productivity”, which was to become the mantra for all of life today. How did people before 1700 view “productivity”?
• Chomsky: Originally there were limits on the length and money allowed for a corporate charter.

Notes on Robert Lucas’ The Industrial Revolution

Economist and Nobel Laureate Robert E. Lucas Jr. makes some interesting observations about economic growth in the Industrial Revolution and the inequality it has wrought in his essay The Industrial Revolution: Past and Future. Much of it reminded me of Robert Wright’s optimistic arguments in Nonzero, trying to prove that the arrow of history is pointing toward a more prosperous and enjoyable future for all. I hope so, but I’m still not convinced it will happen “automatically” as a result of everyone pursuing self-interest, as these two seem to be. Still, Lucas’ arguments are interesting coming from an economic perspective.

First he explains economic growth prior to the industrial revolution:

Between year 0 and year 1750, world population grew from around 160 million to perhaps 700 million…But in contrast to a modern society, a traditional agricultural society responds to technological change by increasing population, not living standards. Population dynamics in such a society obey a Malthusian law that maintains product per capita at $600 per year, independent of changes in productivity.

…As we know from many historical examples, traditional agricultural society can support an impressive civilization. What it cannot do is generate improvement in the living standards of masses of people.

His charts are especially convincing:

Production accelerates past population in about 1900

GDP per capita for five different world regions since the Industrial Revolution; as expected, the English-speaking First World leads the pack, with Japan, France, Germany and Scandanavia close behind. The rest barely improve, especially Africa.

Population growth now slows instead of increasing when GDP rises

A reason for the decline in population growth is that instead of simply having MORE children with the newfound wealth, technology enables parents to have BETTER children with more time and money invested in them:

As family income rises, spending on children increases, as assumed in Malthusian theory, but these increases can take the form of a greater number of children or of a larger allocation of parental time and other resources to each child. Parents are assumed to value increases both in the quantity of children and in the quality of each child’s life.

Interesting ruminations on the nature of innovation and the work produced by “knowledge workers”:

It is a unique feature of human capital that it yields returns that cannot be captured entirely by its “owner” Bach and Mozart were well paid (though neither as well as he thought he deserved), but both of them provided enormous stimulation and inspiration to others for which they were paid nothing, just as both of them also gained from others. Such external effects, as economists call them, are the subject matter of intellectual and artistic history and should be the main subject of industrial and commercial history as well. These pervasive external effects introduce a kind of feedback into human capital theory: Something that increases the return on human capital will stimulate greater accumulation, in turn stimulating higher returns, stimulating still greater accumulation and so on.

A summary of the process:

On this general view of economic growth, then, what began in England in the 18th century and continues to diffuse throughout the world today is something like the following. Technological advances occurred that increased the wages of those with the skills needed to make economic use of these advances. These wage effects stimulated others to accumulate skills and stimulated many families to decide against having a large number of unskilled children and in favor of having fewer children, with more time and resources invested in each. The presence of a higher-skilled workforce increased still further the return to acquiring skills, keeping the process going.

He argues that all economies will eventually make the leap up the curve, no matter how downtrodden they are now:

The rapid growth of non-European nations (and some of the poorer European ones) is mainly responsible for the extraordinarily rapid growth of world production in the postwar era. But enough other societies have been largely left out of this process of diffusion that the degree of inequality among nations remained about the same in 1990 as it was in 1960. As those economies that have joined the modern world catch up to the income levels of the wealthiest countries, their growth rates of both population and income will slow down to rates that are close to those that now prevail in Europe. We have seen these events occur in Japan; they will follow in country after country.

At the same time, countries that have been kept out of this process of diffusion by socialist planning or simply by corruption and lawlessness will, one after another, join the industrial revolution and become the miracle economies of the future.

And he concludes with trickle-down economics of the highest moral caliber:

Nothing remotely like the income differences of our current world, differences on the order of a factor of 25, existed in 1800 or at any earlier time. Such inequality is a product of the industrial revolution…

But of the vast increase in the well-being of hundreds of millions of people that has occurred in the 200-year course of the industrial revolution to date, virtually none of it can be attributed to the direct redistribution of resources from rich to poor. The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.

Fascinating, an economist tackling the problem of companies doing good things only when it makes economic sense to do so; now it’s on a global scale.

Emotional Decision-Making

The Peter Principle says that workers are promoted through the ranks until they reach a position they are incompetent in. Essentially, this is because promotions are based on meeting a standard, something that is often suddenly recognized by a manager. In all probability, performance will decline slightly after this deservedly-noticed peak, making it look like the promotion was to a level of incompetence. Marginal Revolution says that this is because recent activities are overrated when making promotion decisions, though usually not undeservedly so.

In other words, firms know that you sometimes get lucky, and they set the promotion bar high on purpose. After your promotion you experience a “regression toward the mean”, and your observed performance declines in quality, relative to your promotion-winning triumphs. But on average the promotions are still deserved.

A series of speeches by Dodgers GM Paul DePodesta (1, 2) recently brought to my attention also explore a similar topic. His major point is that many baseball decisions are made subjectively on bad data. The recency effect plays a role here too…

There was one pitcher that we particularly liked, but everybody said he was going to be a top ten pick. So we weren’t expecting to get him, and the Saturday before the draft in the regionals of the College World Series, he had a terrible outing…even our scouts began to panic a little bit, and said, “Maybe there’s something wrong with this guy and maybe we don’t like him.”…I was sitting there thinking, “Excellent, I hope he gets crushed every time he goes out there!” Because I know scouts from all the other teams were there watching.

Let’s assign a value to this recency effect. Certainly it should be considered in a stronger light because it may be indicative of a trend…but a study found that the recency effect results in doubling the expected value of a decision.

Just as in the “hot hands” belief in basketball, we find that even when subjects are explicitly told that the rates of return are drawn randomly and independently over time from a given distribution, they still assign a relatively large decision weight to the most recent observations – approximately double the weight of the other observations.

The Innovator’s Dilemma is a book by Clayton Christenson about how once-successful companies fail to adapt to changing markets. It usually happens because they latch on too hard to their successful innovation. Christenson’s first example is from the early hard drive industry:

Their failure resulted from delay in making the strategic commitment to enter the emerging market in which the 8-inch drives initially could be sold. Interviews with marketing and engineering executives close to these companies suggest that the established 14-inch drive manufacturers were held captive by customers. Mainframe computer manufacturers did not need an 8-inch drive. In fact, they explicitly did not want it: they wanted drives with increased capacity at a lower cost per megabyte. The 14-inch drive manufacturers were listening and responding to their established customers.

The Onion had a humorous take on the innovator’s dilemma, in their faux editorial, “F%&# Everything, We’re Doing Five Blades” (temporarily available here). It imagines the Gillette CEO’s response to Schick upping their razors to 4 blades from Gillette’s 3, a move they combined with perhaps the most inane television commercial script I’ve seen…here’s an excerpt from the Onion editorial:

Would someone tell me how this happened? We were the…vanguard of shaving in this country. The Gillette Mach3 was the razor to own. Then the other guy came out with a three-blade razor. Were we scared? Hell, no. Because we hit back with a little thing called the Mach3Turbo. That’s three blades and an aloe strip. For moisture. But you know what happened next…[the competition] went to four blades. Now we’re standing around…selling three blades and a strip. Moisture or no, suddenly we’re the chumps. Well, f*** it. We’re going to five blades.

What’s the common thread? In each of these situations, decisionmakers let their emotions overrule their objectivity. They fell in love with their past success and refused to admit that what they had was simply a temporary lead on the competition, or worse, dumb luck:

What accounts for success and failure? More often than you might think, it’s just luck. But like most things, luck can be managed…Every time you launch a product or service, every time you apply for a job or start a nonprofit, you’re either going to hit or not. If you get lucky, you’re entitled to deny that luck had anything to do with it. But if you fail–and you probably will–understanding the role of the L factor will keep you sane.

Another example of emotional decision-making is pointed out with people who buy SUVs by Malcolm Gladwell. He points out that many of the “safety features” that SUV makers tout are just designed to appeal to what French cultural anthropologist G. Clotaire Rapaille calls people’s deeper, “reptilian” responses.

“The No. 1 feeling is that everything surrounding you should be round and soft, and should give,” Rapaille told me. “There should be air bags everywhere. Then there’s this notion that you need to be up high. That’s a contradiction, because the people who buy these S.U.V.s know at the cortex level that if you are high there is more chance of a rollover. But at the reptilian level they think that if I am bigger and taller I’m safer.

A similar decision was made by the makers of the Chrysler PT Cruiser, who decided to reduce the size of the rear window because drivers were afraid of people being able to see in–not caring that it made it much more difficult to see out as well…Gladwell concludes:

But that’s the puzzle of what has happened to the automobile world: feeling safe has become more important than actually being safe.

Similar to DePodesta, Gladwell goes looking for the statistics that really mean something–the ones that translate into lives saved, not better numbers in a crash test. He finds that building a fortress around yourself is only half the problem–the other half is avoiding things on the road in the first place. And many of the fortesses’ reinforcements are making that part harder:

Bringing five thousand pounds of rubber and steel to a sudden stop involves lots of lurching, screeching, and protesting. The first time, the TrailBlazer took 146.2 feet to come to a halt, the second time 151.6 feet, and the third time 153.4 feet. The Boxster can come to a complete stop from sixty m.p.h. in about 124 feet. That’s a difference of about two car lengths, and it isn’t hard to imagine any number of scenarios where two car lengths could mean the difference between life and death.

Barry Glassner reached similar conclusions in The Culture of Fear. He argues that the torrent of fearful images from far away, displayed on television and in the media, often serve only to distract us from dangers that are closer to home but that we have done nothing about. For instance, paranoia about crack cocaine helps us forget that alcohol abuse has caused more pain and suffering than any other drug. But looking at the numbers is appealing to the cortex, and most of us make decisions in a more “reptilian” manner…

I’ve often felt that one of my most valuable gifts was knowing exactly the limits of my own intelligence. When I am absolutely sure of something to the point of becoming emotional about it, that tells me I’m probably wrong. Emotions are wonderful–just keep them out of my business decisions.

The Innovator’s Dilemma: United States Edition

This month’s WIRED has an article that reminded me of a core argument in Clayton Christenson’s book, The Innovator’s Dilemma–that successful businesses are vulnerable to toppling by smaller competitors when their prior success blinds them to a changing market.

Philip Bobbit of UT Austin argues in Technology is Killing Democracy that the very technological innovations that have pushed America to the forefront are now used by its smaller, nimbler competitors (read: terrorists) to bring it down. In a way reminiscent of the Revolutionary War innovations that helped an upstart band of colonists defeat the established British army, America is now too big and influential to make the instantaneous moves demanded by its opponents–and enabled by its technology.

The US intelligence community is not well adapted to fight global terrorism because it was extremely well adapted to fight the Cold War. That was a triumph, and we were able to preserve our civil liberties. And now our success is killing us.

If only our system hadn’t worked so well before; maybe then we’d be more willing to change it now, something we need desperately to do.

The Importance of Being Incredible

Few things are simultaneously more impressive and disappointing to me than the phenomenon of a “power law”. The idea is that a networked and global economy shrinks the barriers of both control and obedience to nothing, so a powerful person can influence scores of people far beyond their physical reach, and others can follow, in obedience or idolization, the actions of the powerful from afar. It impresses me with its potential; disappoints with its elusiveness.

You see, once I get my act together and actually know what I’m talking about, I’d like to be the beneficiary of one of those power laws, like IDEO, Microsoft, or even Stanford. They innovated and industries formed around them, so at the beginning they were the biggest in this new field. By being biggest, they defined themselves as the leaders. As leaders, they grew even bigger. The web has its own power law beneficiaries, sometimes known as BNBs, like Kottke, Wil Wheaton, and Instapundit. By getting in early and being big in a linked economy, they just keep getting bigger.

For these folks, the power law is great. It funnels traffic and business to them at an exponentially-growing rate, despite their work quality improving at a much more linear speed. No one can get ten times better at their job in a week; but with good publicity, you could book ten times the clients.

So while their work is only moderately better than everyone else’s, they get the lion’s share of the reward. Doesn’t seem fair, does it? In a perfect economy, each person would get the precise amount of credit they deserved, giving young talented workers the same opportunity as the old average workers they easily match in ability. It’s not a perfect economy though, and even if it were, “intangible” qualities like personality, diversity, and friendship will always influence decisions.

There is another law, similar to the power law, that has recently been unearthed and is equally impressive and disappointing. This is the idea of the “irreplaceable person”. These people are so exceptional at what they do that no number of lesser talents can equal their singular ability. One example of this is displayed in the book Moneyball, by Michael Lewis. A book superficially about the Oakland As baseball team, it chronicles their ability to field a successful team on a tiny budget. One thing essential to this was figuring out exactly what actions contributed to winning baseball games — for instance, a sacrifice fly in the right situation may be better than a triple in another, or a strikeout of Murderer’s Row could offset giving up a home run earlier. Paul DePodesta of the As makes sense of all these statistics, and his insights on the process are invaluable.

DePodesta is probably himself one of those “irreplaceable people” — we’ll find out soon enough, as he has moved to the Los Angeles Dodgers to help them find diamonds in the rough.

There are people like this in every profession, but sports bring out the superstar talents most often. CNN recently profiled the people who push the limits of human ability, concluding that some people defy nature:

“It’s hard to explain how they can do that because if you take the numbers that we know from medical school, it just shouldn’t happen,” said Dr. Kenneth Kamler, author of Surviving the Extremes, a chronicle of his medical adventures in treacherous locales such as the Amazon and Mount Everest. “But it does happen. It happens in every kind of human activity. People exceed what you would calculate as their limits.”

More importantly for competition, people exceed what other people’s limits are. My cycling team, Webcor, recently went from just pack filler to the leaders of the field after signing Chris Horner, America’s top domestic cyclist. It turns out that while my teammates are not capable of winning big pro races themselves, they are entirely able to support a leader’s win. Horner is incredible, and everyone else is adequate. The Moneyball of cycling…

I know a number of incredible people, in all walks of life. While none of them can carry a team, they can certainly lead one and inspire others to support them. The lesson here is to spend whatever it takes, sacrifice quantity for quality, to get that one special person who brings you to the next level. Talent also acts like a power law, and if you accept that you are prepared to reap the benefits of the popularity that follows.