Market risk is better than marketing risk

The traditional steps of startups are: find something people want, build it, tell them about it, then charge for it.

The internet has radically changed this. It is now easy enough to churn out experiments, and it’s cheap enough that you don’t need to charge much, if at all.

For a lot of web markets, the steps are now: build it, tell people about it, learn if they want it, then maybe charge for it. 

The hardest step of this is usually telling people about it. The downside of cheap and easy development is that others can do the same, cluttering the web with competitors for attention. It sounds counter-intuitive but it’s usually better to create a product with uncertain demand and killer marketing than a product with certain demand and costly marketing.

Succinctly, on the web, market risk is better than marketing risk. 

Market risk is uncertainty of whether people want your product:

-How many people want your product? 
-How much do they want it? 
-How much will they pay for it?
-How many times or how long?
-How fast is that demand growing?
-Is competition saturating demand? (This could be separated into competitive risk.) 

Marketing risk is uncertainty of whether people will learn about and try your product:

-Where can you reach your target users?
-How much will it cost to acquire a user?
-Is your product inherently viral or word-of-mouth viral? 
-Is it new and sexy or old and boring?
-Is it easy or hard to understand?

While an idea’s risks depend greatly on the details, they tend to fall today into a matrix:

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From worst to best types:

High market and marketing risk: these are the worst type of ideas. Not only are you unsure people want the product given alternatives, even if they do, it’s costly to get them using it. For instance, there are a ton of search engines, people are generally happy with their current one, and search isn’t viral. That’s why Microsoft is spending $100 million to market its new shiny toy. This type needs to be really useful and well-funded/well-marketed.

High marketing risk, low market risk: these are typically large and established markets where it’s clear people have a deep demand or like innovation, but they aren’t viral and have a lot of competitors. People will want porn, gambling, and dating until the end of time, but because these ideas monetize well, incumbents are well-funded and targeted marketing is expensive. If a marketplace gets initial users, more come and the network effect takes over, but getting initial users is often tough.

High market risk, low marketing risk: these are experimental ideas that are inherently viral or have strong word-of-mouth. When the Facebook platform launched, developers launched a flood of programs to figure out what would stick.  When Twitter launched, it was unclear people wanted it, but its virality took over once it was clear people did. If your idea is a unique twist of this type and can be created quickly, it’s worth trying.

Low marketing and market risk: this is the promised land. Niche services can often fill an ignored need and are cheaper to market due to fewer competitors and a focused audience. Copyrighted content is in high demand and goes viral, as it did on Youtube, but has high legal risk. 

If your idea has low market and marketing risk, it’s a good candidate to start today.

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Relaxing while working to the edge: three lessons from yoga

Ever since I can remember, I’ve had chronic muscle tension. It’s caused a good deal of pain, voice hoarseness, and unnecessary stress. One thing that has helped is yoga.

One of my favorite yoga teachers, Kevin at YogaSource, has taught me some lessons for outside the studio.

1. Relax while working to the edge: Kevin will guide us into a pose – my favorite is Warrior II – then say, “Where can you now relax? Where can you push the edge without panic?”

I have seen myself and other Valley folks believe that working hard means working panicked. That if you’re sleeping more than three hours a night, drinking less than four cups of coffee per day, and aren’t sweating bullets, you’re not working to your edge. It’s a poisonous belief.

We can sometimes increase short-term productivity with extreme stress, but we suffer mentally and physically. Investors and managers who aren’t satisfied unless you’re stressed are reaping your short-term gains while saddling you with long-term costs.

The mind and body function optimally when there is a reasonable amount of eustress – positive and achievable challenges – than distress. Kevin’s advice has reminded me to identify where my edges are and how to relax to expand them.

2. Stress is perceived challenges minus perceived resources: Kevin reminds us that yoga is super simple because it starts with breath, not Scorpion pose. Yoga sounds mystical and tortuous to novices who envision bending into pretzels. That perceived challenge plus poor flexibility can cause first-timers to quit.

Stress is fascinating because it stems from perception, not reality. Our minds model what might threaten us based on values, beliefs, biases, and memories. In the most popular class at Stanford, Robert Sapolsky’s Bio 150, he notes primates are the only species that literally makes themselves sick with imagined stress. You can see this among yogis who feel the inability to do a split is a mark of failure.

There are two ways to deal with this:

Reduce our perceived challenges. What percentage of our stressors are really dangerous to our welfare? Maybe 5%? Insults, losing things, sports defeats are examples of stressors that are really rounding errors on our welfare, but we perceive as worse because of unhealthy beliefs. “If X says I’m dumb, I’m no good”, “If I lose in soccer, I’m a loser.”

Cognitive behavioral therapy (CBT) helps people correct these faulty perceptions.  It is the gold standard of therapy with the most scientific evidence of effectiveness.

Increase our perceived resources. Some threats really are serious – cancer, losing a job – but can be managed with coping mechanisms. Cancer patients with strong peer support improve at higher rates. Laid-off workers with a strong network regain employment faster. People who meditate have lower cortisol levels.

Again, many of these solutions don’t increase tangible resources like food or money, but our perceived resources of safety and connectedness.

3. Contentment is not a competition. Most yoga studios have mirrors to help students improve form. Unfortunately this also causes students to compare themselves to others. You’d think men gawking at women in tight spandex is yoga’s most common voyeruism, but it’s really everyone envying the most advanced yogi in the room.

Kevin probably harps the most on this knowing his Silicon Valley audience. “We aren’t competing here, folks.” Some students close their eyes once in a pose to temper the urge to compare. Kevin will lay out levels of difficulty for each pose so that novices can find their own edge instead of adopt someone else’s. For example, here are three levels of backbend:

 

If you haven’t tried yoga, I highly recommend it. If you’re in the Bay Area, YogaSource has been deservedly voted the best studio in the Valley for ten years running. It’s a wonderful community.

Are you predisposed to startups? The Myers-Briggs traits of entrepreneurs

In a recent coffee with Steve Blank, the topic of entrepreneurial personality traits came up. We talked about the Myers-Briggs scale, which classifies our preferences and tendencies on a spectrum of four traits:

Extroversion (E) vs. Introversion (I): Where do you put your social attention and get your energy? Extroverts get it from socializing, introverts from being alone or in small groups. Introverts are not necessarily shy; they just enjoy solitude more. 

Intuition (N) vs. Sensation (S): Where do you put your mental attention and how do you process information? Intuits favor patterns, theory, and focusing on the future. Sensates favor details, sensations, and focusing on the past and present.

Thinking (T) vs. Feeling (F): How do you make decisions? Thinkers favor facts and principles, feelers favor personal concerns and harmony. 

Probing (P) vs. Judging (J): How do you organize your life? Probers are more spontaneous and flexible, judgers are more deliberate and structured.

Myers-Briggs doesn’t say people are all one side of the spectrum or the other. It posits we have natural set points for each trait, and while we can exert effort to temporarily be more one way or the other, at rest we tend to resort to our set point.  

Controversially, it does say people should strengthen these tendencies and find the best environmental fits rather than try moving to the center on all traits and being all things. For example, introverts shouldn’t try to gain energy from socializing, but strengthen their ability to reflect and enjoy solitude.

What set of traits do you think most favors entrepreneurialism? While any combination can succeed, I think there’s a clear combination most predisposed to startups: ENTPs. These folks are only ~3% of the population and classified as Inventors: 

“Inventors are keenly pragmatic, and often become expert at devising the most effective means to accomplish their ends. They are the most reluctant of all the types to do things in a particular manner just because that’s the way they have been done. As a result, they often bring fresh, new approaches to their work and play.

They are intensely curious and continuously probe for possibilities, especially when trying to solve complex problems. Inventors are filled with ideas, but value ideas only when they make possible actions and objects. Thus they see product design not as an end in itself, but as a means to an end, as a way of devising the prototype that works and that can be brought to market.

Inventors are confident in their pragmatism, counting on their ability to find effective ways and means when they need them, rather than making a detailed blueprint in advance. A rough idea is all they need to feel ready to proceed into action.”

Steve and I discussed the importance of both intuition and sensation for his concept of customer development. Steve says entrepreneurs should start with a vision (intuition), then collect data to validate their hypothesis and revamp the vision (sensation). Entrepreneurs without intuition will get lost in data and miss valuable patterns; entrepreneurs without sensation will chase ideas without supporting data and produce unwanted products. It’s a tough balance.

As a dyed-in-the-wool ENTP, I have felt the temptation to brainstorm in a dark room without customer data. I am good at seeing patterns of behavior and needs people may have, but I need to focus more on confirming these ideas by getting outside my head and the building, as Steve would say. 

It’s worth noting Myers-Briggs is itself the product of intuition. It is based on Carl Jung’s theories, which relied primarily on anecdote instead of controlled studies. Another prominent personality tool used to diagnose mental illness, the Minnesota Multiphasic Personality Inventory, is entirely empirical with no initial theory. The creators just posed a list of 600+ questions to people and observed what answers correlated to diagnosed mental illnesses. It is a sensate method.

Of course, any psychological theory is a simplification compared to the complexity of actual people. Yet, my (intuitive) observations are that ENTPs have an inherent advantage in entrepreneurship, and are at the very least, a lot of fun to be around. 🙂

P.S. I’m mainly focusing on the traits of founders. Early employees in other roles are probably optimized by other combinations, like architects (INTPs) and salespeople (ESTPs).

The trifecta of stupid phone trees

Phone trees are almost universally hated; one survey of Americans found they topped a list of the most frustrating technologies. 

One of my duties at PayPal was supporting our call center technology, so I became a bit familiar with phone trees (Interactive Voice Response, or IVR). Implemented well, they do cut costs and help a majority of callers get service faster given agent restraints. They are rarely implemented well.

I was reminded of this when I called a support center recently and went through three stupid processes in a row:

1. “Please note our options have changed.” How many times have you heard this at the start of a call? Who on earth is memorizing phone tree options? Even if a few OCD callers remember the options and press the wrong one, it’s not a big deal. They can hit * to go back or call again. Yet, every single caller has to waste a few seconds listening to this.

It seems like some manager decided years ago this would be a good idea and companies have been blindly following ever since. 

2. “Please enter your account number.” Quick: what’s your bank account number?  I’m not asking because I’m a fraudster. I ask because chances are you have no idea. You’d have to look at a check. But plenty of phone trees ask for authentication information you don’t readily know – account #s, company IDs  – when there’s no need to. Most companies have plenty of unique, easily remembered information about you: name, phone #, date of birth, address digits. Most can be entered quickly on a keypad. 

Instead, many companies self-centeredly ask for the IDs they’ve issued, which requires users to search for documentation and again increases frustration and call times.

3. “Please tell us everything we just asked you again.” The coup de grace is when you finally get a human and they ask you for all the same information again. At PayPal, after the IVR asked users to enter a phone #, the first thing a human agent would do is ask for it again. Why? Because our legal guy wanted to make sure the user talking to the agent was the same user who keyed in the info.

Now, I appreciate that PayPal has to take greater security measures than many, but we were wasting 1-2 minutes on every call asking for info (that we shouldn’t have been requiring in the first place) because of this corner case: a user calls PayPal, enters their phone #, and while on hold, a thief steals the phone and continues the call

Seriously, if product managers and lawyers could channel this kind of imagination into creating useful products, every company could be an Apple. (The kicker is that by smart design, PayPal service agents can change relatively little on an account even if a caller is authorized, so the extra verification was doubly unnecessary.)

The sad part is that all of these decisions damage both users and the company. There’s no exploitation for gain here, just dumb inefficiency. It’s no wonder a few startups are solely dedicated to navigating around phone trees. Unfortunately, like most human failures, this is a problem best solved from within.

Buyers drive markets: the Bag of Snot experiment

Who is more important in a business transaction: the buyer or the seller? It is tempting to believe they are equally important, but I will argue that buyers are a lot more important.

A thought experiment: go to a street corner and try to sell a bag of snot for $1,000. Would you have any takers?

From the same corner, offer $1,000 for a bag of snot. What would happen? You’d have people lining up for half a mile sneezing into bags.

This is a bit misleading because a bag of snot has a market value of almost zero, unless perhaps it’s celebrity snot. If you substituted “bag of snot” with “cure for cancer”, no credible research firm would accept a buyer’s offer of $1,000. The market value for a cancer cure would take a novelty-sized check to print.

The examples illustrate the source of power in business: demand. Buyers drive markets. 

A definition of a market by Merriam-Webster is the extend of demand for a product or service, not how much of it can be supplied. Sellers can influence demand, as the $100 billion TV ad market tries. They can even occasionally create demand, as much of the beauty industry tells you happiness is just a body wash, tummy tuck, or dick pill away. But this is very expensive. Sellers still primarily follow where demand leads them.

This is true even if there is scarcity or monopoly on a low-demand good. If you are the only person on the planet that can create a bag of snot, the demand for it is still limited to its novelty value, which is likely small (but probably above zero; items like Christ-shaped potato chips have a few buyers seeking entertainment, status, or some unique need).

Perhaps sellers had more power in earlier times when the means of production were limited. For our cavemen ancestors, food, water, and shelter were in high demand and low supply. If you could have created a paleolithic bed and breakfast, you’d have been the first billionaire. Today, demand is more varied but our means and productivity are even deeper, fostering multiple competitors in almost every market. Demand is scarcer and more valuable.

The implications of this are critical for entrepreneurs. The most important is to build something people want. The most common entrepreneurial mistake may be creating something just because it can be, not because there’s actual demand beyond the entrepreneur’s market of one. 

There’s also an important implication for creators of marketplaces, which have a chicken-and-egg problem of attracting buyers and sellers simultaneously and balancing their interests. Because buyers drive markets, they are generally the more key element in the long-run.

That doesn’t mean buyers are the best group to target first. One seller can serve many buyers. When Josh Kopelman started Half.com, he convinced dozens of book sellers to upload their inventory for potential leads. Those dozens let him launch Half.com with a million books, giving incoming buyers a lot to browse once they came.

Sellers are also easier to find: there’s literally an alphabetical list of sellers for most items, but unfortunately not the same for buyers. 

eBay reocgnizes the importance of buyers and has favored them with a host of policies, such as light penalties for non-paying bidders and only allowing sellers to leave positive feedback on buyers. It raises seller ire but without the cash of buyers, transaction fees wouldn’t be an issue because sales would be zero. 

It’s become a fashion to attack companies for selling something stupid, unhealthy, or over-priced, but no matter how true those complaints are, it’s worth remembering demand is the real source of business power.