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.

The Web Needs an eHarmony for Travel

When Dev and I began exploring ideas after PlayCafe, I considered what I would personally want to use. One idea immediately came to mind: an eHarmony for travel.

I am seriously considering living abroad. I’ve been in the Valley for 12 years now and while I love it, I feel some wanderlust. My criteria for a new place are:

  • Within 5 minutes of a beach, preferably warm-water
  • English-speaking, since the only other language I know more than ten words in is dead
  • Relatively low cost of living
  • Safe and somewhat modern

The question is, what are all the cities in the world that match this? The answer is surprisingly hard to find.

Travel booking sites like Expedia and travel guides like LonelyPlanet assume you know your destination. Travel social networks like Tripwolf have people to ask, but that’s manual and hit-or-miss. You can Google terms and guess like I did – New Zealand and Australia fit – but that’s inefficient. It took my roommate to suggest Costa Rica.

What’s needed is a data-driven, travel-matching system that shows you which cities match your needs eHarmony does this for dating: tell it who you are and it shows you matches. Travel sites do the equivalent of asking you possible names of who you’d like to date. When a search engine asks you for more information than you have, it’s not doing its job.

Market
Travel is a $100 billion market and not going away even in a recession. A friend in the industry says about 70% of travel is for business and non-discretionary, and of the 30% consumer market, about 70% goes to top 20 cities. Assuming this search engine wouldn’t change top 20 behavior much, that means the long tail of consumer travel is about 9% of the total travel market, or $9 billion. That’s still pretty big.

Note this will be useful for both the vacation and permanent moving market. The latter is especially valuable since people spend tens of thousands moving and that decision must be vetted more.

Product
The site could collect however much information travelers want to give:

  • Environment: temperature, humidity, rainfall, landscape types
  • Culture: languages spoken, religions, ethnic diversity, openness to foreigners
  • Government: tax rates, type of system, economic and social freedoms
  • Safety: crime rates and types, natural disaster patterns
  • Things to do: popular sports, activities, night life, cuisine options, tourist spots
  • Price: cost of airfare, hotel, car, food, rent, activities, schooling, housing prices, health care

Some travelers will only need one or two search filters; some will have highly detailed needs. The site can offer wizards to guide choices,  wikis for user reviews and content, and forums to connect with other searchers.

Business model
Anything that gets people to travel is lucrative. A typical one-person, three-day trip costs about $1,000 in airfare, hotel, car, food, and activity packages. Longer or family trips are at least several thousand. Each booked item can earn a commission of $20-200+; lead-generation in travel is big business.

The site’s search and data APIs could create demand and convert uncertain buyers for several types of partners:

  • Travel booking sites that can increase purchases by showing travellers their best matches. An Expedia VP said their users visit 10-15 times before buying. Reduce that just a few visits and Expedia will be thrilled.
  • Transportation vendors such as airlines, hotels, cars, and cruise ships that want to spark demand.
  • Travel guide sites that want to suggest your best destinations to sell relevant guides and ads.
  • Even weather sites that want to monetize their information better. “It’s 72′ and sunny in Hawaii today. See if Hawaii is right for you!”

Partnerships are essential for this idea to gain scale. Travel is too crowded a market to compete without a lot of partners or a ton of funding. Fortunately this offering is unique and valuable enough to gain partner interest. When I interviewed a VP at Expedia on this, he was ecstatic at the prospect, offered access to Expedia data, and began selling me on why I needed to start this.

Competition
Because travel is big business, it’s very crowded. Travel keywords cost tens of dollars per click on AdWords. Hundreds of sites focus on SEO to get a sliver of Google juice. There isn’t that much innovation in travel but it’s still a ruthless market.

There isn’t much out there that is a direct competitor.

  • Uptake has some matching features and categories of vacations you can choose, but still requires you to name a destination city, defeating the whole purpose of matching.
  • City-data.com has a lot of detailed data on cities and a surprising 6 million monthly visits, but no matching system and an awful interface straight from the playbook of Craigslist.
  • MyIdealBeach is a nice matching pilot from Orbitz, but only shows beach destinations from a limited set. Says Orbitz’s press release:  “Our research has shown us travelers want a different, better way to search for complex trips than by dates and destinations.”

Has anyone seen anything else like this?

Execution
Starting this is a bit time-consuming but fairly straight-forward.

  • Find reliable sources for the above data. Start with a few main traits, then expand as users tell you their needs. The Weather Channel, Expedia, Fodor’s, the CIA factbook, and many other sites have this data and some already have APIs.
  • Build a basic search engine to query the data on keywords and pre-set options.

That would yield a usable beta. You could then add social networking and wikis, build APIs, integrate commission programs, develop partnerships, and watch the dollars fly in.

Why we didn’t do it
Dev and I were open to starting this, but had a few key concerns:

  • Most people don’t move or take vacations often. We’d be lucky to have visitors return every six months. High user churn means constantly having to find new ones or targeting the small sliver of frequent, high-end travelers.
  • Search engines are a pain to market. This one is actually a little word-of-mouth viral in that people often travel together and may share search results and itineraries. Still, gaining search share is a bitch when Google looms.
  • Barriers to entry are low. Any of the major travel sites could copy this in a few months if they woke up. If this site got traction, they might be more likely to buy us than build but that still sets a ceiling on potential acquisition values. The site would need to cultivate sticky content like reviews or a social network to create a barrier.

I do believe just moderately good execution could make this a $5-20M business. What do you think?

P.S. I’m openly releasing this idea into the wild. If you steal it and strike it rich, you owe me lunch.

What is the worst successful domain name?

I have been exploring names for my new venture and thought of a question: what is the worst domain name for a successful company?

Let’s define some traits of a bad domain:

-Difficult to spell
-Confusing or unrelated to its topic
-Contains hyphens or numbers
-Not a .com, making it difficult to remember
-Long (>10 letters)

Looking at the Quantcast top 100 sites, a few candidates emerge:

-#14: craigslist.org
-#50: merriam-webster.com
-#57: ezinearticles.com 
-#96: city-data.com

Craigslist took a while to establish its brand since it’s undescriptive and started as a .org. Merriam-Webster’s spelling and hyphen are problematic but it had an existing brand. City-data also has the hyphen, but at least it’s descriptive.

My choice for worst successful domain name is ezinearticles.com. It’s long and complex, seems like it might have a hyphen, and has a tacky leading “e”. Yet, it receives 16 million visits a month. Like an ugly guy who still manages to get the hot girl, that’s fairly impressive.

Honorable mention: #1 Google, for misspelling their name.

Why Y Combinator’s Terms Are Poor (But I Still Like Them)

I love Y Combinator. They are scrappy, innovative, entrepreneur-friendly, and created a model that VCs originally laughed at but are now copying. I love Paul Graham’s essays and I like him personally.

Y Combinator invests ~$12k in early stage teams in return for ~6% of the company, implying a typical valuation of about $200k.  Paul Graham says this is a good deal because Y Combinator can increase your value by at least 6%.

While I think that’s true, that’s not the right question. The right question is whether YC’s deal is better than alternatives.

A typical $50k seed-stage angel investment for a team with a promising beta and users, even in this crappy market, is at $1M-$3M pre-money valuation in an equity round and can be as high as $5-6M if you use convertible debt. PlayCafe originally raised $250,000 of convertible debt with a $6M cap. (We eventually switched to a complete equity round when First Round Capital invested.)

Let’s compare the numbers:

[table id=1 /]

A $50k angel investment is almost ten times the better financial deal (9.6 to be exact).

YC asserts that their advice and connections are worth this premium. I respectfully disagree. Advice and connections for even idea-stage entrepreneurs are easy to find with a little initiative, and if you don’t have that, you’ll fail as an entrepreneur. YC’s connections, Demo Day, and brand are indeed value-added, but it’s hard to argue they’re worth ten times an angel and free advice and connections.

YC supporters say their teams are little more than first-time entrepreneurs with ideas. That’s generally true, but YC’s hackers are able to build most prototypes in 3-6 months anyway. Is it worth that time working separately to get a 10x better deal? I think so.

One could say it may be a bad deal but the equity involved is relatively minor. I am open to this point. 6% equity can be quite a lot – it’s $120,000 of equity on a $2M pre-money valuation, or the equity component for 5-10 early hires – but I’d agree it’s not a massive amount. Spending $150 for a restaurant dinner that you can create for $30 may be a bad deal, even considering the value of ambiance, but it’s not a disaster. Small stakes excuse small errors.

How much equity should Y Combinator take? I’d say the fairest method is punting on this question and using a convertible note, which would determine YC’s stake at the Series A valuation. The problem for YC is that $12,000 into a typical Series A pre-money valuation of $3M translates into a paltry 0.4% equity.

One partial solution is warrants that give YC the right to invest more money at a pre-set Series A valuation, such as $200,000 at a valuation of no more than $4M, yielding about 5% equity. We did this with First Round Capital to compensate for the dilution that they would suffer in later rounds.

Thus, recognizing that YC deserves at least a few points of equity, my real suggestion is that Y Combinator should invest more, which given their success so far and a recent $2M infusion from Sequoia, should be more than feasible. If Y Combinator just set their valuations at one-half market value instead of one-tenth, that would suggest Y Combinator invest $60,000 instead of $12,000.

Graham believes that $12,000 is enough to keep founders alive for three months, but I would argue is sub-par for early marketing and development. A good domain name alone can cost $2,000-$20,000+ and is painful to change after release. Getting good early design can cost another $2-5k.

I should note that I may be biased because I am not YC’s market. I have been doing startups for a while and am fortunate to have a decent entrepreneurial network. YC provides a faster lane for first-time founders than I had.

I do think an important metric is how Y Combinator alumni view the terms afterward. The majority seem quite happy with it. Y Combinator is empowering hundreds of entrepreneurs and some very cool startups, and for that, I cheer them whole-heartedly.

Update: I see Sarah Lacy makes a similar argument. It’s interesting to see the backlash.

Update 2: Tweaked some of the #s to be current.

Update 3: Two things happened since I first wrote this post:

a. Y Combinator announced the Start Fund to give an additional $150,000 to every YC company at very good terms.

b. I decided to apply to Y Combinator. The extra funding does make the equity calculation more compelling, but the biggest reason is that several YC friends and the thoughtful replies I received convinced me that I was underestimating the value of YC’s network and advice. We will see what happens. 🙂

Start-up co-op mission statement

Mission
Create a productive and inspiring space for high-quality, early-stage internet entrepreneurs to share knowledge, resources, and support.

Rationale
Most internet startups share the same early tasks: refining a business plan, developing a scalable infrastructure, creating a marketing strategy, vetting vendors, recruiting employees, courting investors, and managing logistics like legal, accounting, and operations.

Thousands of startups have repeated these tasks, often without benefiting from the mistakes and lessons of others. While advisers and venture capitalists can help with high-level decisions, we have found that sharp entrepreneurs facing the same daily decisions are often most informed on the many low-level decisions that shape execution. We want to maximize this benefit of shared experience, resources, and support with smart and driven peers.

Mistakes to avoid
Despite the theoretical cost- and knowledge-sharing benefits of incubators, they have an unimpressive history in the valley and typically make one or more of the following mistakes:

  • Equity-for-space: the incubator host often takes an equity percentage, spurning some high-quality startups to whom shared space is not worth the trade-off.
  • Passionless founders: some incubators brainstorm ideas and spin their execution off to an external team, which usually have insufficient passion.
  • VC or corporate oversight: VCs and especially corporations can have insufficient operating experience to competently guide (or leave alone) budding startups. Further, the VC/corp’s immediate goals can cause conflicts
  • Lack of focus: some incubators accept startups across all industries, such as biotech and internet, reducing the relevance of sharing.
  • Too much distraction: some incubators throw several startups into a small space to the point of sharing rooms and tables. This distraction can impede execution and lead to more of a fraternity than a productive office.
  • Too little sharing: on the opposite extreme, many incubators have no process for knowledge-sharing; they are simply office parks of individual startups.
  • Charging for profit: some incubators charge premiums for the benefit of plug-and-play space. While this is a reasonable business, it does not maximize the quality of potential tenants.
  • No marketing: despite numerous incubators, few do consistent marketing and none are recognized as a leader that attracts top talent.
  • Low standards: landlords typically only vet startups for credit and personal fit, not entrepreneurial experience or business plan. Thus, most importantly, incubators fail because their overall proposition does not sufficiently attract the highest caliber entrepreneurs.

Features
To this end, we will build a start-up co-op with the following features:

  • No equity cost: tenants will only pay monthly rents (or possibly no rent if sponsors are secured).
  • No corporate or VC oversight: all involved parties will be entrepreneurs. Beyond being a good tenant, no startup’s decision will be beholden to a co-op authority.
  • Internet focus: we will focus exclusively on internet startups. This is where the co-op founders share the deepest expertise and the plurality of valley startups deal.
  • Limited distractions: each startup will have a semi-private space with barriers to retain focus. Guidelines will restrict interruptions between startups during work hours.
  • Cross-pollinating: to encourage brainstorming and build relationships, all tenants will be under one roof, share a comfortable leisure space, informally share meals, and be invited to weekly social events.
  • Not-for-profit: the co-op will aim to nurture its individual for-profit companies, not make money itself.
  • Quick up-time: spaces will be plug-and-play: furnished, wired, priced full-service, ready-to-go.
  • Bay area marketing: the co-op will hold monthly entrepreneurial events to raise awareness and attract top talent. These events may include mixers, industry speakers, and workshops on how to build a successful internet startup.
  • Highly-selective screening: we will set a high bar for admission. Ideal candidates will have entrepreneurial experience and join the co-op with a high-quality team and idea ready to develop. New tenants will need to be approved by all but one of the co-op committee’s members.

Our goal is to maximize the success of our entrepreneurs and become the premier Bay Area location for launching an internet company.

Sponsorship
If we succeed in recruiting top talent, the co-op may be an attractive sponsorship opportunity for service firms. Firms that offer venture capital, legal, web design and development, IT, accounting, banking, space brokering, and other services derive much of their deal flow through networking and relationships. These firms are incentivized to find high-quality, funded or likely-to-be-funded entrepreneurs, especially firms that take on deferred fees or equity stakes.

For access to our screened teams, invites to exclusive mixers, speaking event opportunities, and association with our unique brand, these firms may be willing to sponsor rent for the co-op. Many of these firms regularly spend $5-25k for one-off, low-ROI sponsorships at events and conferences. Investing a comparable amount in high-value, long-term relationships may be a wiser investment. Free rent in a corporate-quality space would differentiate us from other incubators and greatly enhance the co-op’s appeal to entrepreneurs, thus attracting further sponsor interest and creating a virtuous cycle.