Hermann Simon

Supported by Greenhaven Road Capital, finding value off the beaten path.

Part-of-the-reason See’s Candy is a great business for Warren Buffett is because of the pricing power. We’ve also noted how Restaurants sometimes do, and sometimes don’t have pricing power. A good brand, said Pat Dorsey, is worth maintaining only if it confers pricing power.

If the price is so important, why is it discussed so little? Hermann Simon recalled walking into the Harvard bookstore and “at least 100 were on advertising (and marketing) and how many were on pricing? One. My book, Confessions of a Pricing Man.”

Today we’ll look at Simon’s book. To get a sample there’s this 2017 talk.

Pricing power may be a clear idea, frequently emphasized, but the real-life implementation is anything but. Pricing is a mix of psychology, practice, and consumer preferences that changes with time. Simon addresses this early noting “…for many goods and services, prices have many dimensions.” These go by different names like premiums, fees, taxes, surcharges, subscriptions, etc.

Whatever it’s called, the only thing that matters is perceived value. How valuable a customer perceives the good or service determines how much pricing power business has.

Much of Simon’s work comes back to figuring out what-job a customer hires a business to complete. Before Adam Savage and Jamie Hyneman starred in Mythbusters, they were commercial, literally commercials, artists for companies like Coca-Cola.

In his book, Every Tool is a Hammer, Adam Savage writes about one particularly difficult job for Toys “R” Us. They’d contracted for a certain effect over a series of commercials but the effect wasn’t working. Savage wrote, “When it came time to set it up for filming, a key component exploded into three separate pieces. It was immediately obvious to Jamie and me that the rig was DOA.”

According to the letter of the contract, Jamie and Adam failed the job they were hired to do. But that’s not right at all. A company didn’t hire them for any particular effect so much as their expertise creating effects. With forty-plus people standing around the hired job became clear: effectively and efficiently create something cool.

Savage explained, “Jamie’s response to this incredible pressure was both surprising and inspiring. He didn’t show any emotion, neither perturbation nor anger, not even nonchalance. He just calmly looked a the producer and said: ‘To get this done by the end of the day I figure we have three options…’ Then he carefully laid out three brand-new solutions, complete with the pros and cons for each as they related to the original storyboard.”

One spectrum to think of jobs-to-be-done is the convenience to experience one. A business succeeds when they identify which their customer prefers, providing it, and then promoting it. Simon wrote, “…value alone does you little good unless you can communicate it successfully.”

A techno-case of what job is to compare the Apple glass keyboard with the BlackBerry chicklet keys. An interesting case of what job is the McDonald’s milkshake.

Once a business creates a solution they need to tell their potential customers about it. At a talk in New York City, Lee Child was asked about the press junket. Child said the book tour was necessary because he’s often flagged down by his ‘biggest fan’ and asked when the next book will be released. “Eighty percent of the marketing is just reminding people the book is out,” said Child.

Like any system with a variety of variables, the price fluctuates. There’s a stark difference in pricing power between high-dollar-Jonny hotels and working-Joe hotels even though both provide a bed, a roof, and a hot breakfast. One tool for pricing power is how it’s framed.

The German National Railway wanted more riders but they had a problem. When consumers compared the costs per-mile between driving a car and riding a train, the car won out. It was cheaper to buy gas than sit on your–butt.

However, that’s not the only cost of driving. There’s also insurance, wear-and-tear, and opportunity costs and depreciation. However those costs aren’t salient and when things aren’t salient people have a hard time coming up with those other factors.

Faced with this kind of thinking, The German National Railway had two options before them. They could make the automotive costs more salient, or they could make their costs less so. They chose the latter and created the BahnCard which accessed discounted tickets. Now consumers compared the cost of gas to the price of a discounted ticket(!) and neglected the sunk costs of each.

shotonaniphone
Discount brands should unsilence salience. 

The price depends on the context.

For Veblen goods, people want to pay more. Sometimes people pay more because they’re unsure of the value and slide into you get what you pay for thinking. Sometimes the price is a placebo, ask anyone who chooses Advil instead of Ibuprofen or Diet Coke instead of a store brand.

Instead of ferreting for a silver bullet solution, a business should make a lot of small bets.

Simon published his book in 2015 and included research covering the span of his career in the industry. He praised Gillette for innovating with new razor blades, maintaining pricing power, and succeeding at a high price.

And the effects of this moment in 2012 had yet to ripple to the far edges of the pond.

What changed was the job to be done. The internet reduced transaction costs. Why for example, does Apple have pricing power? Simon writes:

“A strong brand, a cool design, user-friendliness, and system integration. That combination resulted in much higher customer-perceived value, higher prices, higher value, and astronomical profits.”

And in 2010 the same could be said of Gillette. Then the perceived value shifted, as customers wanted more convenience.

One subset of pricing power is price differentiation, which Simon writes, is “high art.” If pricing relies on this weird mix of contexts then it makes sense that perceived value is:

  • different for the same person at different times
  • different for different people at the same time

This is part-of-the-reason for movie windows and why things bundle and unbundle. Chris Dixon wrote in 2012 “The benefits of bundled pricing are proportionate the buyers’ variance of preferences for the goods.” Simon writes, “The driver behind (successful different price differentiation)…is the fact that individuals at different times have different levels of willingness to pay.”

Like much business advice, this is easier said than done. Much of business is making the trains run on time, not studying topographic maps to consider and test new routes. However pricing tests can be quite valuable. Marc Andreessen wants businesses to charge more, in part to see how viable they really are.

Profits sustain businesses and the best way to earn more is to raise the perceived value and raise the prices.

Thanks for reading.

 

 

Zach Lowe and Kevin Arnovitz

Supported by Greenhaven Road Capital, finding value off the beaten path.

There are few basketball commenters more thoughtful than Zach Lowe and Kevin Arnovitz and they paired up for an episode of ‘most interesting’ NBA teams. We’ve looked at one of their conversations from 2017 that asked, ‘What if Jeff Bezos were a GM?

Making predictions is difficult when we extrapolate linearly. Lowe said, “With (Celtics’s) Brown and Tatum we do this thing where we expect linear development and it doesn’t happen and then we get down on them and one of those guys is going to pop this year.”

The same reason people get down on athletes for bad years is the same reason Jason Blum is in business. Blum says that he likes directors with good past movies despite their last. This is Blum’s version of Moneyball, he explained:

“My Moneyball approach is that this guy writes and directs Saw for $800,000. He does two movies for fifteen and twenty million dollars that aren’t good. He can’t get hired. He birthed Saw, a cultural phenom and he can’t get a job. My Moneyball approach is instead of looking at the sexy statistics to look at the work.”

People over-index on recent and optimistic data instead of the more accurate base rates. In his conversations with Lowe, Sam Hinkie explained this idea.

Metrics only matter if we measure the right stuff. Why, for example, Arnovitz wonders, do the Portland Trailblazers exceed their projected win total each year? Why is some data down on them this year? “What is it that these metrics are seeing about the Portland Trailblazers that I’m not seeing?… I still see a hyper-competent team that understands how to orchestrate a hundred possessions a game of offensive basketball.”

What the metrics might be missing is the culture.

The Patriots don’t measure sacks as much as they measure pocket size. Kawhi Leonard didn’t interview well before the draft, should that matter? Only the first four-thousand of your ten-thousand daily steps make big strides.

In much the same way we make predictions using the first (and easy) things that come to mind we tend to measure the first (and easy) things. Baseball’s Moneyball began with walks but teams don’t rely on those numbers anymore.

Numbers are ‘cut and dry’ but the world they describe is anything but.

Market mechanisms set prices, and evaporate good deals. Lowe said, “Someone asked me what I’d pay for DeMar DeRozan’s contract extension and that’s not a fair question for me because he will immediately reach a market value that I would never pay.”

Investors like to ‘fish’ by themselves and venture capitalists love to visit college campuses to talk to students. Fewer people means less bidding.

‘Peak Uber’ was in 2012, before they had to compete with Lyft. Moneyball was published in 2003 and now those same advantages don’t work.

Lowe and Arnovitz are thoughtful and these first three points demonstrate the holistic mindset required. It’s never just one thing. The Celtics had to make wise predictions, measure the right things, and avoid the market to trade down to draft Tatum.

Alpha erosion is the cousin to market mechanisms. Once a rival is familiar with your advantage they’ll work to reduce it. Lowe said, “Last year the sheer speed of how they (the Sacramento Kings) caught a lot of teams off-guard. Everybody knows that’s coming this year.”

Both Annie Duke and Nate Silver rode the poker wave before it got too competitive. Daryl Morey annually complains to Bill Simmons that their draft board looks more similar to the draft order. Venture capitalists pile into companies once they see something that works. It’s just the name of the game.

 

Thanks for reading.

Rogan and Jillette

Supported by Greenhaven Road Capital, finding value off the beaten path.

“The ability to define a term in such a way to be cynical or funny is a measure of your own skepticism. Unless you can do this, you don’t understand the weaknesses in what the person is telling you.” Jason Zweig

We are comedy fans, and not just for the laughs. People like Judd Apatow and Jenna Fischer have helpful, interesting, and insightful advice, lessons, and stories about living, working, and thinking better. Penn Jillette does too.

These notes are from Jillette’s August 2019 podcast with Joe Rogan and focus on one idea: The Entertainment / Information Blend.

There’s a tag in my notes called “media b.s.” and it represents the media as a third person view in a first person world. Sometimes the change in perspective helps, sometimes not, especially not when the entertainment/information blend is too much E and not enough I.

In his study on expert judgement, Phillip Tetlock noted, “the more accurate forecasters tend to bore people.” Investors see this with bulls, and bullshitters. Ben Carlson said a lot of media forecasting is about “taking a victory lap.”

There’s a place you’ve might have seen this. Jillette said:

“I want to say this very clearly. I thought he (Donald Trump on The Apprentice) was wonderful at his job. If you had someone who was actually a business person on that show, it would be the worst show in the world because Bill Gates would make proper decisions and there’d be no surprises. You want someone capricious and crazy with no filter.”

That’s a lot of E, not a lot of I. But it’s not just politics.

Richard Jefferson gave the backstory to USA basketball. Ed Catmull gave the backstory to ‘new Steve and old Steve.’ Paul Sonkin said that he reads the WSJ just to find the stupidest story. Sam Hinkie controlled everything but the story. Andre Agassi wrote that image is everything wasn’t a thing until it was.

Why the E stories and not the I stories? The E is so much better, it’s like candy. Penn and Rogan know this because they’ve trained in the comedic arts.

Joe Rogan has a history with conspiracies and he and Penn talk about the moon landing. Jillette wanted to convince Rogan that he was wrong, the landing did indeed happen, so he called in an expert. It would be on Penn’s radio show. He planned it to be a conversation between adults.

Penn reached out to Phil Plait but warned him, “have your ducks in a row because Joe’s really good…your problem is that he’s a comic and he’s better at talking than you.” 

Like a MMA fight we have our two corners with different skills. Rogan’s got the E, Plait the I.

Fights have decisions and ‘our team’ influences how we see a game. Teams are a mental shortcut. Joe was ‘team conspiracy’, his identity footprint was (partially) tied up in Plait being wrong.

When Plait spoke Rogan entertained, and because he was “better at talking”, Jillette refereed at the end and reminded listeners we did in fact go to the moon.

Changing our minds is difficult. Sweet-talk stories stick with us, become familiar to us, and nestle into our minds. Jillette commented on the hard work required to change your mind, “Usually when I’m against something it means I don’t understand it.”

The last large chunk of the podcast is about education and life-long learning. What really matters is being curious. For someone who’s curious the spectrum of entertainment to information and back again becomes clearer. Like the twist in The Usual Suspects or The Sixth Sense, once someone’s aware of the blend they see it everywhere.

Thanks for reading, however there’s caveat to all this. I write an email that exploits our love of stories. They’re the butter on our popcorn, the sweetness in our gum. In the right proportions stories help, so sign up.

Richard Shotton

Supported by Greenhaven Road Capital, finding value off the beaten path.

Richard Shotton remembers the time and place. He was in the back of a cab and in a sour mood. He’d finished a trainwreck client meeting. To mentally escape he opened a book and read the story of Kitty Gervase. Shotton entered the book, met the Bystander Effect and his whole life changed.

Bystander effect, he could use this. Shotton was spinning his wheels to increase blood donations. Incentives did matter, to a point. He couldn’t pay people more, or at all really. Goodwill helped too, but not enough. Maybe some of the things in this book might help.

Shotton recalled: “Why don’t we tweak the creative? Why don’t we stop saying blood stocks are low in England and start saying blood stocks are low in Birmingham, so please donate.” That wording change led to a 10-15% increase in local donations which added up to a rise in donations across England.

Bingo, behavioral science works. For the last fifteen years Shotton has studied behavioral economics, and wrote The Choice Factory. We’ll look at a handful some of his ideas.

Avoid HIPPOs. Some organizations have decision making obstacles known as HIPPOs, where the Highest Paid Person’s Opinions rule the day. Behavioral economics gets around that by testing, seeing what works, and iterating.

“Too much of marketing is still based around the highest-paid person in the room or the most eloquent person,” Shotton said, “Behavioral science is a significant step forward.” 

Richard Thaler agrees because, “there’s fantastic data, you can test anything. You also have very crisp predictions. We were able to test ideas and disprove them.”

Image result for in god we trust all others bring data

Besides Highest Paid, Shotton warns that the most eloquent can also dominate conversation. This was a problem Penn Jillette had when he wanted to push Joe Rogan away from his lunar landing leanings.

Jillette knew just what to do. He called up @BadAstronomer and said, “Come on my radio show and talk to Joe Rogan about the moon landing. I just want to warn you, have your ducks in a row because Joe’s really good…your problem is that he’s a comic and he’s better at talking than you.”

Rogan came on the show and crushed it. The conversation was so lopsided that Penn chipped in at the end, ‘just a reminder folks, we did land on the moon.’ That’s the power of eloquence.

Behavioral economics can bypass those conversations with evidence–but this can be tricky. Unlike physics psycholog is messy.

That’s okay, says Rory Sutherland. We don’t need peer-reviewed, double-blind, statistically-significant information. We just need a hunch to try.

When Shotton works with clients he says, “We pick the bias, the effect, the experiment that we think is most relevant for our particular client and apply that one.”  In behavioral economics the biases are the tools, “…it’s a collection of biases, and sometimes seemingly contradictory biases. But the brilliance is, whatever brief you have there will be a useful bias.”

How does someone choose? Make small bets. “There’s lot of experiments that run through the book and one of the eye opening moments was that research did not have to mean a $10,000 budget and 6 weeks of work. You could do a fast, frugal, and prudent approach over a day or two running real-life tests.” 

Small bets are how Zappos began. Small bets got 90 Day Fiancé on TV. Small bets is how Pixar makes movie changes.

Shotton tested his guesses on colleagues. David Kelley said to think of small bets like brushfires. Start them all over in weird places, and then double down on what catches. Some ideas for where to start the fires are with habits, incentives, and expectations.

Habits. “Changing behavior is very hard so you want to pinpoint these moments of flux.” 

Our post on actions after windfalls and baby steps hit on this idea orthogonally. It’s mostly in moments of transition that people change.

Principal Agents. Making small bets within organizations can be difficult without the right culture, which shapes the incentives. In their conversation, Rory Sutherland tells Shotton about the difference between brand owners and brand importers:

Culture style starts at the summit; Amazon’s culture is driven by Jeff Bezos. Netflix’s culture is driven by Reed Hastings. Seinfeld’s culture was driven by Larry David and Jerry Seinfeld.

Expectancy theory. “The enjoyment is partially determined by our expectations. If we think the product is great it’s more likely that it will be.”

Framing matters a lot. When Annie Duke – a professional poker player – taught non-professionals how to play they didn’t like it. It was too much folding and watching and not enough flopping and topping she told Barry Ritholtz. “What I found was that people don’t like winning in a mechanical way.”

They expected one thing and got another. Duke reframed the situation. Instead of playing the mechanical way all the time, she had them choose to play that way. In teaching her players Duke reframed their expectations. In teaching Duke reframed their expectations from bravado to autonomy.

Books. Shotton is an avid reader and suggests some of his favorites.

Decoded. “A big fan, another book about behavioral science.”

Rory Sutherland. “I’m a big fan of whatever Rory Sutherland does…he’s frankly a genius. He’ll take the same biases and insights that we all read about but his mind is so fertile he’ll leap in completely different directions.”

Everybody Lies. “Written by an ex-Google data scientist and a brilliant example about how if you ask people behave the way they do they will give you misleading answers.”

Thanks for reading. If you want more book suggestions I send out the ones I enjoyed once a month.

Bill Gurley

Supported by Greenhaven Road Capital, finding value off the beaten path.

The podcast with Bill Gurley and Patrick O’Shaughnessy about direct listings and initial public offerings was financially, technologically and psychologically interesting.

I don’t know if Gurley’s emphasis is appropriate, but it’s clear what he needs to do, reframe the situation.

Gurley and O’Shaughnessy expect that as people get reps, direct listings will appear more normal. That’s the key for Gurley’s focus. He doesn’t need to “think slow” but rather “think fast.” Kahneman’s book by the same name includes the idea that what-you-see-is-all-there-is. Humans evolved to think like this because it works. It’s effortful to compare any two things and it’s doubly so for something brand new.

giphy

“Thinking fast” we use frames to form reactions. Direct listings need better framing. Here are five ideas about how.

Time as framing. Gurley is upset because $171 billion dollars has been lost to underpricing IPOs. “The core process of how we pull off an IPO was designed four decades ago.” Gurley is pushing against we’ve always done it that way logic.

Let’s not immediately dismiss we’ve always done it that way because traditionally it works, it’s why we’ve always done it that way. To dismiss an idea we must head to the woods and ask about this Chesterton Fence. For IPOs we should ask, ‘What’s different?’

As Michael Munger explains, the answer is transaction costs. Munger even uses similar language to Gurley to describe the sharing economy, “What’s being sold is access to excess capacity.”

Solution: Proponents of a direct listing should compare it to other technologies that reduce transaction costs. This should be easy enough, falling transaction costs are everywhere.

Reputation as framing.

Gurley compares IPOs to big southern weddings. That sounds about right.

“If you’re going to be anxious (because you’re the under skilled player) you’re very likely to fall back on tradition because it’s the safest bet. It’s like the old saying, ‘You don’t get fired for buying IBM.'”

Reputation is like an account. Do different things and the balance goes down. Succeed and the balance creeps up. Fail and the balance plummets.

In a foreword for a book about Warren Buffett, Howard Marks lists all the things that makes Warren a great investor. He’s smart, he’s unemotional, he’s focused, etc.

However, there’s something Buffett has that’s much rarer. Marks told Tim Ferriss, “he’s not afraid of getting fired. He doesn’t have to worry about the interim consequences of error. Most people do.”

Solution: Convince entrepreneurs that a direct listing is the last stage on their pioneering journey. They’ve already succeeded by being different and this is the final step.

Brand as framing.

Patrick O’Shaughnessy is a good podcast host because he lets the other person talk. Undoubtedly while listening to Gurley, Rory Sutherland’s ideas came to mind. Patrick doesn’t bring it up, so I will.

Sutherland was the first to point out that people don’t buy brands because they’re good. People buy brands because they aren’t bad.

Gurley says that the best brands in banking (Goldman, Morgan) are the worst pricers of IPOs–leaving the most money on the table. That fits Sutherland’s theory. Brands, Rory writes, are “insurance against disappointment.”

Limiting downside rather than optimizing upside often make sense. When he travels to London to catch a flight, Rory traverses the backroads rather than the highway. The trips are longer on average but avoid outlier incidents. A highway accident, though rare, will create a delay where he’ll miss a flight.

Solution: Every weakness is also a strength and every strength a weakness. Brands which are classic, leaders, and large are also old, rent-seeking, and immobile.

Money as framing.

The problem with the IPO is too much money. O’Shaughnessy said, “Everyone is showered with money too, so they feel like they’re doing pretty well.”

On an absolute basis, Gurley is right but on a relative basis, he’s fighting human psychology.

Behavioral economists make careers noting that humans don’t calculate expected values. Would Zoom’s Eric Yuan introduce any amount of risk (DL vs IPO) to go from being worth 3 billion dollars to 3.2?

Loss aversion and heuristical thinking isn’t the only issue here. There’s also the diminishing value of money. Remember this idea each sports off-season as athletes prioritize teammates, situations, and locations over more money.

How can someone ‘give up’ millions of dollars? They’ve already got millions. As the billionaire who wasn’t Chuck Feeney noted, “You can only wear one pair of shoes.”

Solution: Reframe money as time or per person. Gurley praises the work of Daniel Elk for the Spotify listing.

Media as framing.

If an IPO is underpriced and ‘pops’ then, “the press reinforces this and thinks the pop is good.” It certainly seems good

Ben Hunt warns of the “constant hot take culture” and references The Island of Blue and Green-eyed people. What matters for the islanders, the hot takes, and Hunt’s sheep is what everyone thinks everyone thinks. Who helps tell the story? The media.

Sometimes though, the media is wrong. This error is most glaring when the delta between media-knowledge and insider-knowledge is largest. The management of this framing is the reason Sam Hinkie lost his job but Jeff Luhnow kept his.

When the media frames things one way (Hinkie’s an idiot, IPO pops are good) other people adopt that as their frame too and it’s hard to change.

Solution: Direct Listings need a better story around them. Seth Godin said that global warming was a terrible story and that “atmosphere cancer” told a more accurate one.

Framing matters. I’d wager we’ll hear a lot more about this from Gurley in the future. He’s trying to reframe how people see things. Now you’ve been reframed too. Thanks for reading.

Simmons and Gladwell

Supported by Greenhaven Road Capital, finding value off the beaten path.

Are Bill Simmons and Malcolm Gladwell good decision makers? Yes, yes they are. In this episode we’ll explore how they make good decisons, the narrative fallacies that trip us all up, and why understanding does not imply aggreement.

Listen: iTunes, Overcast, or Soundcloud

The biggest issue is that the world has always been what David Epstein calls Wicked. This is fine except people operate as if it’s Kind. It’s a fisticuffs face-off between the complexity of the world and the simple humans.

The episode touches on four points about how we can make better decisions.

  1. We can trust computers, when relevant, like in the Deep Patient Study.
  2. We can remind ourselves and others that retweets are not endorsements and understanding is not agreement.
  3. We can built our toolboxes to have more problem solving tools.
  4. We can choose the right (and inexpensive) metrics like Rory Sutherland, Bill Belichick, and Billy Beane.

Thanks for listening.

Kara Swisher

Supported by Greenhaven Road Capital, finding value off the beaten path.

Kara Swisher joined Barry Ritholtz on the Masters in Business podcast. What a two-hour trip. We’ll touch on just a few things.

Structure. In physical spaces there’s no ‘good’ or ‘bad’ but low-friction and high friction activities.

An example is automotive infrastructure. Roads, intersections, and bridges are built for the scale of cars. Go see for yourself. Or read about it. Or search for it. Physical low/high friction is easy to see but this exists everywhere.

Twitter, Ritholtz and Swisher note is good for a certain kind of communication by a certain kind of person. They focus on politicians but that again is just an easy to see case.

An unnoticed but relevant instance is organizational structure. Swisher co-founded startups with angel investments but also operated in a skunk works arrangement within The Wall Street Journal. Now, ‘skunk works’ sounds cool and the original’s conent looks cool but it may not be the best model.

It’s not about imitating models from Google, Lockheed, Goldman, Hollywood, or sports. It’s about implementing models with the best friction coefficients for your organization.

We wrote about how the skunk works model can work. Swisher noted the startup and the skunk works model were “good and bad in different ways.” It all depends on what actions the structure makes low friction and which it makes high friction.

In a previous MIB episode, Robert Cialdini told Ritholtz how a restaurant increased their friction to decrease their no-shows.

“A hostess changed from, ‘Please call if you have to change your reservation,’ to ‘Will you please call if you have to change your reservation,’ and she waited for people to say ‘Yes I will.’
It reduced no-shows by 64%.” 

Robert Cialdini

Physical or organizational structures aren’t good or bad, they just make certain actions easier or not. One specific example is a decentralized command. As Ray Kroc said, the person closest to the problem is the one best suited to solve it. Yes!

And no. Teams need coaches, units need commanders, and newspapers need owners. Swisher said that Katharine Graham (and her family) and Jeff Bezos have done a good job owning the Washington Post because “they were not twitchy owners.”

It takes a balance of intervention and trust that can be hard to find. David Chang said one of his restaurant launches bombed because “I fucked up by not editing enough and not finding that balance. I handed it off too completely to them. I didn’t put them in a place to succeed.”

Good decentralized command requires the right people. Sometimes that means great hiring, sometimes it means great training, sometimes it means both. It depends.

When Swisher and Ritholtz both (independently) thought podcasts were a good idea they were both (independently) told podcasts were not a good idea. One way to forcast these kinds of will-they-won’t-they-work situations is to ask if a version of it is already happening.

Tony Hsieh was doubtful about e-commerce for shoes. “To me it sounded like the poster child of bad internet ideas.” But he went along (Hsieh was bored, he didn’t even fully vest after his last startup was acquired) and asked the person pitching him how this idea could work.

‘It already works!’

‘Huh?’ Hsieh thought. He was in the internet and no one was buying shoes. ‘It’s not on the internet,’ the person pitching said. It’s in catalogues. People order shoes without trying them on all the time.

Swisher was told podcasts wouldn’t work because ‘millennials like snackables’ and two hours is too long. Well, no. As Zappos was to catalog shoes, podcasts are to talk radio. Barry added, “The 92nd Street Y has been doing that (live interview and talk shows) for decades.”

Kara has done a lot of podcasts with a lot of technology leaders. She said that Marc Andreessen, “is actually one of the people who will go back and forth.” Andreessen likes to argue well. John Hempton too.

Swisher also got a chance to interview Steve Jobs and said, “I really enjoyed interviewing him. What an interesting and complex person…he was just a complicated and interesting person. A lot of people try to cartoonize a person, ‘He was mean to people!’ Yeah, but lots of people are mean.”

Ed Catmull said almost the same thing about Jobs. Ken Kocienda too. Why does the ‘mercurial’ (and it’s always ‘mercurial’) image of Jobs remain? It’s a tasty story. Our POV 40 IQ emails regularly remind us of the work required to break what Tyler Cowen warns about:

“You have to worry about many more things that might be true and it’s a huge burden and people don’t like it. They like to push that stuff away, keep things neat and easy to deal with, what I call the philosophy of once-and-for-all-ism.”

Swisher is great because she argues well, because she avoids once-and-for-all-ism, and because she recognizes the structure we live within. Thanks for reading.

Scott Kupor

Supported by Greenhaven Road Capital, finding value off the beaten path.

Author of the 2019 book, Secrets of Sand Hill Road, Scott Kupor spoke at Berkeley about being a venture capitalist, the two most important things for a VC investment, and the role of luck.

Education. Kupor wanted to be a lawyer until he worked as one. His first summer internship showed that practicing was quite different from studying. He’d seen this before. As an undergraduate he’d transferred from Wharton to Stanford and “The best thing was that at Stanford I was kind of forced to, because of the general curriculum, to do some stuff in other areas. I took a religious studies class and I took some philosophy classes for the first time.”

Kupor, like a lot of young people, overindexed on certain parts of education.

  • Learning is good, to a point, and then doing is better.
  • Focus is good, to a point, and then broadening is better.

Tyler Willis saw this too, noting that he became a wiser person when, “I became a fairly voracious reader. I read a lot of nonfiction to understand different people’s opinions about different things. I read history, biographies, a lot of varied topics.”

Kupor agrees, “If I could do it (school) all over again, the extra hour I’d might have spent at the library invested in relationship development.” School is great for the things you’ll know, the people you’ll meet, and the access you’ll have.

Luck. Kupor was lucky. “The only reason I got introduced to (Marc Andreessen and Ben Horowitz) is because I knew somebody who took a job who said, ‘Hey these are interesting folks, you ought to meet them.'”

How to get an investment from a16z. We’ve covered founders Marc Andreessen and Ben Horowitz quite a bit on the blog but Kupor gives a nice overview. First, entrepreneurs should consider if they want an investment. Money is fungible so what else does a company bring? “There’s a lot of places you can get money (so) at some point you wanna be able to say, ‘Look, I’ve seen the company building process through my own eyes and how I can be valuable to you as a new CEO.'” Contrary to Kupor, David Heinemeier Hansson provides a different perspetive on the value of venture.

If a16z is the right place, entrepreneurs should prepare three things.

  1. The idea maze. Andreessen told Barry Ritholtz that “It’s this incredibly deep and elaborate process of thinking,” and the best entrepreneurs get frustrated with VC’s questions because they’ve already figured that part out.
  2. The market size. “A cardinal mistake is investing in something that turns out to be a good business in a small market.” Another mistake is when “you intuit from your own experiences.” Kupor and co. missed investing in AirBnb’s ‘A’ round because they thought the market was small, college kids on couches.
  3. Customer acquisition costs. “The major conundrum with consumer companies today,” said Kupor. Though fellow a16zer Alex Rampell has spoken at lengths about approaches to this issue.

Intellectual humility. “Your job is to know what’s happening day-to-day in your business…but I think it’s perfectly reasonable to say, ‘I’m not sure if now is the right time to bring on a head of sales or upgrade from my buddy running engineering to someone with more skill in that area.'”

In marketing there’s the expression, half of my marketing is wasteful but I don’t know which half. In decision making there should be an acceptance of the corollary, half of what I know is wrong but I don’t know which half.

No one expects you to know everything, Kupor explains, but you should know the difference between the things you should and don’t.

Thanks for reading.

Eric Ries

Supported by Greenhaven Road Capital, finding value off the beaten path.

Eric Ries joined Ted Seides to talk about his book (The Lean Startup) and his startup (Long-Term Stock Exchange).

At Ries’s first startup the business plan was a “beautiful artifact,” created with stealth operations. It was going to work, for sure. “If the customers had read the business plan we’d all be rich.” Only it didn’t work, at all. They failed.

Picture a rainbow, at some point one color ends and another begins. Similarly in businesses there must be a point when private work becomes public sharing. Tasty quickly became public. Ashley McCollum said, “The focus was not on food. The focus was on a format that you can watch in your social feeds, post literate, and audio independent.”

The only way to see if that format worked was by creating, sharing, and tracking.

Ries’s “beautiful artifact” made modern and for food TV would be another bubbly, kind, homely, southern, or intelligent chef showing off in a polished kitchen, using matching utensils, and baking in a magic oven.

There’s also private experiments. The Chocolate Wars were full of families fiddling with recipes, trying different milk sources, and ‘borrowing’ tips from their neighbors, friends, and enemies.

Public isn’t necessarily better than private and vice versa. What’s important is experimentation of some kind.

Ries did this with his book, much like a comedian. “During the process of writing the book, I didn’t know how it was going to turn out and I felt a real sense of obligation to make the book as rigorous as I possibly could.” Reis ran workshops, conferred at conferences and worked with all kinds of startups in all sorts of places.

For Steve Martin, this travel was on “the lonely road.” It was there that Martin went from writer/performer/musician/comedian to just stand-up comedian. Jennifer Armstrong wrote about Jerry Seinfeld, “He used his attendance at Manhattan comedy clubs as a kind of independent study. He analyzed comic’s approach to their material and even wrote a forty-page paper on the subject.” Andy Grove calls it “the winds of the real world.”

Now Ries is trying to build a new kind of stock market, the LTSE. One part of it is about nipping executive compensation. One client wondered to Ries why a competitor splurged on buybacks.

“I don’t even know the name of the company, the details of the industry, or anything really but I can tell you everything about their executive compensation system. Why are they doing buybacks? We all know it.” 

The reason? The incentives!

In one of our most popular posts, we looked at how Howard Marks organizes his life Matryoshka-like.

It’s great that Ries is doing what he’s doing, attempting something new, but as the Marks’ post notes, the odds are not in his favor.

The compensation quagmire spawned in 1993 when president Clinton wanted to stem the early 90’s recession (FRED). Clinton gave a speech and congress passed a law which capped CEO-pay-as-as-deduction at one-million dollars. In a world of cause -> single-effect that’s a brilliant move.

However, that’s not real-life, and CEO pay exploded.

How one incentive structure fits in another matters a lot. It’s why hiring is so important. If businesses can find people whose incentive structure already matches theirs then much of the on-boarding is already done. A good culture, wrote Rory Sutherland, is a place with “an atmosphere in which people can ask apparently fatuous questions without fear of shame.” A good culture, said John Hempton, is where people are challenged on accuracy.

Though the road is steep, Alex Ries and his team have a chance to make the climb. Their biggest advantage stems from this incentive weakness. Their competition can’t compete with them.

Ries said “We support dual listings,” & “The reason incumbent exchanges want listings so badly is not for the listing fees but for the extra trades it generates on their platform and we don’t make our money from trading so we don’t need to fight them for that subsidy.”

In another financial services post we noted the advice from Alex Rampell who pointed out that Max Levchin at Affirm is approaching a problem in much the same way. Levchin noted that people don’t need credit so much as they need the thing they want. So Affirm loans them the money. In an interview he’s asked why other banks can’t enter his market.

“Those guys cannot enter our business because they’re addicted to the income. If you make half your money on fees and the other half on these nasty deferred interest programs.”

Ries has learned some helpful lessons about iteration, experimentation, and compensation. Good luck to him for trying something new. Thanks for reading. Want more stories. They’re all here.

Bernard Roth

Supported by Greenhaven Road Capital, finding value off the beaten path.

‘Bernie’ Roth trained as a mechanical engineer. He would build things. Then an opportunity to visit California came up. He was a New Yorker but his wife wanted to take the trip so they went, and he never left. Decades later David Kelley got cancer and Roth was asked to be the dean at Stanford’s d.school, and again he never left.

Today we’ll look at Roth’s book, The Achievement Habit and some quotes from a talk he gave at Stanford. Included are lessons from his time on both coasts, work in multiple university departments, and consulting with a variety of firms.

Roth aims to apply “design thinking” to a person’s life. “Design thinking came about because it uses methods used by designers to design stuff, but now it applies it to almost everything.” It’s a powerful idea because part of what ‘design’ allows is for ‘designers’ and the first question to ask is, What’s the problem?

Designers know, Roth writes, that next-to-nothing has inherent meaning. Almost all meaning is assigned. Is cereal a breakfast food? Not in my house. That’s an assigned meaning. People, Roth proposes, get into trouble when they assign “functional fixedness,” like thinking cereal is only for breakfast. This idea comes through in our language, to a person with a hammer every problem is a nail.

Hammers are only good for nailing is functional fixedness.

But not so fast Adam Savage writes that every tool is a hammer. Designers, like Savage and Roth, wrote their books to inspire people to summize and solve situations in new ways.

Let’s say you’ve got a chain of pizza restaurants. It’s a large company and sales have stagnated. Surveys say that customers don’t like the taste. There’s also an urban legend that the pizza is so cheap because it’s cardboard, not dough, for crust.

This was Patrick Doyle’s situation at Domino’s. It wasn’t enough for Domino’s to change the taste (though they did), Doyle had to change how people saw Domino’s.

In his talk, Roth tells a related story where he spent five minutes looking for the gas-tank-cover-release on a rental car. After his frustrated search, a woman pulled up to the next pump over and he asked her where the lever was. ‘There is none’ she said. The cover opened with a touch. Roth attempted to solve the wrong problem (Where’s the handle?). Had Doyle only focused on taste he would have isolated the wrong problem too.

The first part of good design is finding the right problem. Domino’s situation was like a rummy hand – keep the best and discard the worst.

Roth had a student whose goal was to get a better night’s sleep. So his project for the class was to fix his bed. At their meeting the student admitted that he was behind. Roth gave advice. The student got further behind. Roth wished him luck. When the end of the semester arrived the student presented his solution: a new mattress. Roth gave him an A.

“Design thinking emphasizes that you always make sure you’re working on the real problem.”

Bernie Roth

The real problem is sometimes hard to find because we’re liars. There’s always “a goooood reason” for doing anything and people lie to paint themselves in the nicest light possible around those reasons. “If you don’t want to do something,” Roth writes, “the world will give you a reason.”

This is part-of-the-reason Roth started his class and wrote his book, The Achievement Habit. According to Roth, action and achievements are muscles. “I’m advocating for living your life as reason free as you possible can.” Don’t find a good reason, act instead.

Trying is not doing. That’s okay, but don’t confuse the two. A friend told Roth, “Bernie, every time time I’ve hit a block that’s what got me to do something great and creative.” Constraints aren’t blocks so much as gaps. Constraints help. Film school restricts students. Conan O’Brien said, “The funniest thing in the world is to give someone restraint.” Sam Hinkie said, “Within heavy constraints, thinking different is one of the few ways you can do anything differently.”

It’s good when resources are limited because that means old problems are solved in new ways.

Adopting this approach to problem solving takes work. Finding the ‘Why’ to the ‘Why’ means asking more questions. Getting past our ‘goooood reasons’ means being honest. Doing despite obstacles takes effort, iteration, and ingenuity. Those are all things Roth might say is good design.

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