Author: MIKE

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

When my wife’s first fix arrived the value was obvious. Stitch Fix founder, Katrina Lake’s How I Built This podcast (and other interviews) are another template for startups. It’s a similar path to Instagram & theSkimm, only Lake has taken one further step, straddling the online and meatspace worlds. Let’s see what she did.

Note, Tren Griffin had a typically erudite post on Stitch Fix.

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Lake got the idea for Stitch Fix when she was a restaurant and retail consultant. Large retailers wanted ideas from smart young people (like Lake) but they acted on few if any. One of Lake’s ideas was to make a store half museum, half warehouse. Customers could scan items from one side and they would be collected and delivered to a changing room from the other.

“I had all these ideas on what these businesses could do better,” Lake said. Yet, “People looked at me like I had seven heads.”

This is good! Andy Rachleff said Wealthfront was a radical idea. Scott Norton advocated zigging when others are zagging. Peter Thiel asks about what do people not agree with you on. Eddie Izzard puts it this way: “(history + change in society) * change in technology = the future”.

Lake’s job was to suggest new glasses to men who wanted to stay blind. “It is difficult to get a man to understand something when his salary depends on his not understanding it,”  wrote Upton Sinclair.

This isn’t to say that the people Lake advised were obtuse or ignorant or illogical. They were locally logical. Their incentives were tilted toward the status quo. No one gets fired for buying IBM and no one gets fired for saying no to a museum/warehouse mutt.

Lake left advising and began capitalizing, but it was “A weird time (2007-2009) to be in venture.” But it was also instructive.

“The most important learning was that all these people were just like super unqualified normal people – just like I was…I didn’t need to be in the peanut gallery lobbying my ideas at other people, I could just do it myself.”

She watched for a company to join. No good fit appeared. Two years later she left for business school.

At this point in her podcast with Guy Raz I was cheering for her to say I knew B-School would be a waste of my time and I could learn everything I needed as I went. Lake did not say this. It’s helpful she didn’t. We advocate for the DIY MBA and collect (minor degree curriculums). But Lake said:

“I was never going to quit my job and have this gap in my resume. I can take these two years and be a mediocre student. My end goal is to have a company funded, paying myself a salary and paying back my students loans on the day I graduate then the risk profile of entrepreneurship is tenable to me.”

When asked if her MBA was useful and worth it, Lake told Bloomberg:

“It was absolutely the right thing for me. I had no history of being an entrepreneur. I loved the classes. I learned to be able to present thoughts quickly, which helped with pitching, leadership, running meetings. I was very deliberate about what I was going to get out of it.”

It’s a great approach. Who could argue when your plan B is an MBA from Harvard.

Shipping up to Boston (from California), Lake considered the hunting and fishing industries.

“I had collected a bunch of thesis in my head. If you look at industries, the hunting and fishing industry is massive, people are super compassionate about it, it’s fragmented but also concentrated. There are elements of fashion, whether it’s technology or actual fashion, things go out of style.”

But it wasn’t a good fit. Lake kept thinking and tinkering. She paid attention. Elle wrote that Lake was part of a Community Supported Agriculture (CSA) group that delivered fresh produce to her Cambridge apartment. Hmm, a regular delivery, that’s interesting.

As Griffin wrote, Lake is more missionary than mercenary. Great brands are built on belief, Phil Knight at Nike and Yvon Chouinard at Patagonia are two examples.

In her time consulting, Lake noticed that small dropoffs cascaded into large effects. If a business’s revenue decreased by ten percent, then those marginal dollars had to shoulder more fixed cost.  “Blockbuster,” Lake said, “is kind of the best example of this.” Netflix didn’t have to gain 50% market share, they only had to gain 15. With that loss, Blockbuster would flounder and the 85% remaining would have to find an alternative. Like Netflix.

“There was also a mass depersonalization in a retail store. You don’t need iPhone chargers or diaper purchases to be personal, but this ignored the category of apparel that’s deeply personal.” Why couldn’t a business offer a personal service Lake wondered.

🔑 “The idea was, how can you deliver a personal experience in apparel and use data and technology to make it scalable and make it better.”

In Boston, Lake started to experiment and talk to her customer. These two small acts; test and question, are crucial. Susan Tynan said:

“At Living Social, I sold a lot of framing deals so I knew customers were looking for a deal in this category…I started talking to everybody about it. Imagine me at a cocktail party or a friend’s baseball game talking to people about it and I kept hearing the same stories about six-hundred dollars worth of framing and I couldn’t believe it.”

At IDEO they talk to customers a lot. CEO Tim Brown said that people tour their offices and ask where is everyone? Good designers said Brown, go out and talk to the users. When Fashionista asked Lake for advice she said:

“I would really focus on product/market fit and really understanding your client. I think this is a world where it’s very hard to get people’s attention and it’s … the customer is the most honest. You can come up with all the ideas that you want and then customers ultimately vote with their dollars. So I think the quickest way that you can get feedback from your clients and listen to your clients, and evolve to be able to have the right products for them: All of that is the right place to start.”

What did Lake find out? Surveys worked. Ten items were too many. Brands weren’t sticky. How did she do this? A credit card or two and free online survey tools. Specifically:

“I was buying inventory from boutique stores in Boston and would keep track of their return policy. Then when someone would fill out their profile I would put together a box of things that were relevant based on what they shared in their profile. If they liked it they would write me a check. If I didn’t sell it I would return it.”

“I wasn’t making any money, I just wanted to see if this would work.”

Businesses have to have customers, this is the iron law of the market. Don’t try to sell seven-fingered gloves said Tony Hsieh. Lake told Bloomberg:

“That ‘working mom’ profile is our bread and butter. Someone who is time-starved feels like she is super-busy and doesn’t have time to shop but is excited to have fresh clothes. The time-starved mom is, on average, 39. We also have the working gal profile, she’s more like 30. We have a lot of teachers.”

First, there were ten, then twenty, then thirty-five customers. “We had a wait list for a long time because we didn’t have clothes to send to you that were relevant and demand outpaced what we had.” For people who did get the boxes, Lake sent PayPal request and paper surveys.

The business grew and more people signed up. Stitch Fix expanded into places customers had queued up. “We had 80,000 people on a wait list for plus size before we even launched the business.”

Though a technology company, much of Stitch Fix’s early work wasn’t technical. I was reminded of simplicity in a podcast between Maria Popova and Tim Ferriss. As he often does, Ferriss asks about the tools Popova uses. It’s fun to see the what which is easier to adopt than the why or the how. But Popova is remarkably simple. For exercise on the road, she carries a weighted jump rope. For edits, she emails her post. For hosting it’s WordPress. Lake started simply too, with Paypal and Google Docs. That’s how super unqualified normal people start.

Lake pitched her idea. Venture Capitalists hated it. It was too different for them.

“When you’re doing something nobody else is doing you are either the smartest or the stupidest person in the room.”

Part of the reason may have been that it was a service for women and Lake needed capital to buy inventory.  “Raising money was really hard.” Another headwind was the company size. The home run approach to venture capital was “another dynamic, they want you to be a zero or a billion and everything in the middle is not that attractive.”

Stakeholders influence decisions. How many teams passed on Stitch Fix because they were focused on a round number? How many teams passed on Stitch Fix because – as Lake put it to Elle – “They were like, ‘You want $2 million to buy dresses?’”

Yet, maybe the lack of fundraising helped. On Exponent #143 Ben Thompson talked about Dropbox and Twitter. In some ways, Thompson notes, those companies were too successful. They weren’t forced to figure out a business strategy. Maybe the opposite occurred for Stitch Fix. Without venture money, the company was forced to excel at inventory management, balance cash flow, and crush marketing. They kept serving customers, one of whom was Amie Fineberg. Lake told Elle:

“One of those loyal clients was Amie Fineberg, who happened to be the executive assistant to Bill Gurley, a general partner at the venture capital firm Benchmark. “She was like, ‘I think you should know the staff is spending a lot of money with this company,’” Gurley recalls. He set up a meeting with Lake, and although he was skeptical at first, having worked with Nordstrom.com and experienced the pitfalls of e-tail, he was “blown away” by the company’s financials.”

Benchmark led a twelve million dollar B Round in 2013.

By 2014 Stitch Fix was a profitable company.

What helped get them there was good data. “We were always a data company,” said Chief Algorithms Officer Eric Colson. How do data and fashion go together? Lake explained what Tyler Cowen wrote, “We see it as both are uniquely good at different things. The stylist should never worry about whether or not you hate yellow, the data will take care of that.”

“We don’t have opinions here, we have hypotheses,” Colson told BuzzFeed News. “And we test them to make sure we’re acting in our clients’ best interest.”

Stitch Fix went public in November 2017. Lake and her son were there to ring the bell. Initially, she didn’t want to be seen as a Woman CEO, just a CEO. But:

“Being part of what opens peoples lens of possibility is really powerful. Now I’m proud to be part of that and wear that label and it’s good that people can see more examples of what success could look like that maybe are different from what it’s looked like in the past.”

See-it-to-believe it is a powerful concept. Jessie Itzler, Judd Apatow and Joe Rogan, and Kara Swisher all started because they saw someone do something and thought, Yes. That!

 

Thanks for reading.

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

In our first round with Danny Meyer we looked at his book Setting the Table and took away these lessons:

• Do something that interests you.
• Understand your (and employee’s) incentives.
• Be there for a deep understanding.
• Be different in a way you can be excellent.

Let’s dig into more of Meyer’s advice.

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Meyer sat down with Gary Vaynerchuk.

Meyer is, according to Gary, curious. “Twitter at it’s best is a listening platform,” Vaynerchuk said, “You are great at what you do because you macro listen to your employees, to the market, to the consumer, you’re a listener.”

Meyer experiments. “Daily provisions was an accident…my favorite kind of accident.” Meyer had a little extra room to do something, but what? Experimental optimism may make Meyer an Intelligent Fanatic.

Meyer knows a job is more than work. “I can never imagine not working because it’s brain and heart food.”

Meyer focuses on the most important things. When Vaynerchuk suggested Meyer start a podcast he replied:

“My own team is begging for the same thing but my answer is this; for ten years before I wrote Setting the Table my team was like, ‘you gotta write a book’ and I said ‘we already have cookbooks.’ They said, ‘No, we don’t want a recipe for how you do food, we want a recipe for how you do business.’ What do people need to hear in a podcast that doesn’t already exist?”

Meyer communicates well. At one point they asked Alexa for the best restaurant in New York City and there was no answer. That led Vaynerchuk to say:

“Who has the leverage? In this scenario, Amazon has the leverage. It’s not that Danny’s firm wants to spend all this marketing money to be a paid endorsement, he wants to win on his own merit…99% of restauranteurs don’t want to be at the mercy of Alexa. That’s just Zagat twenty years later. That’s just the New York Times twenty years later.”

“I think the way to not be at the mercy of a third party is to be a tremendous communicator at scale. For you to do what you need to do well, you need to have a podcast and a blog post and an Instagram account and Twitter and Facebook and a YouTube vlog and all of the above.”

“If you ask me, there is nothing more important than the ability to communicate with the end consumer because it keeps you from being vulnerable to the technology revolution happening.”

“Instagram (for marketing today) is the cost of entry.”

Ben Thompson’s body of work emphasizes the pinch point where the value is captured like fish in a net.

If someone is a Naked Brand, is scale communication is the antidote to the aggregator’s paradox?

Meyer said about brand building:

“I really believe that powerful brands emerge when you don’t pursue them becoming a powerful brand…Thing number one, if you want a powerful brand, you gotta pursue the things you’re passionate about and it’s possible a successful brand will ensue.”

Marketer Ryan Holiday wrote, “You know what the single worst marketing decision you can make is? Starting with a product nobody wants or nobody needs.” If Meyer’s Shake Shack hamburgers were foul no one would eat there. If churn was elevated customers weren’t elated. How?

“Make sure your staff understands why you got into this business in the first place. What’s their job when they come to work.”

Brands are one way a business can develop pricing power. Meyer has lived our Moats and Allocators post; harvest gains and allocate to the most fruitful fields.

Thanks for reading.

 

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

Incentives matter, so what are you measuring? Brendan Harris was a college baseball player and now works in the major leagues in player development. On Wharton Moneyball he talked about measuring the right incentives.

“You had to hit .300 to move up a level. A .300 batting average is now the .370 on-base percentage in terms of what’s valued. The same for a .500 slugging percent. If you can continually drive balls into the gap and control the zone you will move up. In the past, you’d have to hit .300, which kind of put you in the mindset of, ‘Is a walk really that valuable to me? I can expand the zone a little bit and poke that ball to right.'”

Incentives also explain part of America’s opioid condition. Gimlet’s Science Vs. podcast on Opioids tells the oscillating story of pain management. Like Goldilocks, we’ve haven’t found just right. The back and forth is jostled too far because of incentive errors.  Physician salaries, for example, were based on the pain scores their patients reported and pain scores were influenced by opioids.

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Test your assumptions. Last week I made a mistake. A friend noted that it was a dumb thing to do. It was. Of course, it was! If I realized it was dumb a priori I wouldn’t have done it. This is true for all our actions. However, some areas give us a glimpse of alternative futures.

In the NFL, for example, teams tend to not go for it on fourth down as often as expected value calculations suggest. Well, the wise coach may say, our team wasn’t playing that well today. Now there’s an app for that (assumption).

Frank Frigo explained the service his company offers to coaches for when they offer counterarguments.

“There could be a whole slew of arguments you could create. We allow the user to test those assumptions. Let’s make your team the worst rushing team in the NFL. Let’s make your opponent the best rushing defense in the NFL. Now, let’s re-simulate it to see how it affects your decisions…We stress that if you put in extreme counterarguments and it doesn’t flip the direction of the decision it’s pretty irrefutable evidence that you might be missing something.”

This isn’t only in sports. Brian Koppelman said that Johnny Chan in the final Rounders movie was Phil Helmuth in the original Rounders script.

Why change? Director John Dahl asked. Koppelman explained:

“At first I wanted to say ‘No’ but then Dave (Levien) and I went away and tried it. Which I think all writers, all creators should do. Because our ego is inextricably invested in our work and our initial reaction is often anger and it crowds our thinking.”

“John Dahl is an incredible senior officer. As director of the film he could have insisted upon, but he did the opposite. He said, ‘Why don’t you guys try it?’ We went back and we did it and it was immediately clear to us that it was the right choice.”

Distance neutralizes eroneous assumptions. It’s Wes Gray’s advice to plan in system two. David Benioff created distance by pitching title ideas to friends. Sherlock Holmes created distance by pulling down his cap and thinking. Walter Mischel saw students create distance to pass ‘the marshmallow test.’

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Where to get ideas. Twyla Tharp wrote:

“You can’t just dance or paint or write or sculpt. Those are just verbs. You need a tangible idea to get you going.”

Tharp also calls it scratching.

“Scratching can look like borrowing or appropriating, but it’s an essential part of creativity. It’s primal and very private. It’a  way of saying to the gods, ‘Oh don’t mind me, I’ll just wander around in these back hallways…’ and then grabbing that piece of fire and running like hell.”

Benioff found his ideas in Russian journals, a trip to St. Petersburg, Russian ex-pats in Brooklyn, and the public library.

Brian Koppelman said, “In terms of making the characters feel real, we do a lot of research in advance.” Billionaires are happy to talk, he said, so long as you don’t call them out. Solitary Man, Koppelman said, was a composite too.

Ideas come from being nosey. Ideas come from IDEO-like work. Ideas, said Shawn Coyle, take work.

“In the creative world there’s no magic pill, there’s no magic solution to becoming more creative, to become better at what you’re doing. It’s basically learning how to work the most efficiently without letting resistance overwhelm you.” – Shawn Coyle

 

Thanks for reading.

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

Cryptocurrency is a wicked puzzle. What does anyone understand this?

There are multiple tools – fluencies – someone must own, operate, and maintain to understand this tweet. There are the words and there are the ideas. My ten-year-old daughter can understand the words. I can too. How many are fluent in the ideas?

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Well before today’s garden of information bloomed colleges circa 2002 kept their information in the library. Sure, we had the state-of-the-art T1 modems but nothing to share. It was an information interstate but no Disney World, Michigan Avenue, or Badlands to visit.

Besides syllabi, there was something we transported, music. This was perfect for college. It was freedom to signal – Hanson or Miller – and that’s all we wanted to do. Who let the dogs out? We did.

I’d guess that the non-mp3 traffic was minimal. Some people had Geocities pages, but businesses didn’t post hours, blogs didn’t post updates, and there weren’t that many viral videos to share.

The college campus was built around the library and so was the model. You learn the 101 stuff and then, after a break, learn the 201 stuff. Information was static. Learning was linear.

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Recently I emailed a friend; did you see this YouTube channel called Crash Course? He’s younger than me, so, of course, he had. I was there for 1984 because I’d listened to that audiobook along with Churchill and Orwell. In less than a week, I’d read two books and watched a handful of videos. I’d time-traveled, first a fake 1984 then to the real 1944.

Education today is like this. Find a trailhead and go. Follow what looks interesting. Head off, backtrack, and create shortcuts. College is for staying on the sidewalk, life isn’t.

Pre-1984 I’d read Breaking Smart and Venkatesh Rao writes about the Luddites *someone who fears technology (or new technology, as they seem pleased with how things currently are).

But, the Luddites didn’t oppose technology. They opposed worse working conditions and worse quality of goods. It would be like if Google created a better programming language which made their search results worse. Oh, and moved their engineers to the broom closest – and never let them shit.

In college this enthusiastic wandering from Orwell to Churchill to Rao and this podcast enlightening me about the Luddites was impossible. Today it is necessary.

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Shane Parrish has written about fluency dues. Or, colloquially, don’t let your mouth write checks your body can’t cash.

Mentally or physically, there needs to be some force behind the facade. Pre-Napster this meant linear hops from 101 to 201 to 301 to degree. Post-Napster this means version 1.0, 1.1, 2.0, and so on ad infinitum. It means self-education is in perpetual beta.

Our networked education decreases fluency dues but makes them more necessary. Can you speak crypto? Can you decipher bullshit? Can you understand statistics? Can you write in hashtags? Can you translate marketing? It’s a harder world to live in but an easier one to learn in.

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In a podcast, Tim Ferriss asked Seth Godin about becoming good at something. Godin said this:

“To be good at something you clear the decks so that’s all that’s left is you and the muse, you and the fear, you and the change you want to make in the world.”

Is that why you aren’t on Twitter Ferriss asked? Godin replied:

“Will Twitter make me better at the things I want to be good at? No.”

Twitter, much like that first college internet connection, is developing. Everyone is still figuring out how to use it. Right now we’re mostly sharing Mellon Collie and the Infinite Sadness. But it’s getting better. There are successful ways to use Twitter which are better than my own bipolar reactions.

In college, I was a bundle of nerves, confidence, hope, and worry. Before each semester I would find each building and each room and time how long it took to walk to each. I also learned how to read a syllabus, check out library books, and submit online assignments. I developed fluencies in this new land.

A networked education requires similar study, with similar distractions. In college, you don’t have to go to class. On Twitter, you don’t have to learn things. In college, you don’t have to take notes. On YouTube, you don’t have to summarize what you learn. With hindsight, it’s ironic that at nineteen, there were fewer distractions.

Tyler Cowen has noticed this shift, commenting that “Books are still better. There’s way more knowledge in books than blogs.” However:

“With Google, it’s easier to forget things, as long as you know how to find them. I find, in the case of myself, that’s how I operate. I remember fewer facts, but I’ve really honed my ability to define the right keywords.

“You (to Russ Roberts) and I have this privileged position of spanning two different human cultures–pre-Internet and post-Internet. And that’s actually fantastic, and I think we’ll go down in history for a kind of richness of our vision, because we’ve lived in both worlds. But I think looking forward there will be many fewer people who have it stuck in their minds as the two of us do that Ty Cobb hit 367.”

Roberts asks if his kids will remember less, Cowen thinks yes, but amends, “But they’ll be much better at finding information than either of us.” In another Econtalk episode Cowen said:

“We grew up without having an Internet, so we had to learn how to look for used books, how to track down scholars, how to make personal contacts in a particular way, how to use a library–in the old-fashioned sense: one had to browse the shelves for books.

“The only book you might have in the house might be a great classic, Tocqueville, and you would read it for the 5th or 6th time and study it in depth, because you couldn’t go browse your Twitter feed. Now, that had big advantages and also big disadvantages.”

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“You can watch the speakers you love on YouTube and so on…By the way, I think it was Ben Casnocha who first made the point to me, so I would credit Ben–who I believe I do in a footnote. He said, ‘You’re so lucky, Tyler.’ I said, ‘What do you mean?’ And then he explained this to me. And Ben is young–he’s, I think not even 30.”

What makes Cowen special is the combination of tracking things down and staying on top of things. He’s fluent in each era. One is the area of Deep Work, as explained by Cal Newport. Another is the area of Daily Vlogging, epitomized by Casey Neistat.

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Brian Koppelman (Billions, Rounders) and Mark Suster (venture capital) both believe in the dots & lines theory of life. When you do something it’s like a dot on a graph. When you do another thing it’s another dot on the graph. Once you have two dots you can make a line. Dots near each other are okay, dots further apart are better. The average annual return for the stock market is a numerical representation of distant dots.

A recent Great Courses course on Sun Tzu’s The Art of War was great, but I noticed that a lot of what Jocko Willink talks about on his podcast is similar to what Sun Tzu thought about. Two distant dots form a line, that’s good intel.

That means Twitter and travel. It means podcasts and Proust. It means streams and Shakespeare. It means figuring out “Spawn camping attacks on PoW algorithms.” It’s a lot of work to not wise or woke but both.

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Thanks for reading.

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

The ILTB podcast continues to be one of my favorites. The episode with Savneet Singh is no exception. While the entire interview was good, this post will only focus on Moats and Allocation.

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We devoted a post and podcast to  Moats and Allocators but to recap; strong moats and wise allocators are important because of alpha erosion. Monkey see monkey do. Strong moats can be built around good brands, high switching costs, and network effects. Intelligent allocators reinvest in the best opportunities, not the easiest ones.

Exponent episode #143 had Ben Thompson and James Allworth discussing Dropbox and they touched on this idea. Dropbox has solid network effects (refer a friend and you’ll each get more storage), great branding (it just works), and high switching costs. That’s why it’s the “Biggest IPO since Snapchat.”

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Savneet Singh understands the power of brands. He told Patrick about a Spanish real estate investment. Why did it work?  “What I found interesting about Airbnb is, if you think about the power of the brand – I can think of Uber, Lyft, and Juno – but most people don’t know what’s beyond Airbnb.”

Singh is building Tera Holdings, a software “holding company that partners with management to help grow their business over decades.” A Berkshire of software. Besides an early interest in value investors, Singh’s early venture capital investments demonstrated what Michael Mauboussin calls The Sucess Equation.

“The first deal I ever got into was Uber and it was complete luck,” Singh explained, “The single lesson I’ve learned from venture (capital), which makes it so hard as an asset class is it’s not systematic. When I break down the success I’ve had as an angel investor there’s no pattern…I couldn’t create a pattern for it.”

Mauboussin uses a two-jar model to explain the balance of skill and luck. Singh’s experiences articulated Mauboussin’s questions:

1. Are cause and effect easily identifiable?
2. How steep is the mean reversion?
3. How predictable are the effects?

Each of those questions must be answered accurately among the crosswinds of our biases.

Value investing was different. Strong moats and wise allocation was different. The Berkshire of software was different.

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Why software? “The Demand for Software is very strong and stable,” Singh said. Software is eating the world, others have said. Singh wrote that Constellation Software is a good example:

“What does a GREAT software business look like? Constellation software is Canadian holding company that only buys niche small software applications. They acquire boring, sticky software businesses and reinvest the cash those businesses generate into the next acquisition. They do NOT get involved in the day to day operations.”

Constellation was founded in in 1995 by Mark Leonard, a modern day Chuck Feeney. The best source on Leonard is this, sadly limited profile:

“As should be obvious by now, Leonard declined this magazine’s request for an interview, but at least he was prompt in declining. ‘Kind of you to offer,’ he replied by e-mail within about half an hour of the request being made, ‘but I discovered when I was in the venture business that interviews aren’t for me. What little I have to say, I generally put in my letters to shareholders. I do occasionally speak with students, but usually in the vain hope that I can distract them from pursuing careers in investment banking and private equity.'”

That vain hope is built on the same ideas Singh is looking for; un-sexy long-term good businesses. This business, Singh explained, “clearly has a moat because your customer lasts for fifty years, you can raise the price every year and no one is going anywhere, you have the ability to reinvest for growth.”

Fifty years seems long. How do you do that?

Talk to people. Paul Graham, Pat Dorsey, and IDEO have all figured out this business secret; talk to the user.

Singh says that he went on a listening tour and, “We quickly discovered it was a much bigger opportunity than we ever imagined…The first thing we started to do was exploratory. We started calling software company after software company.”

Tera looks for mission-critical software, companies like Dropbox, in stable businesses.

“Let me add a little color. Another key attribute we look at is; is the underlying asset that it’s serving going to be around for a long time? We look for companies that service utilities, governments, healthcare. A great example is dental practice software. Dental offices have a 1% failure rate…think of the dentist who installs this software. It does his billing, his payments, his scheduling…if someone comes to him and says ‘I’ll give you a 25% discount on my product,’ there’s almost a zero percent chance that dentist is going to go for that.”

The value proposition for Tera Holdings is in the name, holdings. As Brent Beshore has spoken about, there’s more to selling a business than just money. Business owners are community members, patrons, employers, neighbors, friends.

While technology has made it easier to connect, face to face meetings still signals a lot. “We get on the planes,” Singh said, “We’ve been on seventy flights in six months. We try to meet them in person because that’s how we show our value.”

Tera’s value-add is sales and marketing expertise. For example, Singh explained how they changed the incentives. “We said, ‘Everyday that salesperson makes thirty calls they get a fifty buck bonus. But if you get four in-person demos I’m giving you a thousand dollars.”

Michael Lewis said that his popular NYT profile of Shane Battier resonated because “It’s also a story about how people are not incentivized to help their team because they aren’t being measured properly.” Incentives matter.

Thanks for reading, one caveat. Analogies help us understand broadly but not deeply.

 

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

The March 7th, 2018 Wharton Moneyball podcast was full of interviews Casey Massey conducted with 2018 SSAC attendees. This is the sports analytics conference we drew from for the Competitive Advantage & Sloan 2018 posts.

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Mina Kimes articulated that data is not a panacea. Thanks to a background in business journalism, “I look to data to find answers to basic questions and if I don’t I almost find it more interesting that if I did find the answer.” I forget this sometimes…

Data and curiosity, in James Carse’s terms, combine to form an infinite tool.

Kimes and Massey also agree that situations matter. “Perhaps one of the biggest lessons from the NFL season is how much situation affects quarterbacking, which has always been true unless you’re Aaron Rodgers or Tom Brady. To me it’s like 90% team scheme,” Kimes said. Yes, Massey agreed, context and situation matter so much “and it’s still underappreciated” added Massey.

From two-hour marathons to New England Patriots scouts situations affect outcomes.

I’ve started the Leonardo Davinci book by Isaacson and Leonardo is a product of circumstances. Here’s Isaacson early in the book.

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Ben Alamar pointed out the importance of communication. This is the next nut to crack in sports analytics.

“Even in this day of data availability and analytics sophistication, you still need to render it as simply as possible. And it’s still possible to come up with simple analyses that are insightful.”

Michael Lewis said that while he was researching Moneyball (the book) “Billy Beane told me, ‘we never talk to them about it (Moneyball), it just confuses them.'”

In the same interview Daryl Morey said, “It’s not what you know. It’s what you can impart on coaches so they’ll believe in it and they will then give it to their team. You have to have people skills. It’s not like you can come in and put something on someone’s desk and he’s going to believe in it.” How do you do this? Start by finding data that supports what the coaches already know.

Dean Oliver told Massey much the same thing, “If you can’t communicate it you won’t get a seat at the table.”

Data digging is never done and data discoveries are never obvious.

 

This is the clip Massey mentions, and it shows how the Warriors are trying to crack the communication challenge.  “Without a coach like Steve,” Lacob said, “it would be incredibly difficult to get these messages out.”

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Kirk Lacob from the Golden State Warriors told Massey about their decentralized command structure. “I always thought our secret sauce was that we have great people and turn them loose and let them do what they’re best at.”

What makes Lacob’s boss, Bob Myers good at his job? “Those guys have something in common, they know what they don’t know. They’re very self-aware. They’re very trusting of other people. When they know there’s something they aren’t good at they’re happy to look to other people for those answers.”

This kind of structure requires humility and self-knowledge at the top and Lacob said they have this thanks to “sophisticated ownership.” This is an idea that Charles Koch emphasized too.

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Sandy Weil spoke about alpha erosion. “Basketball might have the slimmest margins. In hockey we have draft models and how many teams have draft models as good as ours? Probably only a handful…In basketball, it’s probably three-quarters of the league.”

As both Jeff Luhnow and Daryl Morey have noted, once you do something that works others will copy it. Weil adds that most of basketball’s low-hanging fruit is picked.

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Chad Millman has broken smart. I was struck by the number of interviewees who started a WordPress blog, YouTube channel, Twitter account, or email list. A lot of the people talking about analytics implementation and decision making started talking about analytics and decision making to no-one in particular online. Breaking Smart is:

“This is breaking smart: an economic actor using early mastery of emerging technological leverage — in this case, a young individual using software leverage — to wield disproportionate influence on the emerging future.”

“How and why you should choose the Promethean option, despite its disorienting uncertainties and challenges, is the overarching theme of Season 1. It is a choice we call breaking smart, and it is available to almost everybody in the developed world, and a rapidly growing number of people in the newly-connected developing world.”

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Jeff Ma (who has his own delightful podcast) told Massey why he wanted to start a podcast. Being on TV “wasn’t the best form for us.” Ma and Rufus Peabody needed time to explain things and focus on the process. It’s only in a podcast that you can articulate what Tetlock calls “the wrong side of maybe.”

Invisibilia started up their fourth season and led with an episode about changing norms (which can change behavior). We can all view the world as cut and dry or nuanced and funky. The medium dictates the norm for that message. Even though Ma is saying the same thing on his podcast that he said on ESPN, the message is different.

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Brian Burke, the creator of the 4th down bot, spoke about career capital. “The Eagles weren’t the only winners that day,” after the Super Bowl, Burke explained. Why? Because Doug Peterson went for it on fourth down, and this normalized it. The adage to fail conventionally is easiest to see in sports.

Rory Sutherland noted that without career capital, people purposely make negative choices because they signal positive characteristics “There are lots of cases where you need to signal something, by making a decision – and it may be the rationality of the decision – actually prevents you from making a better decision.”

On August 16, 2017, Moneyball podcast, the Wharton hosts said that stability and patience can balance the scales when leadership lacks career capital. Massey said, “My sense is that the single scarcest commodity in professional sports is patience…everyone is looking for an edge and the biggest edge is patience.”

 

Thanks for reading.

Photo from TechCrunch Disrupt NY 2016

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

theSkimm is not an email newsletter. It’s a brand built around helping female millennials. The distinction matters. For a company that has a growing employee family, potential acquirers (and fidgety VC investors), and ambitious founders, there needs to be more than just a newsletter.

But a newsletter was a great place to start. The early days of theSkimm were nothing like failed startups and theSkimm is one of the better entrepreneurial cases someone could study.

Let’s do just that.

…

In summary, Danielle Weisberg and Carly Zakin have succeeded because they noticed poor product-market fit and made a small bet to build something using their existing skills and being curious along the way. Once their brand snowball got rolling they focused on strengthening it and are now expanding to other areas.

You can read the pdf here or save the HTML for later. There’s also the podcast versions; iTunes, Overcast, or Soundcloud.

https://soundcloud.com/mikesnotes/skimm-lessons

Curious? 

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

 Conspiracy by Ryan Holiday was good and the one that Holiday alone could write. Like a good song, Holiday establishes a pattern for you to tap your feet to; historical example and explanation followed by current events between Gawker, Thiel and Hulk Hogan with plenty of callbacks to earlier ideas as you go along.

If each chapter is like a song, then Machiavelli is on the drums. It’s his book – not the The Prince, but Discourses on Livy – that Machiavelli advices conspirators and that Holiday uses to set the tone.

Conspiracy plays the lead guitar and does vocals. Some parts are strained but Holiday makes it work and tells the story well.

Why was it a conspiracy? Who were the conspirators? What was conspired?

Each question is addressed but there are no final solutions.

This post will focus on the bassists, Perception. How do you see others, how do others see you, how do you see yourself? That’s the story that I expected from Holiday. Maybe he didn’t write it because he’s been down that road. Trust Me I’m Lying is his book about stories, perception, and marketing. Holiday’s books on stoicism – his recommendation of Meditations changed my life – are about managing your perception of the world. It’s about learning to see the obstacle as the way.

As Conspiracy sings the words, Perception fills in the gaps. For Gawker, they saw the world as one to comment on. Your sexual orientation was part of the world. Your book draft was part of the world. Your opinion, and their dismissal of it, was part of the world.

Gawker thought others saw them as benevolent. They were the kid in high school who was an outsider, like you, but at least they were able to crack smart at the cool kids. When they outed Theil, Gawker snickered. When they defied a judge’s orders they did so while rolling their eyes. Gawker succeeded because people wanted to see the world through Gawker’s eyes.

Gawker failed because the world changed what it wanted to see. At one point in the book Holiday notes the importance of AWARENESS. Thiel is aware, overly so. Terry Bollea (Hulk Hogan) has the word tattooed on his arm. The Gawker legal and editorial teams are not. They fail to change as the world does.

…

Holiday uses historical context to support his point. I’d wager that there’s more American presidents not named than named, but it’s close. In this kind of writing I just have to trust that Holiday understands the facts, explains them as best he can, and doesn’t miss something. This is the crux of any writing, how does the author learn then explain enough to tell the story?

I enjoy Holiday’s (email) booklist. I know he has learned a lot. But after I read the book I wondered, is that the lesson from Lincoln? Was that a small or larger part of Churchill and Roosevelt’s relationship? Did Holiday cherry pick from his readings read or did he separte the wheat from the chaff?

In reading A Man Called Intrepid, I’ve come to see the importance of managing perception  – as best one can – during the build up to the First World War. Churchill inspires the British. He persuades the Americans. He resists, but doesn’t antagonize, the Germans.

Roosevelt convinces Churchill he’ll come to his aid. He arm-locks Joseph Kennedy. He ‘Gets out the vote’ and then sends the voters off to war. Facts through one set of lenses we see one thing, through another set we see something else. From the book:

“We shall be worse off if we get too far ahead of public opinion,” Churchill wrote. He understood how people perceived him.

Germany with hindsight, is the universal bad guy. “President Roosevelt’s support for Churchill’s rebels must have begun almost unthinkingly. Hitler was set upon a monstrous course that seemed sure to bring disaster. Yet many in the United States, struggling with the Depression and disenchanted with the quarrels of Europe, saw only the economic success of Nazi Germany and not its evil roots.”

Churchill and Roosevelt weren’t the only ones swaying hearts and minds. Author William Stevenson points out the “fifth column,” sympathizers within a city loyal to the insurgents. “Hitler was sure that the Nazis could conquer America by propaganda.”

Rory Sutherland likes to point out that this is the beauty of marketing. Marketing, he says, is like magic – it creates value from nothing. Why is a Tiffany’s box different?

Sometimes it’s said that he best investors are contrarians. Theil has written about this, and so have we in this post Zero to One. “Be different” might not be the best definition.

The best investors are the most perceptive. They’re they ones who perceive the current situation the most accurately. It’s what Gawker failed to do when they underestimated the lawsuit. It’s what Thiel did correctly, when he brought it. And the roles were switched after the trial, when Nick Denton was the most accurate of how the world was.

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Holiday’s book isn’t the best book I’ve read this year, but it’s a good one. It’s like a flag blowing in the wind. We can see how things are now but that’s not to say things won’t change. We will end this post where Holiday’s book begins.

…

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

When Charles Koch spoke was on the Freakonomics podcast we took notes. Those are here. To recap.

1. Leaders must create the conditions to argue well.
2. A healthy mix of centralized and decentralized command works well.
3. Systems are one orientation, goals are another.

This time we’ll look at Koch’s November 2017 conversation with Marc Andreessen. The big idea in this podcast episode was experimentation.

Most of the entrepreneurs, investors, and adventurers we profile have experimented. Tariq Farid experimented with knives on fruit. Patrick Collison experimented with different payment sequences. Even David Ogilvy, the advertising icon and generator of brilliant ideas advocated experimentation. “Innovations,” Ogilvy wrote, “provided you test them, can work wonders.”

Let’s see what Koch has to add.

Koch studied engineering at MIT. Why engineering? “I found out at an early age that I was good at one field; math and logic.” Koch experimented to Know Thyself.

After college, he took a job as a consultant, trying different sectors and different roles. “I learned that innovations come from mixing ideas in new ways.” Koch came to believe more and more in “the republic of science” and “an authority of the community.”  New ideas come from challenging old assumptions.

Sure, said Andreessen “Every engineer knows you need to have an open debate.” And, Koch added that it goes beyond just engineering. “What was really fascinating to me was that the principles of social progress were almost identical to the principles of scientific process. That got me really going.”

After his consulting stint, Koch returned to run the family company. The early days were filled with experiments. It was, “a lot of trial and error, mainly errors.” Though these trials and errors Koch decided to focus on two things.

He wanted his company to be counterparty of choice. “We do that by focusing on how we use capabilities to create value for these constituents.” In other words, he wants to deliver value to his stakeholders. Like Scott Norton, Koch is striving for the business version of Charlie Munger’s advice on marriage, “Be worthy of a worthy mate.”

Koch  also wanted his company to be in “continual transformation.” That means, “each one of us has to be lifelong learners, that is, constantly, searching for new and better ways to create value.”

These principles helped Koch Industries grow into related industries. First, they expanded their refining operations. Then grew their other businesses. Soon they expanded their capabilities into consumer products, wood pulping, glass, and software.

They’ve done this, Koch explained because they hire first for values and then for talent. “These principles are who we are as a company. We hire first on values and then on talent, and by talent, I don’t mean credentials.” What does he mean by talent? Potential. If you hire stupid people, Koch joked, make sure they’re lazy too. That way they won’t do too much damage.

Incentives for these people matter. “We try to do the best job overcoming they agency problem.” Well, said Andreessen, “The Silicon Valley way to defeat the agency problem is stock options.”  You want to get people who think like owners. Charlie Munger values this ownership mindset too, giving this advice:

“A lot of people running the business think like careerists. And believe me, you gotta think like a careerist to a certain extent if you’re in a career. But it also helps to look at the business strategy problems as though you are an owner. And so my advice to you is, you don’t wanna be…never get to be a careerist so much that you don’t see it from the owner’s point of view.”

Koch tries to “Understand what an individual employee has contributed to increasing the long-term value of the company….what did you do to help our culture, what innovations do you bring? It’s a combination of objective measures and subjective measures.”

“You don’t need to be precise but you do need to be directionally correct.” Does that mean an employee can make more than her boss? Yes! “Does it make sense that Lebron James makes more money than his coach?”

But how does a manager marry incentives for results and a culture of experiments?

“If you never have a failure you’ll never try anything new.”

“When you come up with a theory you want to try to falsify it as fast as you can.”

“Get the people together and point out the flaws and challenge an idea.”

“Every time we go through this kind of discussion and debate we come up with a better answer than I had myself.”

“When someone points out a flaw you should thank them.”

“All we care is, are you contributing in terms of culture and for the current and long-term value creation.”

It’s a cultural thing, and you have it or you don’t. Sometimes Koch will give talks and he warns the audience about this kind of management, “It’s not a cookbook. The leadership has to live by the underlying principles.”

The interview ends with some reading suggestions. Before Koch’s suggestions, a few people have told me Sons of Witchita is good. Koch suggested:

• Karl Popper, Science as Falsification (pdf)
• Michael Polanyi, Republic of Science (pdf)
• F. A. Hayek, Competition as a Discovery Procedure (pdf)
• Matt Ridley, The Evolution of Everything, (One of my favorites in 2017)
• Deirdre N. McCloskey, How the West and the Rest got Rich (WSJ)
• Charles A. Murray, In Pursuit of Good Government

 

Thanks for reading, Mike.

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

We’ve had two posts that highlighted ideas from the SSAC. The first was general ideas about running organizations, the second was about pushing competitive advantages. Today’s notes will be from a Ringer Basketball podcast where Bill Simmons, Haralabos Voulgaris, and Jason Concepcion talked about SSAC and the NBA. Ready?

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Specialization. Agreeing with Steve Nash and Daryl More, Simmons said that specialization is becoming a bug, not a feature. “I’ve always been an if you have one elite skill there’s a place for you in the NBA guy and now I’m wavering on that.”

Instead of thinking about actors, think about actions. The NBA, like any system, evolves over time. The pace and space era that exists today coincides with the smartphone era. Each paradigm has new rules, new winners (and losers) and new ways to play the game. The phone now does many jobs; it takes photos, sends emails, and allows payments. The modern NBA player now does many jobs too; shooting, defending and understanding the game.

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Competitive advantages. In Sam Hinkie’s words, “when I worked at Bane Capital, everyone talked about the two or three (key) levers, and to pull like hell on those.” Teams succeed when they maximize their advantages.

“Why would you want your center Marc Gasol to be marginalized at the three-point line?” Haralabos Voulgaris

“That’s why Kevin Love, the way the Cavs used him, seems like one of the great wastes of anyone this decade. You have this guy who is unbelievable around the rim, great instincts around rebounding, and you have him twenty-five feet from the basket.” Bill Simmons

“I remember when Alvin Gentry become the (New Orleans) head coach, and he said ‘one of the first things we need to do is have Anthony Davis learn how to shoot threes.’ It’s like, no, it’s kind of silly.” Haralabos Voulgaris

Ben Thompson writes over and over again why Apple can’t become like Amazon or Google. They have different strengths. In our podcast on Moats and Allocators, we noted that good capital allocators know to double down on their strengths.

Anson Dorrance is the winningest soccer coach and he said, “My job is to find out a way to let her know she’s unique, acerbate her unique qualities and hide her weaknesses.”

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Analytics

“(Some) is still gimmicky stuff. I don’t think teams are judging players by them…It’s fine. It’s interesting. But I don’t take it seriously.” Bill Simmons

However.

“The problem with the eye test is it’s not always on. The computer is watching everything. It’s watching every minute of every play. It keeps track of *something*. You miss a lot.” Haralabos Voulgaris

Later Simmons proves the point. “The worst case is Doc Rivers. Who for three years only signed guys who had played a good game against him.” Rivers suffered from the availability bias. There’s also recency bias, survival bias, and confirmation bias, which Shane Battier called, “the mortal enemy” of everyone at SSAC.

Human beings make mistakes and computer models aren’t perfect.

“What you want,” said Jason Concepcion “is for the eye test and the numbers to align on some sort of rule. When the two are in conflict is when you should dig in further.” Mike Zarren agrees:

“This is when things might be most valuable. If you’re watching something and it disagrees with some other process you have that told you something about what you’re watching, one of them is probably wrong. So you gotta go look into the black box and ask questions or ask, is the way you’re watching not capturing something.”

In his book Average is Over, Tyler Cowen suggests we use freestyle chess as the model for human and computer interactions. The advantage to this is that machines will find things (play moves) humans would never consider and there’s less domain expertise required. The most important things wrote Cowen, is to understand the limits of humans and the limits of models.

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Conditions matter.

“Brad Stevens is the Geppetto coach, pulling all the little strings and making everyone look good, look better than they are.” Haralabos Voulgaris

“How about all the guys that left Boston. It’s a long list of people that miss Brad Stevens.” Bill Simmons

 

Conditions matter. Brad Stevens in Boston in 2018 is like Milton Hershey in Pennsylvania in 1900.

“Young Milton Hershey could not have chosen a better time and place to put what he had learned from Joe Royer into a business of his own…In 1870 America had begun an immigration boom that would last fifty years and triple both the country’s population and the number of potential customers for products like Hershey’s caramels…People were looking for consistent quality at a low price.”

Good organizations understand this. One New England Patriots scout said that if he graded a player highly, but that player was a bust on another team he wasn’t admonished. “Because that player in the Patriots’ system might have been successful.”

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Managing stakeholders. About Sam Hinkie.

“The problem was, he alienated the media, which is what you don’t want to do. It was kind of smart because, as a gambler, if you know something you don’t want to tell everyone what you know. So, he was really quiet about what his theories were. But, having that type of job is such a … smarmy, handshake, wink-wink kind of business. You need to have relationships and do all these other things. You can’t just be the guy in the back with a bunch of spreadsheets.” Haralabos Voulgaris

Let’s end with the question we started with, what job are you hiring for? Why are people supporting your business? Daryl Morey said that managers can understand the fans when they listen to the owner. It’s only those two groups, the fans, and the owners, that have a long-term stake in the team.

Astros GM Jeff Luhnow said baseball has a build in advantage. “I think fans are never patient but in baseball, the typical fan is aware of your farm system…and there’s a certain amount of patience baked-in.”  Fans want to be entertained, to feel like teams are doing their best, to see progress. Those are the jobs a sports team, or any business is hired to solve. And it’s up to the management to communicate that.

 

Thanks for reading.