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jeremyau · 7 years

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Dropbox Leaves AWS, Should UPS and Fedex Be Afraid?

Posted onWednesday, March 16, 2016Monday, March 27, 2017 Author by Ben Thompson

Good morning,

Today’s Update is related to yesterday’s Weekly Article on The Amazon Tax, so make sure you read that first if you haven’t.

On to the update:

Dropbox Leaves AWS

Most Stratechery Weekly Articles take shape over several days, if not several weeks (or months: Daily Update subscribers know I made both the Amazon-Costco and Logistics-by-Amazon points last year). Because of this, though, occasional monkey wrenches come flying in at the last minute — like Dropbox moving away from AWS. From the Dropbox blog:

Dropbox stores two kinds of data: file content and metadata about files and users. We’ve always had a hybrid cloud architecture, hosting metadata and our web servers in data centers we manage, and storing file content on Amazon. We were an early adopter of Amazon S3, which provided us with the ability to scale our operations rapidly and reliably. Amazon Web Services has, and continues to be, an invaluable partner—we couldn’t have grown as fast as we did without a service like AWS.

As the needs of our users and customers kept growing, we decided to invest seriously in building our own in-house storage system. There were a couple reasons behind this decision. First, one of our key product differentiators is performance. Bringing storage in-house allows us to customize the entire stack end-to-end and improve performance for our particular use case. Second, as one of the world’s leading providers of cloud services, our use case for block storage is unique. We can leverage our scale and particular use case to customize both the hardware and software, resulting in better unit economics.

So…maybe AWS isn’t so great after all? Should I have changed my article? Well, obviously I didn’t; indeed, I’d argue the Dropbox news reinforces my point.

First, given that Dropbox is premised on storage, hosting on a 3rd-party provider, no matter what discounts the company might obtain from Amazon, is going to be expensive: a low price times a lot of volume is still a lot of money! To that end, keeping whatever margin Amazon was earning will help the bottom line. Relatedly, Dropbox likely has enough scale that they can drive their component prices not to Amazon levels but close enough.

Second, and again related to scale, Dropbox’s static storage needs are almost certainly exponentially larger than the company’s dynamic storage needs. One of the big advantages of using AWS is that a company can not only quickly bring resources online but just as quickly take them offline; that’s almost certainly much less of a need for Dropbox relative to the company’s early days.

Third, as the blog post notes, by virtue of building their own backend Dropbox can build exactly what they need, increasing product performance. This isn��t a surprise: integrated products generally work better (the question is usually whether or not modular products are good enough to leverage their price and scalability advantage).

Most of these factors are unique to Dropbox: they are an exception that proves the rule (the rule being that AWS is better for most companies). Few companies have Dropbox’s storage needs, most companies derive significant value from AWS’ flexibility, and most company’s aren’t differentiated by their cloud infrastructure.

Actually, I’m not entirely sure that Dropbox is, either: the problem for Dropbox has never been the quality of their technology. Dropbox sync remains noticeably superior than any of its competitors, and while as a Dropbox user I won’t complain if it gets even better, if a superior product for Ben Thompson is all that mattered the company wouldn’t be facing the skepticism it now is (including from me).

Nothing about this news changes Dropbox’s core problem: the company delivers a superior user experience, but a superior user experience matters most in consumer markets; consumers, though, aren’t willing to pay for a commodity like storage (at scale). To be sure, when it comes to businesses the user experience matters more and more with the advent of the cloud, but business brings its own contraints, including lots of arcane requirements that pertain to permissions, data retention, etc, and here Dropbox’s product has fallen short for years (I laid this out two years ago here).

That’s why I actually find this announcement really disappointing. Apparently Dropbox has been devoting significant resources for at least two years to a project that will no doubt have a positive impact on the bottom line but a minimal impact on the top line. It’s all well-and-good (and honestly impressive) to announce 500 million registered users, but the reluctance to disclose both active users and especially the number (and size) of its business customers speaks even more loudly. How might have the product and company evolved if the company had continued to rely on AWS and devoted its resources to fixing its product-market fit problem?

This gets to the other reason this news actually reinforces my point about the value of AWS: the variable versus fixed cost and flexibility benefits are obvious; what is perhaps most under-appreciated about the public cloud, though, is the degree to which it allows companies to focus on what really makes or breaks their business. I’m disappointed Dropbox didn’t value that nearly as much as I think they should have.

It’s not all bad news: lower costs mean a lower burn rate, which it seems Dropbox will need. It’s hard, though, to escape the conclusion that the company can’t break out of its tendency to view every problem as a nail in need of its engineering hammer. The blog post even bragged about this:

Dropbox was founded by engineers, and the ethos of technical innovation is fundamental to our culture. For our users, this means that we’ve created a product that just works. But there’s a lot that happens behind the scenes to create that simple user experience.

I honestly dislike being so harsh, because this paragraph captures what is so great about Dropbox: it is a fantastic product that “just works” and occasionally even delights, no small feat for a utility. This paragraph, though, also captures why I am so discouraged: the culture needs to value marketing — as in knowing which customers are willing-to-pay, and what they want — just as highly as it does the tech. Said culture would not have made the decision to build this product in 2013 when product-market fit was still an open question.

(Wouldn’t it be nice if there were a big company that needed an infusion of folks who focus on the user experience and have excellent cloud development chops…)

Should UPS and Fedex Be Afraid?

In yesterday’s post I laid out why it seemed likely Amazon was going to attempt to do to the logistics industry what it is doing to the cloud computing and retail industries: meet its own needs with a services-based offering that can eventually be extended to 3rd-parties, gaining scale that cements Amazon’s competitive position. I forgot, though, to link this Bloomberg article that reports the details:

A 2013 report to Amazon’s senior management team proposed an aggressive global expansion of the company’s Fulfillment By Amazon service, which provides storage, packing and shipping for independent merchants selling products on the company’s website…Amazon’s plan would culminate with the launch of a new venture called “Global Supply Chain by Amazon,” as soon as this year, the documents said. The new business will locate Amazon at the center of a logistics industry that involves not just shippers like FedEx and UPS but also legions of middlemen who handle cargo and paperwork associated with transnational trade. Amazon wants to bypass these brokers, amassing inventory from thousands of merchants around the world and then buying space on trucks, planes and ships at reduced rates. Merchants will be able to book cargo space online or via mobile devices, creating what Amazon described as a “one click-ship for seamless international trade and shipping.” ‘Ease and Transparency’…

Amazon will partner with third-party carriers to build the global enterprise and then gradually squeeze them out once the business reaches sufficient volume and Amazon learns enough to run it on its own, the documents said. If the logistics business takes hold, financial services could follow, with Amazon giving loans to merchants, processing international payments and consulting its network of sellers on customs and tax matters.

Admittedly, this seems like a taller order; both Amazon’s e-commerce and cloud computing businesses had the advantage of being greenfield opportunities: Amazon was making new markets instead of overtaking entrenched incumbents like UPS or Fedex that already operate at scale.

On the other hand, Amazon has reasons, opportunities, and resources to do exactly what they propose:

The current package delivery system in the U.S. was not designed for e-commerce. UPS and Fedex were traditionally more focused on businesses, with the former focusing on packages and the latter on speed. UPS’s more integrated system and package capability meant they have been able to retrofit to supporting e-commerce the best, but just as a company like Dropbox can benefit from custom-building infrastructure for their needs, it’s reasonable to think that Amazon could do the same if they were building a global e-commerce delivery service from scratch

The theory that the logistics companies are better able to meet Amazon’s needs because they can leverage scale falls apart when it is Amazon that is providing most of that scale. I’ve linked to this Wall Street Journal article before that says as much as a third of UPS residential deliveries are for Amazon; given that Amazon is taking over 50% of e-commerce growth that percentage is likely higher now, but the problem from UPS’ perspective is that those packages are very low margin. Actually, that’s a problem from Amazon’s perspective too: UPS doesn’t have the incentive to care as much as Amazon does

As I noted above, cost savings are not always enough of a reason to integrate; Amazon, though, has both the organizational structure to build out this business without losing focus elsewhere and the proven capability of realizing top-line opportunities by extending a service like this to 3rd-parties

Frankly, if I could sum this up, it’s that Amazon has earned the benefit of the doubt here, and I am loathe to bet against them. And, frankly, were I UPS in particular I would be worried: it seems likely that Amazon will build out this network from the inside out, by first connecting its fulfillment centers with each other and with suppliers, leaving the more logistically challenging and expensive last mile delivery to whomever wants to fight for it. That doesn’t sound great for UPS’ already low e-commerce margins.

One more thing: a persistent myth about AWS was that Amazon was selling excess server capacity that resulted from the need to ramp up for the holidays; this never made sense, because what would happen when the holidays came around in the future? Would Amazon kick everyone off? Interestingly, it seems like a similar myth is developing around this logistics effort. Namely, most reports suggest Amazon wants to bring on extra capacity to avoid the 2013 Christmas disaster when many packages were not delivered in time.

This, though, also makes no sense: are Amazon’s planes going to twiddle their thumbs the rest of the year? I’d think about their efforts from the opposite perspective: the company is building a baseline logistics capacity and will use UPS et al to handle peak demand. Until, of course, the company gets such scale that their static volume drowns out dynamic peaks and valleys, and then the existing logistics providers will really be in trouble.

The Daily Update is intended for a single recipient, but occasional forwarding is totally fine! If you would like to order multiple subscriptions for your team with a group discount (minimum 5), please contact me directly.

Thanks for being a supporter, and have a great day!

#entrepreneurship #startup #founders #entrepreneur

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jeremyau · 7 years

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Amazon’s Earnings, Amazon Logistics Services?, Netflix’s Earnings

Good morning,

One thing I didn’t get into in yesterday’s interview with The Athletic CEO Alex Mather was an actual evaluation of the site’s prospects; I simply said the company was “one of the more fascinating stories in media”, and I definitely think that!

For example, I generally believe that subscription-based publications should not take venture capital investment: the best subscription-based publications will win by having a superior cost structure and superior coverage of a relatively narrow niche, and those aren’t typically VC-scale businesses. Surprisingly, though — at least it’s a surprise to me! — I think The Athletic is right to go all-in with venture capital funding. The Athletic isn’t really similar to, say, Stratechery; it is clearly a bundle play, and bundles are like networks: you either have one or you don’t. That is exactly the sort of opportunity where venture funding is critical, because you can’t bootstrap into a bundle anymore than you can a network.

By the same token, that raises the risks for The Athletic considerably: not only does it have all of the pressure that comes with venture capital, it has the bloated cost structure (relative to revenue) that comes from spending to create a viable business model (as opposed to building it slowly). Plus, while networks reduce their customer acquisition costs over time (because the network becomes more valuable and thus more attractive to marginal users the more users there are), The Athletic will run in the opposite direction: not only will the hardest core fans sign-up first, they will also be the fans most likely to be interested in the other non-local sports that make the bundle attractive; acquiring customers cheaply will be a challenge that will only increase over time.

And, of course, there is execution risk; subscriptions are ultimately about quality, not quantity, and those two factors often work in opposite directions. In the case of The Athletic, the more writers they hire the harder it will be to ensure they are of a consistently high quality standard; worse, quality is often judged by a publication’s worst pieces, not its best.

All that said, if ever this model were to work it would work in sports. Sports lends itself to bundles, and there is always something interesting to write about. And, I’d add, while I still favor Faceless Publishers, I was struck by Mather’s argument that many writers wanted to be affiliated with The Athletic; I could see where my own personal desire for independence could lead me to underestimate the attractiveness of being attached to a brand instead of building my own. I’m biased in a second way: I started Stratechery as a side project, but that was only possible because my day job didn’t involve writing publicly; by definition established writers can’t build up a personal site on the side, and for them jumping to a startup like The Athletic is perhaps a bigger leap of faith than I give them credit for.

On to the update:

Amazon’s Earnings

From the Wall Street Journal:

Amazon.com Inc. said quarterly profit fell 77% even as sales jumped, a sign of the high cost of its increasing dominance of retail. The Seattle-based retailer eked out its smallest quarterly profit in nearly two years. The company reported $197 million in profit on $38 billion in sales in the second quarter as it spent on new warehouses and delivery capacity for its retail business and data centers for its cloud services business. The company also poured funds into hiring engineers to work on its artificial intelligence Alexa service as well as warehouse workers…

Amazon’s 25% sales growth comes at the expense of traditional retailers, which are struggling with declining foot traffic and the shift of consumer spending online. At a time when Amazon is investing heavily and expanding, other retailers are saddled with high debt loads and falling sales, forcing them to close stores and cut jobs—and extending Amazon’s advantage.

One of the big takeaways from this quarter goes back to a piece I wrote in 2015 entitled The AWS IPO. As I explained in that piece:

Amazon is not a monolithic operation, but rather a collection of businesses sharing resources, including a channel (Amazon.com), logistics, and a common technological foundation. These businesses range from bookshops to video game stores to home furniture to clothes to shoes to consumer electronics to auto accessories…the list is quite extensive at this point! True, consumers experience all of these different businesses as a unified Amazon.com, but inside the company some of these businesses are mature and (theoretically) throwing off cash, while others are reliant on investment as they work to get off the ground.

The concern for Amazon is that the business that had been throwing off cash for 20 years — Media, i.e. books, CDs, DVDs, and video games — was a dying one; the general e-commerce business was growing revenue dramatically, but was much less profitable (probably significantly unprofitable). That is why the revelation that AWS was extremely profitable was so important:

The profitability of AWS is a big deal in-and-of itself, particularly given the sentiment that cloud computing will ultimately be a commodity won by the companies with the deepest pockets. It turns out that all the reasons to believe in AWS were spot on: Amazon is clearly reaping the benefits of scale from being the largest player, and their determination to have both the most complete and cheapest offering echoes their prior strategies in e-commerce…

Perhaps the biggest implication of AWS, though, is its impact on Amazon.com…the sky is the limit for AWS, and if the service is profitable at its current scale, what expectations should we have for five years from now, or ten? More importantly, that profitability can over time replace the role of ‘Media’ in the Amazon engine: cash to build new e-commerce businesses, or to explore what is next (a la AWS), or both of the above. Or, in the fantasy of Amazon’s investors, to actually provide a return to shareholders.

Over the next several earnings periods it was clear that AWS was throwing off more cash than CEO Jeff Bezos and team knew what to do with; the company started to turn a consistent profit and some investors started to expect a new normal.

Consider expectations dashed.

First, AWS is, more than ever, the key to making Amazon go. While growth continues to slow — 42% this quarter, compared to 42.67% last quarter, and 58.22% a year ago — the division continues to throw off huge amounts of cash; AWS had $916 million in operating income last quarter, as compared to Amazon’s overall profit of only $197 million.

UPDATE: Well, this is a painful update to write — and also an easy one. In short, I totally messed up this section.

The missing money in “Investing Activities”, as a couple of readers gently pointed out, is the purchase of marketable securities. For some reason I had it stuck in my head that that was a financing activity and I just totally overlooked it. I honestly have no excuse: I built a big part of this update on something that was totally wrong, and I’m very sorry about that.

That point aside, the broader takeaway remains that Amazon is pouring money back into the business. International margins in particular have gone even more negative — from -1.4% to -6.3%, and North American margins have slipped from 4.0% to 1.9%; it is, as noted in the update, funded by AWS.

Moreover, I do believe Amazon Logistics Service is a real thing; it would, however, show up under Purchases of property and equipment (it likely already is there, just called “Fulfillment”) or in capital leases, which I have covered previously.

Anyhow, this was a big screw-up, and I’m sorry.

Back to tomorrow, where I plan to do better!

Second, Amazon is spending on something big. Take a look at the company’s cash flows over the last five years:

Note the investment line: ‘Investing Activities’ had negative cash flow of over $5 billion, by far the most in the last five years. Moreover, a look at cash flows on a trailing twelve-month basis shows this is a trend that has been picking up since early 2015 — which, as I just noted, is when Amazon started breaking out AWS in the first place:

So what is this money being used for? According to Amazon’s 10-Q:

Cash provided by (used in) investing activities corresponds with cash capital expenditures, including leasehold improvements, internal-use software and website development costs, cash outlays for acquisitions, investments in other companies and intellectual property rights, and purchases, sales, and maturities of marketable securities.

Amazon actually breaks out most of these individually, and comparing this quarter’s numbers to Q2 2015, when the outflow in investing activities started to accelerate reveals…something (as an aside, the numbers are rounded to reflect the numbers reported in the ‘Liquidity and Capital Resources’ commentary from which the numbers are taken, even though more exact numbers for total Investing Activities are available):

Q2 2015 Q2 2017 Change Total Investing Activities 1400 5100 264% Cash Capital Expenditures 1200 2500 108% Internal-use software and website development 150 90 -40% Acquisitions 8 633 7813% Missing 42 1877 4369%

The acquisitions part is easy: last quarter Amazon paid $580 million in cash for Souq.com, which reflects most of the difference there. ‘Cash Capital Expenditures’, meanwhile, “primarily reflect additional capacity to support [Amazon’s] fulfillment operations and additional investments in support of continued business growth due to investments in technology infrastructure (the majority of which is to support AWS)”, and a doubling in two years seems reasonable and reflective of Amazon’s revenue increase over the same time period.

That, though, leaves $1.8 billion in this quarter alone: what is Amazon investing in that is not AWS, not fulfillment centers, and not an acquisition?

Amazon Logistics Services?

My best guess is the company’s burgeoning logistics business. We already know the company has leased airplanes, bought thousands of truck trailers, is registered as an ocean freight forwarder, and is building a $1.5 billion logistics hub. Moreover, all of that activity started in, you guessed it, mid-2015.

The end game here — call it Amazon Logistics Services — has been clear for a long time, and if fits right in with the Amazon playbook. From a 2016 Daily Update:

It seems likely that Amazon will build out this network from the inside out, by first connecting its fulfillment centers with each other and with suppliers, leaving the more logistically challenging and expensive last mile delivery to whomever wants to fight for it. That doesn’t sound great for UPS’ already low e-commerce margins.

This, though, also makes no sense: are Amazon’s planes going to twiddle their thumbs the rest of the year? I’d think about their efforts from the opposite perspective: the company is building a baseline logistics capacity and will use UPS et al to handle peak demand. Until, of course, the company gets such scale [by offering the service to 3rd parties a la AWS and fulfillment] that their static volume drowns out dynamic peaks and valleys, and then the existing logistics providers will really be in trouble.

Presuming this is true, I suspect that, once again, Amazon’s investors will be quite alright with forgoing profits in the short-term.

Netflix’s Earnings

From Bloomberg:

Netflix Inc. shares soared after the streaming-video provider scored a record second quarter, surpassing forecasts for subscriber growth and boosting its international audience past the domestic total for the first time. Investors continue to forgive minuscule profit for growth in subscribers, which soared to almost 104 million in the period. The company’s stock price jumped as much as 9.7 percent to $177 Tuesday in New York, its biggest increase since October. Netflix shares have risen 78 percent in the past year.

I’ve explained previously why investors care more about Netflix subscriber numbers than profits: like any good SaaS customer, Netflix customers will pay back the cost to acquire them (which in the case of Netflix is the investment in evergreen content) over time. What is particularly noteworthy about the Netflix strategy, though, is that those customer acquisition costs are funded by debt.

This gets at why I’ve long considered Amazon Netflix’s most problematic competitor (and Apple a potential acquirer): not only is Amazon offering a far more comprehensive bundle (Prime) for less money than Netflix, the former has a massive capital advantage. The only cost to using AWS profits to fund, say, original video are opportunity costs. That means no default risk and, thanks to Amazon’s track record, permission from the market to set whatever hurdle rate management deems prudent. Netflix, meanwhile, has to take a riskier route and pay for said risk with actual cash (in the form of interest), and then endure the roller coaster that is to what extent their quarterly subscriber numbers exceed or fall short of the company’s expectations (and by extent, ability to pay back said debt).

It is to the company’s credit that it has withstood Amazon’s onslaught to date, and a reminder that Netflix is very much a company built with Internet assumptions; Amazon’s competitors that were built for a world before the Internet are in decidedly worse shape, and it’s only going to get worse.

Thanks for being a supporter, and have a great day!

#entrepreneurship #startup #founders #entrepreneur

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jeremyau · 7 years

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Amazon’s Earnings, Amazon Logistics Services?, Netflix’s Earnings

Good morning,

And, of course, there is execution risk; subscriptions are ultimately about quality, not quantity, and those two factors often work in opposite directions. In the case of The Athletic, the more writers they hire they harder it will be to ensure they are of a consistently high quality standard; worse, quality is often judged by a publication’s worst pieces, not its best.

On to the update:

Amazon’s Earnings

From the Wall Street Journal:

One of the big takeaways from this quarter goes back to a piece I wrote in 2015 entitled The AWS IPO. As I explained in that piece:

Consider expectations dashed.

UPDATE: Well, this is a painful update to write — and also an easy one. In short, I totally messed up this section.

Anyhow, this was a big screw-up, and I’m sorry.

Back to tomorrow, where I plan to do better!

Second, Amazon is spending on something big. Take a look at the company’s cash flows over the last five years:

So what is this money being used for? According to Amazon’s 10-Q:

That, though, leaves $1.8 billion in this quarter alone: what is Amazon investing in that is not AWS, not fulfillment centers, and not an acquisition?

Amazon Logistics Services?

The end game here — call it Amazon Logistics Services — has been clear for a long time, and if fits right in with the Amazon playbook. From a 2016 Daily Update:

This, though, also makes no sense: are Amazon’s planes going to twiddle their thumbs the rest of the year? I’d think about their efforts from the opposite perspective: the company is building a baseline logistics capacity and will use UPS et al to handle peak demand. Until, of course, the company gets such scale [by offering the service to 3rd parties a la AWS and fulfillment] that their static volume drowns out dynamic peaks and valleys, and then the existing logistics providers will really be in trouble.

Presuming this is true, I suspect that, once again, Amazon’s investors will be quite alright with forgoing profits in the short-term.

Netflix’s Earnings

From Bloomberg:

Thanks for being a supporter, and have a great day!

#entrepreneurship #startup #founders #entrepreneur

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jeremyau · 7 years

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Male and Female Entrepreneurs Get Asked Different Questions by VCs — and It Affects How Much Funding They Get

June 27, 2017

There is an enormous gender gap in venture capital funding in the United States. Female entrepreneurs receive only about 2% of all venture funding, despite owning 38% of the businesses in the country. The prevailing hope among academics, policy makers, and practitioners alike has been that this gap will narrow as more women become venture capitalists. However, homophily does not seem to be the only culprit behind the funding gap. Over the past several years, the U.S. has seen an increase in the number of female venture capitalists (from 3% of all VCs in 2014 to an estimated 7% today), but the funding gap has only widened.

Research my colleagues and I conducted offers new evidence as to why female entrepreneurs continue to receive less funding than their male counterparts. We observed Q&A interactions between 140 prominent venture capitalists (40% of them female) and 189 entrepreneurs (12% female) that took place at TechCrunch Disrupt New York, an annual startup funding competition. Our study then tracked all funding rounds for the startups that launched at the competition. These startups were comparable in terms of quality and capital needs, yet their total amounts of funding raised over time differed significantly: Male-led startups in our sample raised five times more funding than female-led ones.

When we analyzed video transcriptions of the Q&A sessions (with a linguistic software program and manual coding), we learned that venture capitalists posed different types of questions to male and female entrepreneurs: They tended to ask men questions about the potential for gains and women about the potential for losses. We found evidence of this bias with both male and female VCs.

According to the psychological theory of regulatory focus, investors adopted what’s called a promotion orientation when quizzing male entrepreneurs, which means they focused on hopes, achievements, advancement, and ideals. Conversely, when questioning female entrepreneurs they embraced a prevention orientation, which is concerned with safety, responsibility, security, and vigilance. We found that 67% of the questions posed to male entrepreneurs were promotion-oriented, while 66% of those posed to female entrepreneurs were prevention-oriented.

The table below illustrates the key differences between promotion and prevention questions. For example, take the topic of customers. A promotion question would look into customer acquisition, whereas a prevention question would inquire about customer retention.

This difference in questioning appears to have substantial funding consequences for startups. Examining comparable companies, we observed that entrepreneurs who fielded mostly prevention questions went on to raise an average of $2.3 million in aggregate funds for their startups through 2017 — about seven times less than the $16.8 million raised on average by entrepreneurs who were asked mostly promotion questions. In fact, for every additional prevention question asked of an entrepreneur, the startup raised a staggering $3.8 million less, on average. Controlling for factors that may influence funding outcomes — like measures of startups’ capital needs, quality, and age, as well as entrepreneurs’ past experience — we discovered that the prevalence of prevention questions completely explained the relationship between entrepreneur gender and startup funding.

We also noticed that the majority of entrepreneurs (85%) responded to questions in a manner that matched the question’s orientation: A promotion question begets a promotion answer, and a prevention question begets a prevention answer. This pattern of behavior perpetuates a cycle of bias in the Q&A process that can aggravate the funding disparity. By responding in kind to promotion questions, male entrepreneurs reinforce their association with the favorable domain of gains; female entrepreneurs who respond in kind to prevention questions unwittingly penalize their startups by remaining in the realm of losses. When it comes to venture funding, entrepreneurs need to convince prospective investors of their startups’ “home run” potential — it’s not enough to simply demonstrate that they’re unlikely to lose investors’ money.

Fortunately, there’s an actionable silver lining to our findings: If entrepreneurs change how they respond to prevention questions, they may be able to raise more funds. TechCrunch Disrupt entrepreneurs who were asked mostly prevention questions but gave mostly promotion responses went on to raise an average of $7.9 million in total funding. Conversely, those who responded to mostly prevention questions with mostly prevention answers went on to raise an average of only $563,000. So an entrepreneur who is asked to defend her startup’s market share would be better served by framing her response around the size and growth potential of the overall pie than by merely stating how she plans to protect her share of the pie.

These findings from our field study were correlational, so we crafted an experiment to determine whether the relationship between Q&A orientation and funding is causal. We recruited both professional VCs (194 angel investors, 30% of whom were women) and ordinary people (106 Amazon Mechanical Turk users, 47% women).

Simulating the Q&A setting of TechCrunch Disrupt, we asked participants to listen to four six-minute audio files consisting of Q&A exchanges between investors and entrepreneurs. Each file involved a different company and employed a distinct combination of Q&A orientations, such that one had promotion questions with promotion answers, another had promotion questions with prevention answers, and so on. Since we used actual TechCrunch Disrupt transcripts as the basis for the audio files, we redacted the dialogue for any startup specifics and standardized the clips to control for variations in quality and stage. Participants had to allocate funds to each of the four companies (using a total of $400,000 available to them) based on their reactions.

The experimental results reinforced our findings from the field: Entrepreneurs who were asked promotion questions received twice as much funding as those who were asked prevention questions. More important, we also confirmed the benefits of switching orientation. Angel investors allocated an average of $81,113 to startups in the prevention question, promotion answer condition — 1.6 times larger than the $52,369 average allocated to those in the prevention question, prevention answer condition. Similarly, ordinary investors gave an average of $96,321 to the prevention question, promotion answer condition — 1.7 times larger than the $55,377 average given to the prevention question, prevention answer condition.

Armed with the knowledge that promotion has advantages over prevention, informed entrepreneurs can recognize question orientation and frame their responses to benefit their startups.

Our findings suggest that the gender gap in funding is not likely to narrow simply because more women are becoming VCs. Both men and women who evaluate startups appear to display the same bias in their questioning, inadvertently favoring male entrepreneurs over female ones. Being cognizant of this phenomenon can help investors approach Q&A interactions more evenhandedly. By posing a balance of promotion and prevention questions to men and women, investors grant all startups an equal chance to display their worthiness and may even improve their own decision making in the process.

#entrepreneurship #startup #founders #entrepreneur

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jeremyau · 7 years

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Staring at the numbers

Sometimes, you can learn a lot by watching. But not always.

An alien observing our behavior in elevators would note that most of the time, a person gets in, approaches the front corner, leaves that corner, goes to the back and then stands silently, staring at the numbers above the door.

Only one of those actions is actually required. If you don't push the button (or have someone push it for you) nothing happens. The rest—the moving to the back, standing silently and most of all, staring at the numbers—it's just for show, a cultural tradition.

Most practices work this way. From eating in restaurants to marketing, we add all sorts of extraneous motion to our effort. Which is fine, unless you don't understand which ones actually matter to the outcome.

Too often, we train people in the motions without giving them understanding. Then, when the world changes, we're stuck staring at the numbers going by, unable to find the insight to push a new kind of button.

Posted by Seth Godin on June 22, 2017

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« Worth being afraid of | Main | "Is judgment involved?" »

#entrepreneurship #startup #founders #entrepreneur

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jeremyau · 7 years

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Travis Kalanick Resigns, Uber’s Dangerous Delusion, Uber Going Forward

Posted onWednesday, June 21, 2017 Author by Ben Thompson

Good morning,

Subject: A hard decision

I never thought I would be writing this.

As you all know, I love Uber more than anything in the world, but at this difficult moment in my personal life, I have accepted a group of investors’ request to step aside, so that Uber can go back to building rather than be distracted with another fight. I will continue to serve on the board, and will be available in any and all ways to help Uber become everything we’ve dreamed it would be.

Thank you for everything.

And with that Travis Kalanick has resigned as CEO of Uber. On to the update.

Travis Kalanick Resigns

From the New York Times:

Travis Kalanick stepped down Tuesday as chief executive of Uber, the ride-hailing service that he helped found in 2009 and that he built into a transportation colossus, after a shareholder revolt made it untenable for him to stay on at the company.

Mr. Kalanick’s exit came under pressure after hours of drama involving Uber’s investors, according to two people with knowledge of the situation, who asked to remain anonymous because the details are confidential.

Earlier on Tuesday, five of Uber’s major investors demanded that the chief executive resign immediately. The investors included one of Uber’s biggest shareholders, the venture capital firm Benchmark, which has one of its partners, Bill Gurley, on Uber’s board. The investors made their demand for Mr. Kalanick to step down in a letter delivered to the chief executive while he was in Chicago, said the people with knowledge of the situation.

After promising more coverage of Uber last Monday, I ended up not writing anything the rest of the week, even after the release of the Holder recommendations and the instantly infamous staff meeting that resulted in an Uber board member resigning for making a sexist remark.

You will recall that before said board meeting it was announced that Kalanick was taking a leave of absence, and he did not appear at the meeting. What you may have missed is that, later that night, Kalanick was emailing the company about the aforementioned board resignation. It was a small thing, but it heightened my suspicion that things weren’t over.

And how could they be? As I wrote in February I believe Kalanick’s fatal mistake, the one that ultimately led to his resignation, was back in 2014 when Vice President of Business Emil Michael was accused of suggesting the company might dig up dirt on journalists critical of the company:

That, though, is why the 2014 Michael episode was such a missed opportunity: it is always incumbent on CEOs to define what is or is not acceptable, but that responsibility was especially heavy at Uber:

The very nature of the company’s business model required pushing up to the line, which meant egregious offenses had to be disciplined to ensure folks didn’t go too far

As I noted last week, Uber’s dominance is about controlling demand, which means the company’s public perception matters greatly

The company is based in San Francisco, which means it is in one of the most competitive talent markets in the world

I don’t think this last point can be underestimated when it comes to evaluating Uber’s response: the number one thing that seems to motivate Uber accountability is its own employees, and the threat of either losing them or not being able to recruit new ones. That, though, is why Uber should have drawn the most obvious of lines three years ago.

Michael was finally let go last week; his defiance in this Bloomberg report is pretty incredible:

Michael believes that a weak board of directors, a lax internal legal team, coupled with his tight friendship with co-founder Kalanick, ultimately led to his downfall — not the scandals, two people close to Michael said.

This is delusional, and, frankly, goes a long ways towards explaining Uber’s problems, many of which go beyond the workplace environment.

Uber’s Dangerous Delusion

At the end of that February piece I concluded:

This is rapidly becoming an existential question for Uber: exactly how much of the company’s success was due to the idea, and how much was due to the executives? The surest route to a company allegedly rife with the behavior documented this week is to strongly credit people, who soon come to believe that nothing matters but the (short-term) bottom line; the potential casualty for being wrong, though — for rewarding people who just happened to be in the right place at the right time — is the very idea itself.

As I think I’ve made clear, I do credit Kalanick specifically for much of Uber’s success (and, by extension, the success of Lyft in particular but also Didi; Uber paved the regulatory way for the former, and forced the latter into the correct business model). The thing to remember, though, is that Uber has far more going for it than just its CEO. This is a point I’ve made several times in the context of Airbnb:

This matters when it comes to understanding Airbnb’s regulatory challenges, particular relative to Uber. The most important reason why Uber (and Lyft) has overcome regulatory challenges most of the time is that the company has positive externalities: not only is the service “good” for passengers (who get a liquid transportation option) and drivers (who get a job), it benefits people who don’t use the service. There are fewer drunk drivers, fewer parked cars, restaurants and bars get more business, underserved neighborhoods become accessible, travelers have better experiences, etc.

It follows that a lot of the opposition to Uber was due to regulatory capture: regulators may have been materially captured by taxi companies or non-materially captured by virtue of the fact that, having spent decades in a symbiotic relationship with taxi companies, they couldn’t imagine how the transportation industry might operate differently. What Uber did so successfully was get the public on their side such that regulators felt more pressure from the general public than they did from the industry, which had no way to fight back: taxi companies offered an inferior service, were already disliked by riders, and they treated drivers even worse than Uber did!

Kalanick was brilliant at overcoming regulatory capture, but don’t miss the crucial point: Uber, at least the idea of it, is a good thing. It actually does make the world better. That has always been Uber’s best asset, not Kalanick (and, for heaven’s sake, not Michael).

It has long been weird to me that Uber hasn’t pushed this narrative more consistently: oh sure, the company made these points aggressively when threatened in places like Austin, Texas, but by that point it was too late: valid points were dismissed as political positions, and many were primed to dismiss them because of Uber’s unrelenting controversies.

This is why I find Michael’s delusion so illuminating: while I’ve long criticized Kalanick specifically and Uber generally for giving too much credit to, well, themselves, and not nearly enough to the general idea, I never really considered that the delusion might go so far that Uber itself forgot the point, so consumed as it was by petty grievances and the all out drive to win.

This, ultimately, is why Kalanick had to go: the idea of Uber is bigger than even the person who is more responsible than anyone else in making that idea a reality. And while the motivation of the investors that ultimately convinced Kalanick to step down may not have been so prosaic, the desire to protect their investment is, ultimately, the same sentiment: transportation-as-a-service is not only the future, it is one of the biggest investment opportunities seen in years, and Kalanick had crossed the line from asset to liability.

Uber Going Forward

Let me be super clear: losing Kalanick is a massive blow; it may be fatal. That alone should give an indication of just how delusional Michael was about the scandals engulfing the company: that Uber’s investors would risk a future without Kalanick shows just how damaging the last few months have been. That said, the path forward is, in my estimation, relatively straightforward, and, I’d add, something that Kalanick would have been unable to execute:

Hire a CEO: This is a rather obvious point, but it’s an important one. The Uber COO job was not a very attractive one given Kalanick’s dominant position in the company. CEO, on the other hand, is much more intriguing, even if Kalanick is still on the board, and the company should be able to pursue much better candidates. I imagine Sheryl Sandberg is at the very top of the list.

Fix Accounting: As I detailed a few weeks ago, I’m suspicious that Uber is calculating its unit economics correctly (and, I’ll note, Bill Gurley, the VC and Uber board member who reportedly led the effort to convince Kalanick to step down, has written a couple of posts that almost seem like letters to Uber). I suspect this has led to a sub-optimal strategy in terms of winning drivers from Lyft: Uber has focused on monopolizing drivers via bonuses instead of simply paying more and winning via network effects.

Settle With Waymo and Retrench in Self-Driving Cars: Uber’s entire self-driving car saga, including the Waymo lawsuit and the allegations contained therein, are arguably a fireable offense on their own. It’s unclear if Waymo will succeed in implicating Uber in Anthony Levandowski’s transgressions, but the truth is that Uber’s entire self-driving effort is arguably a strategic error; certainly driving Waymo to partner with Lyft is a massive blow. Uber should seek to put the whole affair behind it and focus on partnering with the Intel/Here/BMW/Mercedes coalition.

Retrench Internationally: I will admit, this is the part I have the least conviction about: international markets are even more attractive than developed ones because most potential customers don’t own cars (the car in the garage is Uber’s biggest competitor). That said, it feels like Uber has pushed the fundraising envelope as far as it can, and a focus on fiscal discipline will help the internal culture nearly as much as a change in leadership. At the end of the day, Uber will either IPO or not on the back of North America and Europe (and that fortuitous investment in Didi), and it is past time to focus all of its resources on locking down those market.

Sell Uber: This is the most important: I firmly believe that Uber has positive effects on the cities in which is operates, and the company needs to start singing that reality from the rooftops. This is not simply about ginning up more riders or drivers: this is also about rebuilding internal morale, and, even more importantly, it is about reminding Uber’s leaders — and its board members — that Uber is not about any one person, but rather about a new way of approaching transportation that is uniquely enabled by technology.

You’ll note that I haven’t said anything about Uber’s internal culture problems; that is because, as I explained in The Curse of Culture:

Culture is not something that begets success, rather, it is a product of it. All companies start with the espoused beliefs and values of their founder(s), but until those beliefs and values are proven correct and successful they are open to debate and change. If, though, they lead to real sustained success, then those values and beliefs slip from the conscious to the unconscious, and it is this transformation that allows companies to maintain the “secret sauce” that drove their initial success even as they scale. The founder no longer needs to espouse his or her beliefs and values to the 10,000th employee; every single person already in the company will do just that, in every decision they make, big or small.

Uber’s internal culture will be fixed not by fiat but rather by a new approach to its business that emphasizes the good Uber does, instead of venerating (and excusing) its executives. That is why “Selling Uber” is the most important point: the ultimate customer is Uber itself.

Thanks for being a supporter, and have a great day!

#entrepreneurship #startup #founders #entrepreneur

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jeremyau · 7 years

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Montessori Was the Original Personalized Learning. Now, 100 Years Later, Wildflower Is Reinventing the Model

Photo Credit: Kate Stringer

June 18, 2017

Talking Points

How @wildflowerschls are reinventing Montessori’s 100-year-old personalized learning for the 21st century

Updated, June 20

Cambridge, Massachusetts

For a classroom of a dozen 3- through 6-year-olds, things are surprisingly quiet inside Wildflower Montessori. The most audible sounds, though still hushed, come from two small boys sitting on the hardwood floor next to a tray of wooden cursive letters. The boys are creating their literacy lesson plan for the day: learning to spell “crazyman.”

Inspiration comes suddenly and passionately, as the best ideas do. “Can we make ‘crazyman’?” the older boy asks. “I know what C looks like,” the younger one says, sounding out the harsh consonant and picking a C from the box. “Yeah, that’s easy,” the older one replies.

Head of School Erin McKay approaches the students and lays a cloth on the floor for them to arrange their letters. “Crazyman,” the teacher says. “Who is that?” The two boys smile at each other. “Nobody!”

Nearby, other students are pioneering their own lesson plans, though they’d hardly call them that. A boy leans over a mirror and sketches his portrait. A girl lies on the floor, labeling the countries of South America on a map. Another girl makes tea.

Students guiding their own learning with minimal teacher direction — it’s a personalized learning dream. But this is a Montessori school, following a century-old model that has been doing personalized learning since before it even had a name. That model was the creation of physician and innovator Maria Montessori, who opened her first school in Rome in 1907 and built educational materials around her belief in children’s natural desire to explore their world.

Wildflower Montessori is part of a chain of micro-schools that take Montessori’s model a step further, operating as one-room schoolhouses, led solely by teachers, that aim to make personalization a definition rather than a description of education. Each location supports three grade levels, and although the majority of students are under age 6, ages range from 14 months to 17 years old, depending on the school.

“We are all special and unique, and the fact that we stick the word ‘personalized’ in front of ‘education’ and make it a topic is its own profound comment on where we are and how far we’ve gotten away from common sense in education,” said Wildflower CEO Matt Kramer.

Wildflower schools populate one- or two-room storefronts, creating a micro-school spin on the Montessori learning model.

Photo: Kate Stringer

Today’s typical school design is far from personalized, he said. Large buildings with hundreds, if not thousands, of students. Children working on the same material at the same time of the day and year. Teachers with more parents and students than they can possibly develop relationships with.

That was the landscape former Google head of personalization and MIT Media Lab professor Sep Kamvar encountered when he tried to find a school for his young son in 2014. Dissatisfied with what he found, he developed the Wildflower model: a school led by two veteran Montessori teachers who would teach no more than 25 students. The teachers would direct the school and the students would direct the learning.

From that first location in a Cambridge storefront, the Wildflower network has grown to encompass 11 schools in Massachusetts and Puerto Rico, with more to open soon in Colorado, Rhode Island, and Minnesota. The Wildflower Foundation raises millions of dollars from donors like the Walton Family Foundation and the Chan Zuckerberg Initiative to partially fund the schools and to provide startup grants for teachers who want to open a school of their own, following Wildflower’s open-source model.

Teachers are called "guides" in the Montessori education model, which centers around student agency in learning.

Photo: Kate Stringer

‘The hero of their own story’

In the back of Cambridge Wildflower, Head of School Mary Rockett sits in a wooden chair designed for a 4-year-old, her legs stretched out in front of her. “It’s good for my knees,” the teacher jokes. She leans over an Apple laptop, one of the only pieces of modern technology visible in the school. As McKay engages with the students, Rockett sneaks in some administrative work.

There are an estimated 20,000 Montessori schools around the world, including 4,500 in the United States, the North American Montessori Teachers’ Association estimates. Rockett has taught in Montessori classrooms for 25 years and was an administrator for 10 — so when she heard about the opportunity to both run her own school and teach, she jumped at it.

This level of control is attractive to many teachers, said Kramer, who receives dozens of inquiries a week from educators interested in starting their own Wildflower school.

“It empowers teachers to meet their needs directly,” said Kanan Patel, head of school at Wildflower’s Aster Montessori in Cambridge, who has taught in Montessori schools in both India and the United States. Because she doesn’t have an administrative hierarchy to navigate, she and her co-teacher can make immediate changes based on parent feedback, such as adjusting the schedule of their after-school care program.

Students at Wildflower Montessori in Cambridge, Massachusetts, help each other practice spelling with wooden cursive letters.

Photo: Kate Stringer

This kind of respect and empowerment of teachers fits naturally into Montessori’s model of respect and empowerment of children. It can be startling to watch at first: young students freely navigating the classroom with little instruction. That’s how Rockett felt when she first set foot in a Montessori school as a volunteer in high school, but now, she said, she can’t imagine another way that shows as much respect for students. She recalled her few stints as a student teacher in traditional classrooms: “It felt unnatural, disrespectful of children,” she said. “We just don’t give them credit for their ability to concentrate.”

Montessori weaves respect into the literal fabric of the classroom, giving children high-quality natural materials made of wood or ceramic rather than the ubiquitous plastic that makes up most children’s toys. But it’s also in the freedom teachers give their students to explore learning.

“There is nothing more dangerous you can do to a kid’s long-term development than undermine their sense that they are the hero of their own story, and our [traditional] schools do that all the time,” Kramer said. He speaks from his own experience of being forced to miss recess every day as a first-grader with ADHD, who couldn’t sit still in a traditional classroom. When he switched to Montessori for the rest of elementary school, he said, he felt liberated from the confines of desks and strict rules.

Research shows the effectiveness of the Montessori approach. The Journal of Research in Childhood Education found that students who attended Montessori schools in grades pre-K through 5 achieved better math scores on the ACT than their traditionally educated peers, though the English scores were similar. A 2006 article in Science magazine reported positive effects for students in inner-city public Montessori schools, citing better standardized test scores at the end of kindergarten and a better ability to write complex and creative essays at the end of elementary school.

Students work independently in the Aster Montessori School in Cambridge, Massachusetts.

Photo: Kate Stringer

Guiding the ‘inner blueprint’

In the Wildflower schools, teachers can sometimes be found at the back of the room, sitting quietly and taking notes. Other times, they’re sitting next to a student, observing and asking guiding questions. But in the background is a rigorous curriculum that they want their students to learn, so they have tricks for guiding children through the process. If a student isn’t participating in a subject area, like math, a teacher might invite her to help a classmate learn counting with wooden blocks. If a student is having difficulty mastering a topic, a teacher might recruit an older peer to help out, or ask the student to explain the process back to the teacher.

For example, when “crazyman” takes a turn for the ... well, crazy, McKay approaches her students again. She kneels next to the boys, who have arranged their wooden letters on the floor to spell “craseemiee.” “Can we clap together?” McKay asks. The boys start clapping as they sound out each letter in “crazyman.” They figure out that “e” is not the right sound for “man.” “Can I move this ‘e’ sound?” McKay asks, waiting for the boys’ permission before removing the letter. It’s a gentle approach that keeps the students in charge.

This subtle approach to teaching was attractive to parent Amelia Sorensen, whose two sons attend Aster Montessori. Sorensen’s oldest son, Gus, isn’t a fan of writing but loves science and geography — which his teachers know how to turn to his advantage. When he came in one morning and shared a new word, phagocyte, his teacher suggested he try to spell it using wooden letters. While Gus will attend public school next year because of cost, Sorensen said, “we wanted to start them as best we could to give them that solid foundation of thinking of school and learning as a wonderful thing, and not as a chore or something to be avoided.”

Can the model work for every student? Kramer replied that “the basic ideas of Montessori, that children are fundamentally good and peaceful and curious, that in the right environment their inner blueprint will become live, that basic idea, that applies to every kid.” But Montessori's intensive 15-minute bursts of intervention might not hold water for all students who are far behind, Kramer said, and teachers may choose other methods for their students.

Photo: Kate Stringer

Another issue, as Sorensen found, is cost. Tuition at many of the Wildflower schools ranges from $15,000 to $22,000, though Kramer said he is committed to opening his schools to a diverse range of students. For example, Marigold Montessori in Haverhill, Massachusetts — which joined the Wildflower network in 2016 — is tuition-based but accommodates low-income families by accepting Massachusetts child care vouchers. About half the school’s families receive $700 a month toward tuition by using the vouchers, according to the Montessori Public blog. Another Wildflower school, in Puerto Rico, operates out of a public school while maintaining the teachers’ autonomy. The network has also started applications for opening charter schools and is exploring sponsorship arrangements with universities or businesses as another method of increasing accessibility.

Wildflower’s drive to quietly blend the traditional with cutting-edge innovations extends from its exploration of various school choice options to its desire to imbue technology into the learning model without being invasive. One development, created in conjunction with the MIT Media Lab, is trackers that are placed in different classroom learning areas, on teachers, and inside the slippers that students wear during class. The trackers map which activities the children use each day and how long the teachers spend with certain kids, allowing the educators to adjust their instruction.

They’ve also developed simple Montessori-style tools to teach coding. With one such tool, children arrange tiles on a cork board that correspond with code written on a piece of paper.

It’s 21st century learning. Montessorized.

Disclosure: The 74 receives funding from the Walton Family Foundation.

#childcare #daycare #parenthood #preschool #kindergarten

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jeremyau · 7 years

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All it takes is effort

Customer service used to be a great divide. Well-off companies would heavily invest in taking care of customers, others would do the minimum (or a bit less). Of course, back then, organizations couldn't possibly give you all the service you might dream of. They can't all afford to answer the phone on one ring, it's expensive to hire enough operators and train them. And they certainly can't dedicate an operator just to you, someone who would know your history and recognize your voice.

Today, though, when more and more of our engagements are digital, it doesn't take an endless, ongoing budget to delight people. All an organization needs to do is care enough (once) to design it properly.

To make a process that is easy to use, clearly labeled and well designed.

To build a phone system that doesn't torture you and then delete everything you typed in.

To put care into every digital interaction, even if it's easier to waste the user's time.

[Insert story here of healthcare company, cable company or business that doesn't care enough to do it right. One where the committees made the process annoying. Or where the team didn't cycle one more time. Or where the urgency of the moment takes attention away from the long-term work of system design. The thing is, if one company can do the tech right, then every organization with sufficient resources and motivation can do the tech right.]

The punchline is simple: In consumer relations and service, good tech is free.

It's free because it pays for itself in lower overhead and great consumer satisfaction and loyalty.

But it requires someone to care enough to do it right.

Perhaps we need to change the recording to, "due to unusually lazy or frustrated design and systems staff (and their uninvolved management), we're going to torture you every single time you interact with us. Thanks for your patience."

Posted by Seth Godin on June 20, 2017

| |

« Winner take all | Main

#entrepreneurship #startup #founders #entrepreneur

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jeremyau · 7 years

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People Don’t Follow Titles: Necessity and Sufficiency in Leadership

June 15, 2017 | Reading Time: 6 minutes

“Colonel Graff: You have a habit of upsetting your commander. Ender Wiggin: I find it hard to respect someone just because they outrank me, sir.” — Orson Scott Card

***

Many leaders confuse necessary conditions for leadership with sufficient ones.

Titles often come with the assumption people will follow you based on a title. Whether by election, appointment, or divine right, at some point you were officially put in the position. But leadership is based on more than just titles.

Not only do title-based leaders feel like once they get the title that everyone will fall in line, but they also feel they are leading because they are in charge — a violation of the golden rules of leadership. This makes them toxic to organization culture.

A necessary condition for leadership is trust, which doesn't come from titles. You have to earn it.

***

Necessary conditions are those that must be present, but are not, on their own, enough for achievement.

Perhaps an easy example will help illuminate. Swinging at a pitch in baseball is necessary to hit the ball, but not sufficient to do so.

War offers another example. It's necessary to know the capabilities of your enemy and their positions, but that is not sufficient to win a battle.

Leadership can be very similar. Being in a position of leadership is necessary to lead an organization, but that is not sufficient to get people moving towards a common goal. Titles, on their own, do not confer legitimacy. And legitimacy is one of the sufficient conditions of leadership.

If your team, organization, or country doesn't view you as legitimate you will have a hard time getting anything done. Because they won’t work for you, and you can’t do it all yourself. Leadership without legitimacy is a case of multiply by zero.

There is a wonderful example of this, from the interesting history of the Mongolians. In his book The Secret History of the Mongol Queens, Jack Weatherford tells an amazing story of the unlikely, but immensely successful, leadership of Manduhai the Wise.

250 years after Genghis Khan, the empire was in fragments. The Mongols had retreated into their various tribes, often fighting each other and nominally ruled by outsiders from China and the Middle East. There was still a Khan, but he exercised no real power. The Mongol tribes were very much at the mercy of their neighbors.

In 1470 the sitting Khan died, survived only by a junior wife. There were immediate suitors vying for her affection because by marrying her the title of Khan could be claimed. Her name was Manduhai. Instead of choosing the easy path of remarriage and an alliance, she decided to pursue her dream of uniting the Mongol nation.

First, she had to choose a consort that would allow her to keep the title of Queen. There was one remaining legitimate survivor of Genghis Khan’s bloodline – a sickly 7-year-old boy. Orphaned as a baby and neglected by his first caregiver, he had been under Manduhai’s protection for a few years. Because of his lineage, she took him to the Shrine of the First Queen and asked for divine blessings in installing him as the Great Khan. They would rule together, but clearly, due to his age and condition, she would be in charge.

Although her words would be addressed to the shrine, and she would face away from the crowd, there could be no question that, in addition to being the spiritual outcry of a pilgrim, these words constituted a desperate plea of a queen to her people. This would be the most important political speech of her life.

She was successful in securing the appointment. But Manduhai understood that the title of Great Khan for the little boy and Khatun (Queen) for her would not be enough. She needed the support of all the Mongol tribes to give the titles legitimacy, and here there were a significant number of obstacles to overcome.

Twice before in the previous generations, boys of his age had been proclaimed Great Khan, only to be murdered by their rivals before they could reach full maturity. Other fully grown men who bore the title were also ignominiously struck down and killed by the Muslim warlords who tried to control them.

First Manduhai had to keep herself and the boy, Dayan Khan, alive. Then she had to demonstrate that they were the right people to unite the Mongol tribes and ensure prosperity for all. This would take both physical battles and a strategic understanding of how to employ little power for great effect. Her success was by no means guaranteed.

Throughout their reign, as on this awkward inaugural day, they frequently benefited from the underestimation of their abilities by those who struggled against them. In the world where physical strength and mastery of the horse and bow seemed to be all that really mattered, no one seemed to anticipate the advantages of patient intelligence, careful planning, and consistency of action.

It was these traits that led Manduhai to carefully craft her plan of action. She needed to position herself as a true leader that could unite the Mongol tribes.

Vows, prayers, and rituals before a shrine added much needed scared legitimacy to Dayan Khan’s rule, but without force of arms, they amounted to empty gestures and wasted breath. Only after demonstrating that she had the skill to win, as well as the supernatural blessing to do so, could Manduhai hope to rule the Mongols. She had enemies on every side, and she needed to choose her first battle carefully. She had to confront each enemy, but she had to confront each in its own due time. Manduhai needed to manage the flow of conflicts by deciding when and where to fight and not allowing others to force her into a war for which she was not prepared or stood little chance of winning.

She made an important strategic alliance with one of the failed suitors, a popular and intelligent general who controlled the area immediately east of her power base. Then she went to battle to secure her western front. Some tribes supported her from the outset, due to the spiritual power of her partnership with the boy, the ‘true Khan’. The rest she conquered, support snowballing behind her.

In addition to its strategic importance, the western campaign against the Oirat was a notable propaganda victory, demonstrating that Manduhai had the blessing of the Shrine of the First Queen and the Eternal Blue Sky. Manduhai showed that she was in control of her country.

Grinding it out in the trenches inspired support. Manduhai demonstrated the courage and intelligence to lead and to provide what her people needed. She was not an empire builder, seeking to conquer the world. Rather, she was pragmatic desiring to unify the Mongol nation to ensure they had the means to thwart any future attempt at takeover by a foreign power.

In contrast to the expansive territorial acquisition favored by prior generations of steppe conquerors, Manduhai pursued a strategy of geographic precision. Better to control the right spot rather than be responsible for conquering, organizing, and running a massive empire of reluctant subjects. … Rather than trying to conquer and occupy the extensive links of the Silk Route or the vast expanse of China, she sought to conquer just the strategic spot from which to control them.

Her story teaches us the difference between necessity and sufficiency when it comes to leadership.

Manduhai ticked all the necessary boxes, being a Queen, choosing a descendant of Genghis Khan to rule by her side, and asking for meaningful spiritual blessings. While necessary these were not sufficient to rule. To actually be accepted as a leader, she had to prove herself both on the battlefield and in strategic negotiations. She understood that people would only follow her if they believed in her, and saw that she was working for them. And finally, she also considered how to use her leadership to create something that would continue long after she had gone.

Manduhai concentrated the remainder of her life in protecting what she had accomplished and making certain that the nation could sustain itself after her departure. With the same assiduous devotion she had applied to the battlefield and the unification of the Mongol nation, Manduhai and Dayan Khan now set to the reorganization of the Mongol government and its protection in the future.

In this, she succeeded. She cemented her power as Queen by ultimately working for the peace and prosperity of the entire Mongol nation. Perhaps this is why she is remembered by them as Mandukhai the Wise.

#entrepreneurship #startup #founders #entrepreneur

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jeremyau · 7 years

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Good morning,

It’s a special Friday edition of the Daily Update!

On to the update:

Blue Apron Files for IPO

From Bloomberg:

Meal-kit delivery company Blue Apron Holdings Inc. is hoping it can stand out to public investors in an increasingly crowded marketplace for on-demand food. The company filed for an initial public offering in the U.S. Thursday, after reportedly delaying listing preparations while it worked to improve financials. While revenue more than doubled last year, Blue Apron is still losing money as it fights to win customers from competitors such as HelloFresh AG and Sun Basket Inc. as well as publicly listed giants like Amazon.com Inc.

Gaining share in the busy U.S. food-delivery market is expensive: Blue Apron spent $144 million on marketing last year, or about 17 percent of its total operational spending. The company has been working to reduce the cost of acquiring customers, aligning that outlay more closely with the value of long-term subscribers, a person familiar with the matter said last year.

That last sentence is critical when it comes to evaluating not just Blue Apron, but companies of all types, and, frankly, that sentence raises big questions about Blue Apron even before you look at the numbers.

The lifetime value (LTV) of a customer is pretty straightforward to understand: how much revenue will you earn from a customer for the duration of the time they are a customer, minus how much it will cost to serve them, discounted by the cost of capital. Why discount? Because there’s one more piece of the LTV equation: how much it costs to acquire that customer, and that cost is borne today, while revenue isn’t realized until the future (and future revenue is worth less than cash paid for customer acquisition today).

In other words, it makes no sense to say that “the cost of acquiring customers” needs to be aligned with “the value of a long-term subscribers” — the value of long-term subscribers by definition should include the cost of acquiring them.

Anyhow, we have the numbers, not just news stories, so how is Blue Apron doing? Well, I actually can’t say for sure, and that’s another huge red flag. Blue Apron’s S-1 seems to purposely obfuscate a proper analysis of the lifetime value of its customers.

The fundamental problem is this chart:

Blue Apron shows revenue per customer by cohort, but insinuates that the cost per customer (CPC, aka Customer Acquisition Cost — CAC) is identical across cohorts. That seems highly unlikely (more on this in a second). Moreover, while Blue Apron gives financial numbers going back to 2014, the company only gives user and order numbers going back to Q1 2016, which means we don’t know how many of the customers from older cohorts are still around. What is Blue Apron hiding?

In fact, even with the limited information Blue Apron deigned to give us, the answer seems to be that they are hiding a lot. Over the last 12 months the company has added at most 387,000 new customers, presuming zero churn (a word that doesn’t appear in the S-1, I’d note), which seems unlikely. Meanwhile, over the same period Blue Apron has spent $179 million in marketing. That implies a CAC of $463, a number that is nearly 5x the number in the above graph. In other words, customers are becoming vastly more expensive to acquire over time, at least for the only period that Blue Apron bothered to give us sufficient data to calculate (and, as hinted at above, we have no idea how long customers actually stick around).

Network Effects and Customer Acquisition Costs

One of my favorite Twitter followee’s, @modestproposal1, noted that:

I think this is exactly right: the first customers a company gains are those for whom the product has the best possible fit; by definition they cost less to acquire. Growing beyond that initial base, though, costs more and more.

This is why network effects are so important. What differentiates services that are actually sustainable businesses is that the larger they grow the more their utility increases, and it is this increased utility that drives new customer acquisition (as opposed to simply spending more marketing dollars).

Ride-sharing services are a perfect example: the initial customers came from a very narrow market, but by virtue of earning those customers ride-sharing services improved their supply of drivers, which made the service better and thus more attractive to new customers. Another example, that I wrote about earlier this year, is Netflix: the reason the company invests in (relatively) timeless video content (as opposed to, say, sports) is that the presence of that content increases the value proposition of a Netflix subscription for the marginal customer.

This is a fundamental problem for Blue Apron: while the company is benefiting from scale (the company’s gross margins are decreasing as the customer base grows), there are no network effects or other means by which Blue Apron is becoming more valuable to marginal customers. That means that, outside of cutting prices, the only way to grow is to spend more money on customer acquisition, and that is a very good way to make the lifetime value of a customer negative.

As I noted above, the limited data we have suggests that is the case, and the fact the company doesn’t give sufficient data to argue otherwise is even more of a red flag.

Uber Concerns

Speaking of ride-sharing services, Uber’s CFO, Gautam Gupta, is leaving the company, seemingly on friendly terms; the spin seems to be that the company is looking for a new CFO with public-company experience to help prepare for an IPO.

In conjunction with Gupta’s exit the company released new financial numbers that showed continued growth and a narrowing of losses, suggesting that the company is getting its financial house in order. Gupta, though, gave an exclusive interview to The Information that contains some alarming information (I will note that, by definition, seemingly negative information from a recently departed executive should be treated with a dose a skepticism):

The scope of the CFO role was reduced one year after Mr. Gupta took over because other executives took away some of the finance team’s ability to control prices for rides in various markets or determine how much bonus money Uber should pay to loyal drivers—the single most important factor in Uber’s profitability…

Financial-performance data tools that Uber executives use for internal purposes have a long way to go, according to two people who have been briefed about the issue. For instance, Uber until recently didn’t have a way to accurately calculate the amount in bonuses that Uber paid to drivers in, say, the past week.

First, it is staggering to me that the expense that is allegedly the “single most important factor in Uber’s profitability” cannot be tracked on something approaching a real-time basis.

Secondly, the implication of this lack of tracking is that Uber may not have a clear picture as to what its unit costs are; as I noted in a Daily Update last year about Uber’s unit economics, driver bonuses based on meeting a quota of rides in a specific time period are absolutely variable costs that should be allocated to a unit cost calculation. But, if Uber doesn’t even know what those costs are in anything approaching real time, how can it really know what its unit costs are?

Third, it is worrisome that these bonuses are the key to profitability; I have long argued that Uber wins not by monopolizing drivers (i.e. supply) but by monopolizing riders (i.e. demand). And, optimizing for demand would suggest giving drivers a bigger cut of each ride such that marginal drivers (i.e. those that aren’t in a position to earn those volume bonuses) are encouraged to come on to the network and improve liquidity. Of course, higher driver payouts quite obviously impact unit economics; if bonuses, at least in Uber’s accounting, do not, then its easy to see how a suboptimal decision that favors bonuses over higher payouts could result. Accounting matters!

To be sure, there is a lot of conjecture in this analysis based on an interview with a recently departed executive, so take it with a grain of salt. I did find this bit in The Information article interesting though:

In fact, smaller rivals like Lyft can spend a lot less money per ride in order to attract enough drivers to serve the company’s customers. That’s because it needs only a fraction of the number of drivers that Uber does, and it can get by with more part-time drivers versus Uber, which needs as many full-time drivers as possible to meet its customers’ demand.

Part-time drivers are the marginal supply I was referring to above, and Lyft reported last year that 82% of its drivers work fewer than 20 hours a week; it’s possible that it is these part-time drivers, exposed to Uber’s relentless rate cuts but ineligible for its high-volume bonuses, are what has kept Lyft (which generally monetizes better on a per-ride basis, in part because of tips) alive. If so — and again, there is very thin information here — that would be for Uber a truly large penalty for a lack of financial controls and properly calculated unit economics.

Thanks for being a supporter, and have a great day!

#entrepreneurship #startup #founders #entrepreneur

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jeremyau · 7 years

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The Trouble with Optionality

By Mihir A. Desai May 25, 2017

The language of finance can be insidious. Words like leverage and concepts like diversification can morph from narrow financial terms into much more general ways of understanding the world. For students that go into finance or business, the idea of “optionality” is particularly pliable—and taken too far, it can be downright dangerous.

Courtesy of Mihir A. Desai

I’ve lost count of the number of students who, when describing their career goals, talk about their desire to “maximize optionality.” They’re referring to financial instruments known as options that confer the right to do something rather than an obligation to do something. For this reason, options have a “Heads I win, tails I don’t lose” character—what those in finance lovingly describe as a “nonlinear payoff structure.” When you hold an option and the world moves with you, you enjoy the benefits; when the world moves against you, you are shielded from the bad outcome since you are not obligated to do anything. Optionality is the state of enjoying possibilities without being on the hook to do anything.

For new graduates, working at a consulting firm creates optionality because of the broad exposures (to industries and companies) and skills these firms purportedly develop. Going to graduate school creates optionality by enabling more opportunities than a narrow professional trajectory can provide. Working at prestigious firms and developing social networks are similarly viewed as enabling more choices and more optionality. And of course, the more optionality, the better.

In contrast, the closing of doors and possibilities signals the loss of optionality. This language doesn’t only apply to career planning: Don’t be surprised to hear someone in finance talk about marriage as the death of optionality.

This emphasis on creating optionality can backfire in surprising ways. Instead of enabling young people to take on risks and make choices, acquiring options becomes habitual. You can never create enough option value—and the longer you spend acquiring options, the harder it is to stop.

The Yale undergraduate goes to work at McKinsey for two years, then comes to Harvard Business School, then graduates and goes to work Goldman Sachs and leaves after several years to work at Blackstone. Optionality abounds!

This individual has merely acquired stamps of approval and has acquired safety net upon safety net. These safety nets don’t end up enabling big risk-taking—individuals just become habitual acquirers of safety nets. The comfort of a high-paying job at a prestigious firm surrounded by smart people is simply too much to give up. When that happens, the dreams that those options were meant to enable slowly recede into the background. For a few, those destinations are in fact their dreams come true—but for every one of those, there are ten entrepreneurs, artists, and restaurateurs that get trapped in those institutions.

Of course, this is not a pitiable outcome. And in fact, maybe those serial options acquirers are simply masking a deep risk aversion that underlay their affinity for optionality. Even if not explicitly stated, optionality was always the end rather than a means to an end.

In fairness, these optionality-obsessed professionals often wind up happier than the other type I’ve become accustomed to seeing in my office: the lottery ticket buyers. These individuals are just one payday away from securing the resources they need to begin their work toward their true ambition, be it political, civic, or familial. They believe that one Silicon Valley startup or one stint at a hedge fund will allow them to begin their true journey.

While the serial option and lottery ticket buyers seem like different creatures, they are, in fact, close cousins. Both types postpone their dreams and undertake choices that they think will enable their dreams. But they fail to understand that all of these intervening choices will change them fundamentally—and they are, in fact, the sum total of those choices.

The shortest distance between two points is reliably a straight line. If your dreams are apparent to you, pursue them. Creating optionality and buying lottery tickets are not way stations on the road to pursuing your dreamy outcomes. They are dangerous diversions that will change you.

By emphasizing optionality, these students ignore the most important life lesson from finance: the pursuit of alpha. Alpha is the macho finance shorthand for an exemplary life. It is the excess return earned beyond the return required given risks assumed. It is finance nirvana.

But what do we know about alpha? In short, it is very hard to attain in a sustainable way and the only path to alpha is hard work and a disciplined dedication to a core set of beliefs. Given the ambiguity over the correct risk-adjusted benchmark, one never even knows if one has attained alpha. It is the golden ring just beyond your reach—and, one must enjoy the pursuit of alpha, given its fleeting and distant nature. Ultimately, finding a pursuit that can sustain that illusion of alpha is all we can ask for in a life’s work.

So, give up on optionality and lottery tickets and go for alpha. Our elite graduates need to understand that they’ve already been winners in the lottery of life—and they certainly don’t need any more safety nets.

Mihir A. Desai, a M.B.A. graduate of Harvard Business School and a Ph.D. graduate of the Graduate School for Arts and Sciences, is the Mizuho Financial Group Professor of Finance at Harvard Business School and a Professor of Law at Harvard Law School. He recently published “The Wisdom of Finance: Discovering Humanity in the World of Risk and Return”.

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jeremyau · 7 years

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Leverage: Gaining Disproportionate Strength

June 05, 2017 | Reading Time: 8 minutes

“It is easier to conquer than to administer. With enough leverage, a finger could overturn the world; but to support the world, one must have the shoulders of Hercules.” — Jean-Jacques Rousseau, The Social Contract

***

The Basics

A good place to begin understanding the concept of leverage is the etymology of the word. We can trace its origins back to the Proto-Indo-European ‘legwh’ which described something light, agile, or easy. From this, the Latin ‘levare’ formed, which referred to something that was ‘not heavy.’ But the word absorbed into English in the 14th century from Old French, where ‘levier’ referred to raising something (hence the reflexive verb, ‘se lever’ which, in general, is used in the context of getting up in the morning.) So in essence, leverage refers to making something light by raising it in a specific manner.

The fusion of these two ideas perfectly describes a physical lever- a pole connected to a fulcrum which serves to create additional strength or force. A lever does not bend or create additional friction.

Three main types of physical levers have been identified

Levers with the fulcrum in the middle. A force is applied on one side and the load is on the other side (such as a crowbar.)

Levers where the load is placed in the middle and the force is applied on one side, with the fulcrum located on the other (such as a bottle opener.)

Levers where the force is applied in the middle (such as our lower jaw bones.)

Archimedes is credited with establishing the concept of leverage, over 2000 years ago. He famously stated that, given a lever long enough and enough distance, he could lift the earth.

In On the Equilibrium of Planes, Archimedes wrote: “Magnitudes in equilibrium at distances are reciprocally proportional to their weights.”

However, the Peripatetic School (the followers of Aristotle) wrote of levers before the birth of Archimedes. In Mechanica, a work believed to have been written by members of this school of thought, they state:

Why is it that small forces can move great weights by means of a lever, as was said at the beginning of the treatise, seeing that one naturally adds the weight of the lever? For surely the smaller weight is easier to move, and it is smaller without the lever. Is the lever the reason, being equivalent to a beam with a cord attached below, and divided into two equal parts? For the fulcrum acts as the attached cord: for both these remain stationary, and act as a centre. For since under the impulse of the same weight the greater radius from the centre moves the more rapidly, and there are three elements in the lever, the fulcrum, that is the cord or centre, and the two weights, the one which causes the movement, and the one that is moved : now the ratio of the weight moved to the weight moving it is the inverse ratio of the distances from the centre. Now, the greater the distance from the fulcrum, the more easily it will move. The reason has been given before that the point further from the centre describes the greater circle, so that by the use of the same force, when the motive force is farther from the lever, it will cause a greater movement.

Like many of our mental models, leverage is a scientific concept which has applications in many other areas.

Leverage is an idea which humans have used to great effect for thousands of years, enabling them to gain disproportionate strength. For example, the ancient Egyptians used levers to lift stones weighing up to 100 tons in order to build the pyramids and obelisks. Many of humanity’s tools, used for centuries all over the world, incorporate levers- scissors, pliers, door handles, wheelbarrows, fishing rods and more.

The concept of leverage has been applied to other areas over the last century or so. In Decision Making, Alan C McLucas defines leverage and leverage points as:

Leverage is built on the notion that small, well-focused actions can sometimes produce significant, enduring improvements if they are applied in the right place. Tacking a difficult problem is often a matter of seeing where the high leverage lies.

… A leverage point is where a small difference can make a large difference. Leverage points provide kernel ides and procedures for formulating solutions. Identifying leverage points helps us: create new courses of action, develop increased awareness of those things that may cause a difficult before there are any obvious signs of trouble and figure out what is causing a difficult.

Leverage in Negotiations and Business

“You don’t convince people by challenging their longest and most firmly held opinions. You find common ground and work from there. Or you look for leverage to make them listen. Or you create an alternative with so much support from other people that the opposition voluntarily abandons its views and joins your camp.” — Ryan Holiday, The Obstacle Is the Way

***

Roger J Volkema provides an example of how people use leverage for their own benefit in negotiations:

It is one of the hottest days of the year and something is wrong with your refrigerator…the temperature seems too warm. You contact a repairman who promises to come that afternoon. You ask about the likely cost. He says it could be around $80… The repairman arrives, late in the afternoon. He believes the problem is with your freezer. He takes out all the frozen foods, unscrews panels, cuts wires. There is the problem: a coil had gone bad. It will cost you $230. Sound familiar? You are now at the mercy of the repairman. You know little to nothing about freezer coils…you lack a choice and agree to pay the price. This story has been repeated dozens of times in your life…in each case, you felt at a disadvantage… They had leverage.

This tactic is used commonly by businesses. Buying a drink or snack on an airplane will always be expensive because the airline knows people lack an alternative, giving them the leverage. Spotify and Youtube can subject users to endless advertisements because the service is otherwise free and this gives them control. Companies with a monopoly (due to a patent, for example) can charge more because they own a particular market. A doctor can present an extortionate bill because we have no option to return the service (“hey doc, can you undo these stitches? I can get a cheaper operation elsewhere.”)

Volkema goes on to explain the key principles of leverage:

1. Leverage is based on perceptions. If a party to a negotiation has an advantage and nobody perceives that the advantage exists…there is no leverage. This is especially true for the party with the disadvantage…Thus, it is perceived cost, real or imaginary that enables leverage. … 2. Leverage is dynamic. Leverage can change as quickly as new information becomes available…These sorts of changes occur during formal business negotiations as well. If, for example, information central to an upcoming bidding process known only to one company becomes available to the other company, then leverage among companies has shifted. …3. Leverage is situation specific…The aforementioned company with privileged information might have an advantage over another company, but in another situation, the advantage could be reversed (for example, the second company has just made a technical breakthrough the will revolutionize the industry.) Sometimes the situations that create leverage overlap or can be linked in some way. …4. Leverage is a social or relational construct. Therefore, one has advantage over another individual only as long as the relationship exists. If one part leaves the relationship…leverage ceases to exist…Without another party, it is like being on a seesaw by yourself.

In one of his iconic letters to shareholders, Warren Buffett declared: “Don’t ask the barber whether you need a haircut.” To do so transfers leverage to the barber, who will always say yes. To retain leverage would necessitate telling the barber you certainly do not need a haircut, leading them to offer you an attractive deal.

Anyone who has ever haggled at a market or with a salesperson will understand the principle of using leverage in a negotiation. The trick is to declare their product or service to be so flawed and worthless that you are doing them a favor by buying it. Subsequently, the next step is usually to offer a low price which they counter with a slightly higher one that is still much lower than the asking price.

Another amusing example of leverage in negotiation comes from Jarod Kintz:

Money is not equal for all people. A strong personal brand adds more lift and leverage. One dollar from me may buy a soda from a car dealership, but one dollar from Justin Bieber may get him a Ferrari. And they would pay him to drive away.

Related Mental Models and Concepts

Critical mass — Also known as a boiling point or tipping point, critical mass is the point where something (an idea, belief, trend, virus, behavior etc) is prevalent enough to grow at an exponential rate. It becomes contagious and is everywhere in a short span of time. We can combine this mental model with leverage to understand how drastic changes can be created with minimal effort. The critical mass serves as a lever. Imagine a teacher who wants to encourage the 30 pupils in her class to read more. Research has shown that just 10% of a population are necessary to form a critical mass. Rather than seeking to convince all 30 pupils to read more, she needs to persuade 3 popular ones. Once they begin reading more, the teacher can leverage them to spread their new love of books. Once this is achieved, it can pass on to the rest of the school.

Power law — A power law is a relationship between two things when a change in one can lead to a large change in the other, regardless of the initial quantities. In the case of leverage, a power law relationship exists between the effort exerted on the lever (actual or metaphorical) and the outcome. For example, consider two children on a seesaw. If both children are an equal weight, the seesaw will go up and down with ease. If one goes away and a heavier child replaces them, a small difference in their weights will lead to a large increase in the speed at which the seesaw moves.

Pareto’s principle — This principle states that 80% of outcomes are the result of 20% of inputs. Recognizing the 20% can provide us with a great deal of leverage. If a business receives 80% of its income from 20% of customers, the latter group can be leveraged to increase profits (e.g. by offering special deals and treatment to them, increasing their loyalty.)If 20% of the foods we eat comprise 80% of our diets, we can leverage these to improve our health (e.g. if a person eats bread each day, they could switch from white bread to wholegrain.)

Tribal leadership — This concept involves leveraging ‘tribes’ within an organisation to further an agenda and grow a company culture. Tribes go through five stages towards maximum productivity and each has different leverage points.

Outsourcing — Outsourcing certain tasks (such as cleaning or making transcripts) enables us to leverage one asset – money- to free up more time and make more money as a result.

Commitment consistency bias — We have a desire to remain consistent with our past behaviour. Companies and manipulative people leverage this cleverly. If our favorite coffee shop raises their prices, we are unlikely to switch to somewhere else- after all, we have a loyalty card and the baristas know our usual order. If we realize the interest rates at our bank are lower than elsewhere, we are unlikely to change- we must have chosen them in the first place for a good reason. If an old friend suddenly becomes obnoxious and insulting, we are unlikely to stop spending time with them, due to the sunken costs of all the time spent together in the past

Activation energy — Activation energy is the initial amount of energy necessary to commence a chemical reaction. We can apply this to leverage – the energy required to move the lever is the activation energy required to create movement.

#entrepreneurship #startup #founders #entrepreneur

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jeremyau · 7 years

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This Secretive Billionaire Makes The Cheese For Pizza Hut, Domino's And Papa John's

Chloe Sorvino

Forbes Staff

This story appears in the June 13, 2017 issue of Forbes. Subscribe

AN AVALANCHE OF CHEESE pours into the test kitchen at the Denver headquarters of Leprino Foods, the mozzarella supplier to Pizza Hut, Domino's and Papa John's. First, thin wisps of low-moisture mozzarella, then a diced alternative, followed by an "artisanal" version, cut short and wide. Then come flavored cheeses made with a mozzarella base, as well as provolone, cheddar and Monterey Jack.

Cooks bring out a take-and-bake pizza, a New York-style pie and a stuffed crust, fresh from nearly a dozen ovens. Another course features frozen food made with Leprino products, including ham-and-cheddar Hot Pockets, Stouffer's lasagna and Smart Ones baked ziti. Then come the cheese cubes marketed as snack pairings: pear flavor with nuts or Gorgonzola with pretzels. Team Leprino next brings out dessert: salted-caramel-flavored mozzarella wrapped in hot dough, rolled in cinnamon sugar. After an hour, the plastic shot glasses appear for sampling the company's lactose and whey powders, which end up in protein bars, Yoplait yogurt, Pillsbury Toaster Strudel and baby formula consumed by millions of infants annually.

Two floors above this dairy deluge, in a dark-wood-paneled office with white marble floors, Corinthian columns and gold accents, sits James Leprino, the Willy Wonka of cheese. "It's hard for me to believe I agreed to this," the 79-year-old billionaire says. "I really like to keep my privacy."

Getty Images

Camera shy: If you Google James Leprino’s picture, you’ll get fellow billionaire John Malone. This 1978 company portrait is the only known image of Leprino Foods’ founder (right). He speaks with former president Wes Allen (left).

Indeed he does, to a nearly unprecedented degree, given the way he dominates his industry. Leprino has somehow eluded photographers for decades: A Google search picks up photos of fellow Colorado billionaire Philip Anschutz and cosmetics heir Ronald Lauder. There isn't a single image of Leprino on his company's website. But after nearly 60 years running the business and more than a decade on Forbes' list of billionaires, Leprino, worth an estimated $3 billion, is finally willing to be interviewed about how his family's grocery in Denver's Little Italy became the world's top producer of pizza cheese--the slightly derisive term competitors use to describe its mozzarella. In all, Leprino Foods sells more than a billion pounds of cheese a year, to the tune of $3 billion in revenue.

Also on Forbes:

The little-known Leprino (he declined to be photographed for this article) rates as one of America's all-time monopolists. He lets others worry about fresh mozzarella balls and pizza that taste like they were made in the old country. His laser focus on large pizza chains has allowed him to control as much as 85% of the market for pizza cheese and somehow sell simultaneously to a set of customers — Pizza Hut, Domino's, Papa John's and Little Caesars — that try to cut each others' throat in every way that doesn't involve where they buy their milk products. Dominating the market has its advantages: He's able to invest in technology that no run-of-the-mill dairy farmer ever could, resulting in more than 50 patents —and an estimated 7% net margin, which dwarfs the dairy-industry average.

Cody Pickens for Forbes

Leprino Foods is the world's largest mozzarella company with sales of more than $3 billion annually.

As the diamonds of his watch bezel shimmer on his wrist, Leprino takes out his beat-up black leather wallet, removes the rubber band holding it shut and reveals a card featuring the four company watchwords: quality, service, price, ethics. "I've got everybody keeping one in their pocket," Leprino says. "The company was growing so fast they were missing this important message."

Quality is listed first intentionally. It's easy to mock his product (Frankencheese, anyone?), but Leprino Foods is one of the few dairy giants that have never had a recall. Every Monday at 11:30 a.m., Leprino walks down to the test kitchen along with two dozen of his most trusted executives for the weekly Monday Melts meeting like the one I attended. The executives test samples of the cheese produced for some 300 clients in 40 countries and check every complaint received the week before. "Your employees have got to know you're not a phony," he says. "They've got to believe in you.

"I support what's going on, but I don't try to lead it," he adds. "My job is to hold them responsible for doing what they said they're going to do."

He wasn't always so hands-off. While acknowledging his "genius," numerous industry executives paint Leprino, in his younger days, as an "aggressive" leader who wasn't above visiting individual franchise owners to pitch his technologically advanced cheese. But very few will go into detail, and fewer still will attach their name to their comments. One pizza entrepreneur puts it this way about the man who owns 100% of this mozzarella giant: "Jim Leprino is a very powerful man."

Leprino Foods

Mike Leprino Sr. stands in the original Leprino family shop selling Italian specialties.

LEPRINO'S OFFICE BEARS testaments to his roots, including a black-and-white photo of his mother on her wedding day at age 16 and a bronze relief of James and his father rolling fresh mozzarella balls. Leprino Foods' genesis lies in the mountains of southern Italy, which Mike Leprino Sr. left in 1914, at age 16. Accustomed to high altitude, he settled in Denver; without much of an education or the ability to read and write English, he began farming. More than three decades later, in 1950, he finally opened a grocery store to sell the produce he grew. Italian specialties followed, including fresh ricotta, mozzarella balls and ravioli made by James' sister Angie.

Meanwhile, James, the youngest of five children, noticed his classmates spending free time at neighborhood pizza joints. After graduating high school in 1956, he started working with his father full-time and shared a revelation: "Pizzerias in this part of the country were buying 5,000 pounds of cheese a week," he recalls. "I thought, This is a good market to go after, so I did." In 1958, after larger chain grocery stores had forced the Leprino market to close, the Leprino Foods cheese empire started with $615.

Leprino Foods

Mike Leprino Sr. makes fresh mozzarella balls in the original Leprino Foods store.

The timing couldn't have been better. That same year, the first Pizza Hut opened, in Wichita, Kansas. A year later, Mike and Marian Ilitch opened the first Little Caesars, outside Detroit. Another year went by, and Domino's began delivering pizza, in Ypsilanti, Michigan. Frozen pizzas, introduced after soldiers returned home from WWII craving slices, were also gaining popularity. After two years in business, Leprino Foods was delivering 200 pounds of block mozzarella a week to local Italian restaurants.

Leprino realized he needed to learn the science behind making cheese on a mass scale. But with a young daughter at home and another baby on the way, he didn't have time for college. Instead, he hired Lester Kielsmeier, who had run a cheese factory in Wisconsin only to find out that it was sold during his stint in the Air Force during World War II, because his dad believed he'd been killed in action. "When Lester came, I went downtown to the junkyard and I bought a couple bigger cheese vats to make it look like we were really in the business," Leprino says.

Leprino's first coup came in 1968, when Pizza Hut was looking for a supplier that could help it cut costs while standardizing portions. After hearing that shredding 5-pound cheese blocks in the franchises was time-consuming and inconsistent, Leprino Foods started selling frozen, presliced blocks. For the first time, pizza-makers could simply layer a few slices onto each pie.

While Kielsmeier made the cheese, Leprino fixated on efficiency. He quickly realized he was dumping half his raw ingredients into the river in the form of whey, the calcium-rich liquid left over after curds are strained. Inspired by the 1964 World's Fair in New York, Leprino traveled to Japan to meet with scientists using milk proteins derived from whey to help the Japanese population grow taller. More than a half-century later, Leprino Foods remains the largest U.S. exporter of lactose, a by-product of sweet whey, and retains a large market share in Japan.

On the cheese side, Leprino hustled to satisfy Pizza Hut, which went public in 1972 with around 1,000 stores and, at its peak in the 1990s, accounted for 90% of Leprino's sales. Pizza Hut franchises would sometimes wait too long to thaw the presliced mozzarella and reported that their cheese would crumble, so Leprino Foods responded with its first major breakthrough: a preservative mist. The scientists there soon realized that this method allowed them to add flavors such as salted caramel and jalapeño. They could even make a reduced fat "cheddar" by using a mozzarella base and then misting on cheddar flavor and orange food coloring. Leprino Foods' production rose sixteenfold, to 2 million pounds of cheese a week.

Leprino Foods

Mike Leprino Sr. stands in front of the original truck he used to deliver fresh mozzarella to local Denver customers.

Just as his timing ahead of America's pizza boom proved lucky, so did his location in the center of the country. In the 1970s, Wisconsin and New York were producing most of the country's milk, but California's nascent dairy industry often priced milk lower. Leprino had the foresight to engage in some arbitrage, locking California dairy farmers into multi-decade contracts at rates that were often above-market locally but below-market nationally. Over the next two decades, Leprino Foods also signed sweetheart deals with co-ops that eventually became the Dairy Farmers of America, securing a lasting milk supply with the country's largest dairy co-op; the company also purchased and renovated some of the older dairy plants, cutting off the options for competitors who wanted to process milk. As Jerry Graf, a former cheese buyer for Pizza Hut, notes, "Jim was always one step ahead of the game."

LEPRINO'S MOST IMPORTANT innovation, ultimately, was marrying science and sales — a combination that met the needs of the four biggest U.S. pizza chains during a period when they were growing exponentially, launching one of the greatest turf wars in the history of American food.

The first key was something called "Quality Locked Cheese"--shredded and individually frozen portions--which Leprino introduced in 1986. Leprino's competitors, still mostly run by Italian-Americans with strong immigrant roots, sniffed. "They didn't believe that was what should go on top of their grandmother's pizza recipe," says Ed Zimmerman, a 30-year pizza-industry veteran. But the franchise-friendly process quickly became the industry standard, both for consistency and scalability. With a patent in place, Leprino made himself indispensable. Graf left Pizza Hut, which was still growing, for Domino's and brought Leprino's business with him, as that chain surged from 200 outlets in 1978 to 5,000 in 1989. Meanwhile, Little Caesars, with more than 3,000 stores, was growing 25% a year with its deal of "Two great pizzas, one low price." And by 1991, Leprino had become the exclusive supplier for Papa John's, which launched in 1985.

Leprino was able to grow with them all by putting them in silos, granting each company its own specs and then troubleshooting as necessary. "We treat every customer like our only customer," says Mike Durkin, a former Pepsi executive who came on six years ago to run day-to-day operations as president of Leprino Foods. "We don't discuss Papa John's business with Domino's — or anybody else's." Domino's agreed to an exclusive relationship in 1996--the contract was just one page. "It was more of a handshake than it was anything else," recalls Michael Soignet, a former vice president of supply chain at Domino's.

Cody Pickens for Forbes

Leprino Foods' ribbon cheese, which is made at its Greeley, Colorado plant.

When Pizza Hut began using a hotter conveyor oven, Leprino Foods changed the formula so the cheese wouldn't burn at higher temperatures. As delivery-focused Domino's expanded, Leprino's head cheese maker, Lester Kielsmeier, manipulated the product so that it retained its fresh-out-of-the-oven look and taste longer. When Papa John's insisted it wanted cheese without fillers--eschewing a new Leprino product that contained some — the big cheese didn't take it well. "His reflected sense of self is his patents, his business," Papa John's billionaire founder John Schnatter says of Jim Leprino. "That really means a lot to him. When I said I didn't like it, he took it personally." Within two months, Leprino switched Papa John's back to the previous blend. "Jim came at me and said,'It's going to cost you three more cents a pound.' "

Price has long been Leprino's biggest advantage, and a large one since cheese accounts for about 40% of a pizza's cost. Leprino's scale begat better prices, which begat more scale. And that scale also led to cost-saving breakthroughs that Leprino's fragmented competitors could neither catch up with technologically nor fight in patent court. "They are a biotech company that is wrapped inside a food business," Zimmerman says.

For example, in the 1990s, Kielsmeier realized that just as the cheese changed when ingredients were sprayed on at the end, certain additives used early in the process could affect how cheese melts--from how big and how brown the bubbles get to how many are on the top of the pie. On the manufacturing side, Kielsmeier cut down the cheese's aging period from 14 days to just four hours, which multiplied the company's production capabilities while cutting costs significantly.

"I would tell people,'Lester is the man that made me rich,' " Leprino says. Notably, though, Leprino never gave Kielsmeier any equity. While Leprino got rich, Kielsmeier — who came to work every day right until his death at 95 in 2012--would have to content himself with being very well paid.

FOR JAMES LEPRINO, the perks of being a billionaire are relatively muted. Yes, the company owns three private planes — a Gulfstream G450, a Bombardier jet and a small 1980 commuter plane — and his house in Denver's affluent Indian Hills suburb has 11 bedrooms, to go with an 8,000-square-foot vacation home in Scottsdale, Arizona. But he's more likely to pick up a hammer than call a repairman: Leprino, who has been known to operate a forklift at the factory, has also personally bulldozed trees around his Colorado home. A devout Catholic, he goes to church every Sunday and donates to charity anonymously. And the immigrant's son has no intention to retire, ever. "My success is a fairy tale," he says.

Leprino's succession plan is simple: He'll split ownership between his two daughters, Terry, 57, and Gina, 55, who have been on the board for years but won't take day-to-day roles. "I don't want them to be living a corporate life resentfully," Leprino says. And for now he'll continue to ensure that Leprino cheese is on as many American pizzas as possible — as well as Asian and European ones (Leprino has a joint venture with the U.K.'s Glanbia Cheese).

America's fifth-largest pizza chain, the take-and-bake Papa Murphy's, remains in his sights. Cofounder Robert Graham says Leprino visited him at least three times to try to get the company to sign on, selling the technology above all else. "It didn't perform well for our pizza, which is cooked in a home oven," Graham says. "Because of the moisture content, you could see the sauce under the cheese. It evaporated." Yet Leprino executives continue to press.

And while Little Caesars uses other vendors--industry insiders say Leprino isn't exclusive with Little Caesars, in part because the chain's blend uses Muenster cheese, too — Leprino president Mike Durkin predicts that Little Caesars will eventually succumb. "Would we want more? Probably the answer is yes, and it'll come at some point," he says.

Cody Pickens for Forbes

The storage warehouse at Leprino Foods newest plant in Greeley, Colorado.

Meanwhile, Leprino will pursue new markets. Leprino has invested $600 million in a factory in Greeley, Colorado, that specializes in "ribbon cheese" — bulky 2.5-pound blocks that are popular among frozen-pizza companies. It's also created an in-house "innovation studio," designed to ride the coattails of food trends. One creation, Bacio ("kiss" in Italian), is catering to artisanal-pizza-makers by offering mozzarella with a kiss of buffalo milk. It's Leprino Foods' most expensive cheese — and its fastest-growing.

Leprino is also rolling out the company's first direct-to-consumer product, a whey protein powder called Ascent, which will have a dedicated wing at the Greeley facility. While Leprino still produces whey protein as a by-product of making cheese for its clients, Ascent is filtered straight from raw milk to protect key proteins and vitamins that help aid muscle recovery. Leprino hopes that will be an edge in the $6.6 billion-and-growing U.S. protein market.

There is plenty of history to remind Ascent's team of their roots. Ascent's space sits atop the original cheese factory's loading dock and warehouse.

"I remember the first day that we had this set up," says Mike Arnold, who is overseeing Ascent's launch. "Jim Leprino walked in here and was like,'Ah, this reminds me of the old days.'" A new, fractured market, primed to be dominated.

#entrepreneurship #startup #founders #entrepreneur

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jeremyau · 7 years

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Facebook’s Emotion Tech: Patents Show New Ways For Detecting And Responding To Users’ Feelings

Facebook's newest patent, granted May 25, aims to monitor users' typing speed to predict emotions and adapt messages in response.

We took a look at some of Facebook’s emotion-based patents to understand how the company is thinking about capturing and responding to people’s emotional reactions, which has been a tricky area for consumer tech companies but key to their future. On the one hand, they want to identify which content is most engaging and respond to audience’s reactions, on the other emotion-detection is technically difficult, not to mention a PR and ethical minefield.

Links in this post are accessible to CB Insights clients, and clients can also view additional related patents.

Webinar: Crosswinds in Digital Media

Using tech, audiences are unbundling, aggregating, and curating media. Legacy and startup brands are vulnerable. See the future of digital media revenue models, startups to watch, and more.

Patent: Augmenting text messages with emotion information

Date filed: November 24, 2015

Date granted: May 25, 2017

This patent would automatically add emotional information to text messages, predicting the user’s emotion based on methods of keyboard input. The visual format of the text message would adapt in real time based on the user’s predicted emotion. As the patent notes (and as many people have likely experienced), it can be hard to convey mood and intended meaning in a text-only message; this system would aim to reduce misunderstandings.

The system could pick up data from the keyboard, mouse, touch pad, touch screen, or other input devices, and the patent mentions predicting emotion based on relative typing speed, how hard the keys are pressed, movement (using the phone’s accelerometer), location, and other factors.

To integrate emotional data into the messages, Facebook could change the text font, size, spacing, or use other formatting tools.

Patent: Techniques for emotion detection and content delivery

Date filed (application): February 25, 2014

Date published (application): August 27, 2015

This patent proposes capturing images of the user through smartphone or laptop cameras, even when the user is not actively using the camera. By visually tracking a user’s facial expression, Facebook aims to monitor the user’s emotional reactions to different types of content.

To monitor the user, Facebook proposes using “passive imaging data,” or visual data captured automatically through a laptop or phone’s front-facing camera. The user often faces this camera without thinking about it, while using the phone or laptop normally, and Facebook hopes to start leveraging this imaging data.

Once the system captures the images, an API component would identify the user’s emotion and store the data. Then, Facebook could a) determine which emotions a piece of content elicits, which could be useful for Facebook as well as the content producers, and b) deliver content to the user based on the displayed emotion, which could help Facebook keep users more engaged.

Patent: Systems and methods for dynamically generating emojis based on image analysis of facial features

Date filed (application): November 16, 2015

Date published (application): May 18, 2017

This patent describes a more streamlined process for sending messages with emojis. The system would capture real-time image data of a face (such as through a selfie) and analyze the facial features to determine the user’s emotion, and map it to the emoji that would be the best fit. For example, it could serve up a smiling emoji in response to a photo of someone smiling. The user can then add the emoji to a post or message.

The patent mentions several additional features, such as the ability to modify the emoji based on more detailed analysis of the user’s face, and the ability to capture gestures made by the user and add those to the emoji (such as the thumbs up in the image above).

By reducing users’ facial expressions to emojis from a pre-set list, Facebook could potentially analyze users’ emotions more easily. Facebook could gain clearer insight into feelings and reactions, while also adding a new interactive feature.

Want more trending patent data? Log in to CB Insights or sign up for free below.

#mental health #depression #anxiety #digital health

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jeremyau · 7 years

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Faceless Publishers

When I first worked for a (student) newspaper, the job of a publisher seemed odd to me; as far as I and my editorial colleagues were concerned, the publisher was the person the editor-in-chief, who we viewed as the boss, occasionally griped about after a few too many drinks, usually with the assertion that he (in that case) was a bit of a nuisance.

That attitude, of course, was the luxury of print: whatever happened on the other side of the office didn’t have any impact on the (in our eyes) heroic efforts to produce fresh content every day. We were the ones staying in the office until the wee hours of the night, writing, editing, and laying out the newspaper that would magically appear on newsstands the next morning, all while the publisher and his team were at home in bed.

The moral of this story is obvious: the publisher represented the business side of the newspaper, and the effect of the Internet was to make the job and impact of editorial easier and that of a publisher immeasurably harder, in large part because many of a publisher’s jobs became obsolete; it is the editorial side, though, that has paid the price.

The Jobs a Publisher Did

In the days of print, publishers provided multiple interlocking functions that made newspapers into fabulous businesses:

Brand: A publisher had a brand, specifically, the name of the publication; this was the primary touchpoint for readers, whether they were interested in national news, local news, sports, or the funny pages.

Revenue Generation: Most publishers drove revenue in two ways: some money was made through subscriptions, the selling, administration, and support of which was handled by dedicated staff; most money was made from advertising, which had its own dedicated team.

Human Resources: Editorial staff were free to write and complain about their publishers because everything else in their work life was taken care of, from payroll to travel expenses to office supplies.

What tied these functions together was distribution: a publisher owned printing presses and delivery trucks which, combined with their established readership and advertising relationships, gave most newspapers an effective monopoly (or oligopoly) in their geographic area on readers and advertisers and writers:

Each of these functions supported the other: the brand drove revenue generation which paid for editorial that delivered on the brand promise, all underpinned by owning distribution.

Publishing’s Downward Spiral

It is hardly new news, particularly on this blog, to note that this model has fallen apart. The most obvious culprit is that on the Internet, distribution, particular text and images, is effectively free, which meant that advertisers had new channels: first ad networks that operated at scale across publishers, and increasingly Facebook and Google who offer the power to reach the individual directly.

I wrote about this progression in Popping the Publishing Bubble, and the intertwined functionality of publishers explains the downward spiral that followed: with less revenue there was less money for quality journalism (and a greater impetus to chase clicks), which meant a devaluing of the brand, which meant fewer readers, which led to even less money.

What made this downward spiral particularly devastating is that, as demonstrated by the advertising shift, newspapers did not exist in a vacuum. Readers could read any newspaper, or digital-only publisher, or even individual bloggers. And, just as social media made it possible for advertisers to target individuals, it also made everyone a content creator pushing their own media into the same feed as everyone else: the brand didn’t matter at all, only the content, or, in a few exceptional cases, the individual authors, many of whom amassed massive followings of their own; one prominent example is Bill Simmons, the American sportswriter.

Vox Media + The Ringer

I wrote about Simmons two years ago in Grantland and the (Surprising) Future of Publishing, and noted that media entities needed to think about monetization holistically:

Too much of the debate about monetization and the future of publishing in particular has artificially restricted itself to monetizing text. That constraint made sense in a physical world: a business that invested heavily in printing presses and delivery trucks didn’t really have a choice but to stick the product and the business model together, but now that everything — text, video, audio files, you name it — is 1’s and 0’s, what is the point in limiting one’s thinking to a particular configuration of those 1’s and 0’s?

In fact, it’s more than possible that in the long-run the current state of publishing — massive scale driven by advertising on one hand, and one-person shops with low revenue numbers and even lower costs on the other — will end up being an aberration. Focused, quality-obsessed publications will take advantage of bundle economics to collect “stars” and monetize them through some combination of subscriptions (less likely) or alternate media forms. Said media forms, like podcasts, are tough to grow on their own, but again, that is what makes them such a great match for writing, which is perfect for growth but terrible for monetization.

My back-of-the-envelope calculations estimated that Simmons’ Ringer podcast network was likely generating millions of dollars, and in an interview with Recode earlier this year, Simmons confirmed that is the case, claiming that podcast revenue was more than covering the cost of creating not just podcasts but the website that, at least in theory, created podcast listeners.

Still, given Simmons’ ambitions, it would certainly be better were the site more than a cost center, which makes the company’s most recent announcement particularly interesting. From the New York Times:

The Ringer, a sports and culture website created by Bill Simmons, will soon be hosted on Vox Media’s platform but maintain editorial independence under a partnership announced on Tuesday. Mr. Simmons, a former ESPN personality, will keep ownership of The Ringer, but Vox will sell advertising for the site and share in the revenue. The Ringer will leave its current home on Medium, where it has been hosted since it began in June 2016.

Jim Bankoff, Vox’s chief executive, said in a phone interview that the partnership was the first of its type for the company and would allow it to expand its offerings to advertisers. Mr. Simmons said in a statement: “This partnership allows us to remain independent while leveraging two of the things that Vox Media is great at: sales and technology. We want to devote the next couple of years to creating quality content, innovating as much as we can, building our brand and growing The Ringer as a multimedia business.”

Simmons is exactly right about the benefits he gets from the deal: instead of building duplicative technology and ad sales infrastructure, The Ringer can simply use Vox Media’s. This is less important with regards to the technology (Vox’s insistence that Chorus is a meaningful differentiator notwithstanding) but hugely important when it comes to advertising. It’s not simply the expense of building an infrastructure for ad sales; the top line is even more critical: it is all but impossible to compete with Google and Facebook for advertising dollars without massive scale.

Make no mistake, Simmons is the sort of writer that many advertisers would be happy to advertise next to (his podcast has had an impressive slate of brand names, in addition to the usual mainstays like Squarespace and Casper mattresses); the problem is that when it comes to the return-on-investment of buying ads, the “investment” — particularly time — is just as important as the “return”: a brand looking to advertise directly on premium media is far more likely to deal with Vox Media and its huge stable of sites than it is to do a relatively small deal with a site like The Ringer.

Indeed, the bifurcation in the Internet’s impact on editorial and advertising — the former is becoming atomized, the latter consolidated — explains why the implications for Vox Media are, in my estimation, the more important takeaway from this deal.

Vox Media’s Upside

To date Vox Media has been a relatively traditional publisher, albeit one that has executed better than most: the company has built strong brands that attract audiences which can be monetized through advertising, and that revenue, along with venture capital, has been fed into an impressive editorial product that builds up the company’s brands.

The Ringer, though, is not a Vox Media brand: it is Simmons’ brand, a point he emphasized in his statement, and that’s great news for Vox. The problem with editorial is that while the audience scales, production doesn’t: content still has to be created on an ongoing basis, and that means high variable costs.

Infrastructure, though, does scale: Vox Media uses the same underlying technology for all of its sites, which is exactly what you would expect given that software can be replicated endlessly. Crucially, the same principle applies to advertising: one sales team can sell ads across any number of sites, and the more impressions the better. Presuming The Ringer ends up being not an outlier but rather the first of many similar deals,1 then that means that Vox Media has far more growth potential than it did as long as it was focused only on monetizing its owned-and-operated content.

Publishers of the Future

The new model portended by this deal looks something like this:

In this model the most effective and scalable publisher is faceless: atomized content creators, fueled by social media, build their own brands and develop their own audiences; the publisher, meanwhile, builds scale on the backside, across infrastructure, monetization, and even human-resource type functions.2 This last point makes a faceless publisher more than an ad network, and crucially, I suspect the greatest impact will not be (just) about ads.

Earlier this month I wrote about the future of local news, which I argued would entail relatively small subscription-based publications. Said publications would be more viable were there a faceless publisher in place to provide technology, including subscription and customer support capabilities, and all of the other repeatable minutiae that comes with running a business. Publishers still matter, but much of what matters can be scaled and offered as a service without being tied to a brand and a specific set of content.

I suspect this is part of the endgame for publishing on the Internet: free distribution blew up the link between editorial and publishing and drove them in opposite directions — atomization on one side and massively greater scale on the other. And now, that same reality makes possible a new model: a huge number of small publications backed by entities more concerned with building viable businesses than having memorable names.

Disclosure: I have previously spoken at the Vox Media-owned Code Media conference and was previously a guest on The Bill Simmons Podcast; I received no monetary compensation for either appearance

#entrepreneurship #startup #founders #entrepreneur

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