Babak Bagheri

I’ve been absent from these pages tending to other matters. One of these is now interesting enough to write about. So here it goes.

For the past year and few months, I’ve been conducting a real-life experiment in bootstrapping a business. The original impetus for the experiment, aside from wanting to make money of course, was Apple’s creation of the App Store. The App Store is a remarkable market place. It provides a structured environment where I thought the kind of startup experiments I had in mind could be carried out cheaply.

I wanted to see if a series of applications could be made at minimal cost to generate enough interest and revenue to become self-sustaining. This would be a very low-cost way to try out my ideas about the experimental way of bootstrapping a business. The business entity I set up, Mentiva LLC, has now created three applications that are available for sale at the App Store: Swoop, Galaxy Wars, and Doodle World. The first two are games, the last offers a combination of drawing and physics simulation. The sales and reviews of these apps have been less than stellar, but the patterns and lessons that emerge are very interesting and valuable.

Swoop

The first game, Swoop, was aimed at pushing the iPhone and iPod to their limits by creating a true 3D environment. This actually turned out to be fairly challenging given my self-imposed cost and time limits. The app was done in about 3 months by one person (yours truly) working on it off-and-on using the least expensive tools available. The out-of-pocket costs for the app were less than $2000. The experimental question was: would a true 3D simulation be enough to generate interest and sustain upgrades? I had my answer within a few days of releasing the app: No. It became clear that App Store customers were interested in other aspects of games. Pushing the devices to their limits with 3D simulations was actually a negative, not a positive attribute. I’ll expand on the lessons below, but one interesting point was that the object of the game itself, parachuting, did generate interest, as in “good idea, but…”

Galaxy Wars

The second game, Galaxy Wars, was aimed at using the multi-touch capabilities of the devices in an interesting way. I had never considered myself a “gamer,” but I had enjoyed games like Asteroids, so the next experimental question became: would a multi-touch game in the Asteroids genre generate enough interest? Galaxy Wars was created at an even lower out-of-pocket cost: a few hundred dollars for an additional second-generation iPod. The time to create it was also fairly short: about a month from idea to app. Again I had my market answer within a couple of days of the release: No. The multi-touch controls were unusual enough to actually turn people off instead of generating interest.

Doodle World

The third and most recent app is Doodle World. Here the question was: would an unusual combination of already-successful features generate interest? The two features I chose were “glow doodling” and physics simulations, both of which had been successful in existing apps. With Doodle World, a clear answer hasn’t emerged yet. There is one very negative review of a version of the app, but it says more about the approach than the specific market question.

Three experiments are not enough for sweeping generalization. But some patterns are emerging. I’ll expand on one of these that I think is most important: it’s challenging to carry out low-cost experiments in a commercial setting. This is true even in a very structured environment like the App Store.  The reasons have to do with the way we make purchasing decisions. We go into a transaction with a set of expectations about both what’s on offer and the seller. Low-cost experiments taint these expectations, they can “damage the brand” even if there is no brand yet. The challenge is to do just enough initially to pique interest and not damage the brand. To do this one needs to know the market well enough to push the right buttons and avoid pushing the wrong ones. But those are really the questions we want our experiments to answer, hence the challenge…

There is an essential conflict between market conservatism and people’s need for novelty. Markets have an inertia that acts against innovation; it takes a good deal of energy, time, and even luck, to establish a significant innovation. We are far from “business at the speed of thought.” On the other hand, if we look beyond basic needs, people’s need for novelty demands innovation.

We all fear being taken to the proverbial "cleaners."

What are the origins of this market inertia? To oversimplify a bit, the underlying reason is our old friend fear. In a commercial transaction, big or small, both sides harbor a fundamental fear: will the other side take advantage of them? When we multiply this fundamental fear by the enormous number of transactions taking place every hour of every day, we see how the collective conservatism emerges. A new product, service, organization, or even person, has to overcome a natural collective skepticism. Those engaged in market ventures recognize this instinctively, they understand that they need to “establish trust.”

One can analyze this underlying fear more closely and see that it has components: “Is the other side competent?” “Is the other side honest?” “What will my friends think of me?” and so on. But the more interesting questions have to do with the evolution of this fear over time. As the overall number and quality of commercial transactions increase, the fear should subside. People should feel braver and experiment in their commercial transactions, especially the small ones. This should reduce the “friction” for innovation and benefit us all.

The rise and popularity of online rating sites makes one wonder if we’re moving along the right trajectory. If you engage only in the transactions endorsed by a small circle of people, then you’re exhibiting the fundamental transactional fear in a fairly extreme way. So beware of overusing these services.

On the innovator’s side, taking people’s potential fears into account early pays back. One of the ways this has been done recently is to lower the price of new, presumably innovative, online services to zero. When buyers are giving up “nothing” in the transaction, then their initial fears are essentially eliminated. Of course this approach has the well-known problem of converting the “free” customers to paying ones in some way, the “monetization” problem.

I believe a fertile field for “business innovation” is to tackle this transactional fear problem in new ways. The Sears and Roebuck “lifetime guarantee” was probably the first attempt to address the problem.

Many forces and people have shaped the world of trade and business. In American business, three figures have had, in current jargon, outsized roles. They are Fred Taylor, Al Sloan, and John Patterson. Fred and Al are better known by their full formal names: Frederick Winslow Taylor and Alfred Pritchard Sloan Jr.; John Henry Patterson is not as well known as the others, but his influence has arguably been greater. Why should we care about these historical figures? Well, keep reading.

Time and Motion Study (© NMPFT/Walter Nurnberg/Science & Society Picture Library )

Frederick Taylor has been called “the father of scientific management.” His main idea was, to put it bluntly, that workers don’t know what they’re doing, and unless properly supervised, they’ll slack off. The original efficiency expert, Fred was the fellow who came up with the infamous time-and-motion studies. The upshot of his ideas was, essentially, to treat workers as if they were machines. The extreme forms of these views have been, at least publicly, in disfavor; presumably because we’re in a “knowledge economy.” But Fred Taylor’s basic notions linger and run very deep. The next fellow on our list took the next steps following Fred.

Alfred P. Sloan was the organizer of General Motors. He, almost single-handedly, defined the quintessential American corporation. His approach dovetailed Fred Taylors’ notions very nicely. The bedrock of Alfred Sloan’s General Motors was “professional management.” The idea was that decisions should be made by professionals who, being the best and brightest, “run the numbers” to make sure all will go well. The Sloan approach has been so thoroughly woven into the American business community, that it has almost achieved the status of being self-evident. The main challenges to these views have come from overseas, mainly Japan.

John Patterson defined the American way of selling. During his years at the National Cash Register company, he created a well-regimented army of salesmen. He gave his sales army clear and detailed marching orders that codified the suspect-to-prospect-to-customer conversion process. His techniques were picked up by most other large corporations, chief among them IBM. If you’ve had to deal with a slick salesman, you’ve been exposed to the John Patterson push.

So what does all this have to do with you and me at the beginning of the 21st century? The ideas of these three gentlemen have become so pervasive that they color our thinking without our overt awareness. We should be aware that many of the “truths” we consider self-evident were invented by these three men (and others to a lesser extent) at a specific time and place. The world has changed and will continue to change at a quickening pace. We need to find more appropriate ways to orgranize and sell, otherwise we’ll live in the past with Fred, Al and John. The first step towards exorcising their ghosts is to take automation and interaction more seriously, more seriously than another GM luminary Roger Smith.

So what is your attention worth? In our attention-driven economy, this is a fairly fundamental question. For any product or service to do well, it has to attract attention. More and more, this attention has to be bought in one way or another. To make the right attention buying decisions, one has to have some notion of what attention is worth.

Eye (by Andrew James McNulty)

A few recent “market valuations” give fairly direct hints about the value of attention. The most recent valuation was the large investment, about $180 million, in a “social gaming” company. The company is private and secretive about revenues, but they do like to mention the size of their user base. Apparently, they have about 60 million “active” users. It’s hard to tell what percentage of the company this investment has bought. Let’s be generous and say 15%, that values the company at about $1.2 billion. So in this online social entertainment business, a pair of eyeballs is worth about 20 dollars. Another relevant piece of public information about this situation is that only 3% to 4% of this user base actually spends any money and the amounts being spent per month are small (less that three figures).

It would be interesting to push this exercise and guesstimate eyeball values for different kinds of businesses and contexts, especially how “engaged” the eyeballs are and how much the attached brains spend. But already it tells us something about how much it makes sense to spend on buying attention. If you can get 3% or so conversion and $20 or so per month in expenditure, it makes sense to spend a fair amount on acquiring those eyeballs. This is a little counter-intuitive given the current craze about “free viral and social” advertising. Of course, this bodes well for those who already have the eyeballs (ad inventory and distribution channels); if the trend holds, they can sell at a premium.

The “sales funnel” has been an important marketing concept. Together with market segmentation, it’s part of the common marketing diet. Interactive media give us pause about how valid these two classic concepts are. Is reaching customers still as simple as dividing the audience into appropriate segments, then sifting through the buckets over time to see who is willing to buy what?

There are, at least, new complications because of the new feedback loop of interactivity. Suspects, prospects and customers can talk back both to you and to others. So their interests and sales “responsiveness” are shaped by many more voices than before. The main effect is that the market buckets and funnels become leaky. A “qualified” prospect can become “unqualified” (and vice versa) because of a few “posts,” “comments” or even “tweets.” And changes like this reinforce each other because of the interactive feedback loop.

A Basic Feedback Loop

The upshot is that the entire buy/sell system becomes more volatile. A small whisper, if it triggers the right feedback loops, can have big consequences. What’s more, this sort of thing can happen almost silently. This is because the number of voices is becoming so large that  opinion feedback clusters can incubate without being noticed until they reach an audible threshold. A small-world network together with this kind of circular interaction can throw the usual segmentation and funnel calculations into disarray.

So what does this mean in practice? It means expecting and insisting on “planned outcomes” is becoming outdated. Instead we need dynamic arrangements that can react quickly in a volatile environment. The right kinds of reactions can dampen and steer the system. As usual, this is easier said than done.

True entrepreneurship is disruptive. You can certainly be in business without being disruptive, but I wouldn’t call that true entrepreneurship. If assumptions are not put to the test and, at least, revalidated, then the promise of enterprising work is betrayed. A new enterprise must try to cross “regions of unfitness” in the fitness landscape. Trips across these regions of unfitness are challenging. Images of mountain climbing and arctic expeditions come to mind.

Mountain Climbing in India (The Silk Road Group)

During these hazardous trips, it certainly pays to be well-prepared. But it pays even more to be agile and prepared to do whatever is necessary to get across. Just attempting this kind of agility changes our fitness profile. What looks like an impossible path to the unpracticed is often a cake walk for the seasoned mountain climber.

Here’s an obvious point to keep in mind: live to climb another day and take another trek. Fortunately, few business situations are hazardous to one’s life and limb. There are business analogies to sudden death that one should avoid; they are mostly related to accounting and the law.

In the normal course of events, the hazards of entrepreneurial treks are not nearly as dangerous as we imagine. Disruption is challenging, but rarely life threatening.

Traction, be it sales or just attention or “eyeballs,” is a must-have in the entrepreneurial pursuit. Gaining enough interest in each step to be able to take the next one is essential.

So how do we get traction? For the answer we need to go back to psychology and the street savvy we’ve talked about. We should scan the social environment, with our “itch X-Rays,” routinely to detect itches that can be scratched. We should then use our social imagination to guess if solutions we find will stick. We should then do inexpensive experiments to see which of these guesses pan out.

Being able to do all this well is a challenge to say the least. So a good deal of mythology surrounds these abilities. We hear about the “guys with golden guts” whose every guess is right and can pick exactly the right people to get it all done. It would be nice if there were such heros, but in real life it’s usually persistence that wins. Some have even tried to quantify these abilities and claim to be able to tell you if you’ll succeed by comparing your background with historical data. There’s even a startup to do this kind of evaluation online! How’s that for itch scratching? Give us a little data and we’ll tell you if you’ll make it; yeah right.

Male Peacock (by Laurence Shan)

A lesson from the animal kingdom is worth keeping in mind. Evolution is the quintessential traction detector. What is the main lesson from evolution? Lots and lots and … lots of trials. Another important lesson is: call attention to yourself and what you’re doing. Don’t think that helps? Take a look at the male peacock.

How fast can you earn money? Are there bounds, and if so what are they? We all hear the statistics about Gross Domestic Products: the rates of GDP growth which vary from -10% to 10% or so; although the extremes are rare. Rates of growth for smaller groups or individuals can fluctuate much more wildly. But what is the upside limit, if any, and how does one approach it?

Here is a recent claim form one of the few successful “dot-coms:” from $0 to $170 million in three years. (The claim is fairly legitimate. It’s the story of “mint.com” being sold to Intuit after three years of operation.) Can we use data like this to come up with the earnings speed limits we’re looking for? I think the answers would be interesting if anyone did a study like this. The highest rates of accumulation would probably go to lottery winners, then traders of various kinds (commodities, stocks, etc.), then entrepreneurs and VCs with earnings capitalization, then the rest. In other words, the highest rates of accumulation would go with the lowest probability events.

John L. Kelly

What does all this mean to enterprising folks? It means the careful market experiments we conduct have to take into account the “hail mary” or “home run” factor. We should have at least one “bit bet” type experiment going at any given time, but we should try many more smaller bets with higher probability. This kind of calculation is familiar to gamblers and some traders. William Poundstone gives an entertaining account of a particular approach to this betting problem in his book “Fortune’s Formula.” It’s the story of what I call proportional betting invented by John L. Kelly. The basic idea is to modulate the amount you bet by the odds the market offers and how likely we think success is. Seems obvious, but most people forget ignore both the problem and Kelly’s and others’ ideas in the heat of battle.

Are experiments the only way to navigate the bootstrap process? Are there no rational shortcuts? The answer, as usual, is “yes, but.” The alternate or complementary approach is what I call “social imagination:” the ability to imagine the effect an enterprising act will have on a group. This is really an exercise in imagination, not calculation. We don’t have any formulas to compute what the effect of any act will be on a complex social environment. But we humans seem to be endowed with brains that can imagine various social outcomes in uncanny ways.

Adult-Born Neurons (Veronica Piatti et. al.)

Recently, there have been a number of publications and discussions about these human abilities. They all point out that our social imagination is related to the constituents of our brains and how they are wired, or, more accurately, continuously rewired.

Social imagination seems to be built into us in ways that we’re just beginning to understand. A very dramatic example of these abilities is attributed to the “mirror neuron system” of the brain. The system, discovered by accident in an Italian laboratory, allows us to copy the brain state of another person by mere observation.

Apparently, our abilities go beyond mirroring: we can play out scenarios of what people will think. There are, most likely, severe limitations here. I don’t believe we have social crystal balls built into our brains. It’s also most likely that people differ a great deal in their capacity for social imagination like they differ in every other capability.

To complement actual experiments, then, we’re well advised to carry out “thought experiments” to see what the possible outcomes may be. These imaginative musings should be guides for framing the actual experiments and hopefully they will increase the probability of success. As with all other mental abilities, social imagination will improve with practice; so the more we do this the better we’ll be. Hence the value of experience.

The line between stupid and brilliant innovation is blurred. People have tried to systematize and show the difference in dramatic ways. Guy Kawasaki has a graphical way to illustrate the difference in his “The Art of the Start” book. He points out two dimensions: how novel an innovation is and how much people like the innovation. Presumably, the stupid innovations are the ones that are novel, but nobody likes.

The Art of the Start

The problem with Guy’s illustration of stupid innovation is that it’s static. Both dimensions change over time, sometimes very quickly. We’re familiar with how fickle people’s tastes can be. But the other dimension, the novelty of an innovation, can also change rapidly. As you’ve guessed by now, the reason is our old friend subjectivity. What people consider novel today, they may consider old hat tomorrow.

So what are enterprising folks to do? Shooting a moving target is not easy. And the target is moving fairly quickly these days. A good answer, of course, is our old standby experimentation. The trick is to lower the cost of failure and do as many reasonable trials as possible as quickly as possible. I did sneak in a qualifier here: reasonable.  It’s probably best not to try patently silly things, but there are plenty of cases where patently silly things turn out to be exactly what’s needed. So the “reasonable” qualifier is a soft one.

The safe and usual solution has been to copy existing successes. It’s not an approach I like, but I don’t knock it. Empires have been built this way. The formula is: find something that’s been somewhat successful, then tweak and polish it. It’s safe if you can “execute,” hence all the recent spilling of ink about “execution.”