Compound Interest is for People Too

Save $20,000 when you’re 24 and let it compound for 40 years. At 4%/yr interest you have $96,000 and at 6% interest you have $205,000. Compound interest is a beautiful thing.

Compound Interest - you want 6% not 4%

People work the same way

The quality of people you surround yourself with is the biggest determining factor for how good you will be at whatever it is you want to be. Surround yourself with entrepreneurs, engineers, artists, or parents who are just slightly better and the impact will compound over time.

Are you compounding your life’s purpose with 4% interest people? With 6% interest people? Is there an opportunity to compound at 20% interest, if even only for a few years?

I’ve seen it happen around me for the last 20 years. People that I started in the same place with, and had the same potential as, are now either far ahead or far behind — whether it be in the military, entrepreneurship, civil service, academia, or family life. Almost universally, the people who are far ahead, optimized to be around the best people.

Note: This is not just for careers. If you want to be a better parent, spouse, or friend then surrounding yourself with people who are better spouses, parents, and friends will compound in the same way.

Creating Art is Fundamentally Human (Instagram is worth $1 billion)

Some products allow anyone to become an artist and tap into the human desire to create art. Products that enable this desire can have a tremendous adoption curve. Pinterest, Instagram, and Tumblr are all examples of this phenomenon. I think the ability to turn anyone into an artist is (part of) what creates a religious fanaticism in each product’s users.

With a few re-pins, you can create collections on par with any magazine. Or with a few taps, you can create pictures that look as though they should be in a museum. The beauty of lowering the friction to being an artist is that as the community gets bigger, it actually gets better! This is the opposite of most communities — think about Yahoo Answers today.

Pinterest and Instagram are not frivolous. They are the most efficient tools ever invented to create art. And creating art (just like sharing and connecting with our clans) is one of our most basic desires. Companies that own this behavior online are worth A LOT of money.

Startups Win by Cheating

Many engineers believe that if you build a great product, everything else will take care of itself. Unfortunately startups rarely work this way. Building a great product is a necessary, but not a sufficient condition for success.

Types of Unfair Advantages

Startups usually win because they exploit an unfair advantage — they cheat. A small advantage can give a startup enough momentum to succeed on the quality of its product.

You have to figure out where you have an unfair advantage. This can help filter or eliminate opportunities, and helps you focus on how to acquire the advantages your company will need to win. An incomplete list of advantages:

  • Information Advantage – If you worked on Facebook’s feed algorithms and leave to start a business built on Facebook distribution, you have an information advantage.
  • Access Advantage – If you were previously VP of Sales at a company and are going to sell a new product to your previous company’s customers, you have an access advantage.[1]
  • Technology Advantage – you have patented technology or defensible (non-trivial) technical advantages that is core to your business. This is very rare for startups. Engineers tend to over-estimate the defensibility and true value of their technology.
  • Data Advantage – you have access to data no one else has access to yet. For example, a company I consulted with had access to a non-public API from a major retailer that allowed them to advertise to users in a way no one else could.
  • Reach Advantage – if you’re already a celebrity, you can reach people for free. Kevin Rose used his reach on television to promote Digg in the early days. Jessica Alba is using her celebrity to promote her diaper company. They “cheated” to jump start their business.

Example

Zynga was kickstarted because Mark Pincus was an angel investor in Facebook (Access Advantage) had early notice that the FB API was going to launch (Information Advantage). Zynga became a launch partner and had a head start on almost everyone in the market.

Every entrepreneur and company has ways to “cheat.” Unfortunately, too few entrepreneurs spend time thinking about what their unique advantages are and what unique advantages a company in their space would need to succeed. If a company can get those two to align, they have a much easier time getting off the ground. And getting off the ground is the hardest part of doing a startup.

Footnotes

1 – I’m not advocating violating any employment contracts/laws or being shady. For example, you could sell a non-competitive product to your former clients that became your friends.

Cultural Competence

What is Cultural Competence?

Core competence is a factor that cannot be easily replicated and gives the business a competitive advantage in delivering their product or service to customers. Core competencies are how a business does something.

Cultural Competence is the lens through which opportunities are identified and evaluated. Cultural competencies are how a business figures out what to do. [1]

Implications

Every business, no matter the size, has cultural competencies.

  • Cultural competencies are a reflection of the founders’ personalities. It’s no coincidence that Google was started and led by Ph.Ds, Apple by a designer-perfectionist, and Amazon by a quant from a hedge fund.
  • Cultural competencies are directionally set as you go from 0-20 people. If you achieve product-market fit, you will only deepen your cultural competencies. You can inject new culture via new (strong) leadership, but the existing leadership has to be receptive. The larger the organization, the harder this is.
  • Product market fit is easier to achieve if you work with your cultural competencies, not against them. Often times when a company builds the wrong product, the market they are pursuing does not align with their cultural competencies.
  • If you understand your cultural competencies, filtering potential opportunities becomes much easier. Be honest about whether or not the market you are pursuing can be won given your cultural competencies.
  • Don’t emulate another company’s cultural competencies, as many do against Apple. Pursue a market through your own cultural competencies to create a differentiated (and more successful) offering, as Amazon has done with Kindle Fire.

How do Cultural Competencies develop?

Cultural competencies are an emergent property of people in an organization. It starts with founders who pursue ideas and markets they understand. If they get traction, they hire a team that thinks about the opportunity similarly (belief in the vision). If they achieve product market fit, they hire more people. These people then pursue scaling a business in the way that has worked best thus far, reinforcing the cultural competencies and world view. This yields more revenue, which results in more people hired to support that core business. At each iteration, the new hires cause a deepening of existing cultural competencies.

An example: Amazon vs. Google

Amazon and Google share core competencies. They’re focused on large data problems, machine learning, exploiting massive infrastructure, experiment driven monetization, and more. They have non-overlapping core competencies, as well. Amazon has phenomenal customer support and logistics, while Google has deep expertise in search and performance-based advertising.

Given their similar core competencies, no one should be surprised that Google and Amazon both pursue the smartphone and tablet markets. However, their approaches are dramatically different because of their different cultural competencies.

Google’s cultural competence sees the world as signal and noise that must be filtered. A minority of the signal is commercially useful, and Google monetizes the shit out of it. This is how they manage to make money on search, email, and maps when few others can.

Amazon’s cultural competence sees the world as a series of transactions on which it can build a platform. Amazon pursues opportunities that will facilitate repeated transactions and then builds the platform to own all of these transactions. The Kindle was made to drive the sale of digital books. Free Shipping and Amazon Prime are levers to drive more sales on Amazon. It’s all about increasing and owning transactions.

How Cultural Competence Skews Perspective

For Google, Android is the key to owning mobile search and ads. Google’s cultural competence perceives Android as a moat for Google’s castle — search and ads. For Amazon, Android is about selling more video content, pushing Amazon Prime (which results in more sales on Amazon.com), and the Amazon Android Market (a digital goods store). Amazon’s cultural competence sees Android as a platform to enable more commerce and monetize directly.

Same platform, yet dramatically different perspectives, and ultimately different ways to extract value out of the ecosystem.

How Cultural Competence Impacts Product Success

It is not a surprise that Google makes a small amount of money directly from Android. Google’s cultural competence does not align with what the market demands from a direct monetization product — Google Wallet, Checkout, and the Play Market are examples of how Google fails because their cultural competence prevents them from building the right product.

For example, Google has rich analytics in the Android Developer Console and has search baked into the core Android experience. Given their cultural competence, it makes sense Google would prioritize these features. At the same time, the platform has no subscription billing and has yet to create a seamless integration of apps and content, 9 years after iTunes revolutionized digital content delivery. Google’s cultural lens has led them to either build the wrong product or be unable to come to a decision about what the right product is for a direct monetization market.

Meanwhile, Amazon has had no problem defining a transaction platform because of their cultural competence, and they execute on this market opportunity efficiently because their core competence is building transaction based products. Amazon has demonstrated this in multiple markets.[2]

Google’s lack of direct monetization from Android is not a surprise. Apple’s lack of monetization via iAds is not a surprise. Amazon’s lack of monetization through auctions is not a surprise. [3]

Credits

Thanks to Elad GilCurtis Spencer, Aditya KoolwalDan Siroker and Yin Yin Wu for reading drafts and providing input.

Appendix


1 – I just created the term “cultural competence” to apply to something that people have talked about informally for a long time, so the definition will likely evolve. The concept itself has been floating around in lots of brains for a long time. Edit: Turns out it’s been used in the HR world to mean something different (see comments below). So the definition in this post is more of a “secondary definition” than an “invention”


2 – Another Amazon vs Google example
Hosting platforms are another great example of how cultural competence skews outcomes. Amazon looked at Amazon Web Services the way they look at their retail site. Find the simplest set of things people will buy, then broadening out to related offerings. They manage inventory, demand, and have efficient pricing. Amazon figured out what developers wanted (S3 and EC2), sold it to them, and then expanded the offerings.

Google’s cultural lens skewed their perspective towards thinking that what developers want is the most efficient way to manage large amounts of data and not worry about scaling. Most businesses don’t have Google scale problems and don’t want Google’s internal platform approach to manage their non-Google problems. They need something that works with existing (open source) systems and leaves them the freedom to customize infrastructure. Google tried to apply it’s cultural lens to a market, rather than find a market where it’s cultural competence would give it a competitive advantage.

Hosting is fundamentally a retail problem, not a signal vs. noise problem. Amazon Web Services does $1 Billion in revenue and Google has been tweaking App Engine for years. This is a prime example of how to filter opportunities and pursue ones that align with your cultural competence.

3 – Examples of Cultural Competence Failure
Companies that have a strong cultural lens will stay focused and thrive. Those that dilute their cultural competence die because they lose a very important filter for which ideas to pursue and how. Companies that try to build outside their cultural competence tend to fail as well.

  • Apple – Apple’s cultural competence is finding large industries full of geeky products and Apple’s core competence is building simple, cool status symbols in their place. Laptops, desktops, phones, and music players are all examples. Ping (their music social network), MobileMe, Pages/Keynote/Numbers, and iTunes are great examples of where if the product succeeds by piggybacking on their hardware business, not because it’s a great in its own right.
  • Facebook – Facebook’s cultural competencies lie in identifying opportunities to enable sharing. Every software, app, or platform upgrade is about fostering more connections and data flow between people. Facebook sees markets as an opportunity to get users to share more, find out more about their friends/connections, and elicit relationships (family, friends, worked with, who likes whom) that were previously unknown. When they try to extend this into another area, like daily deals, they don’t do well. Daily deals are not about the relationships between peers, they’re mostly about Facebook’s relationships with merchants.
  • eBay – has core competencies in peer-to-peer transactions (sometimes with goods changing hands). eBay’s cultural competence is around bringing groups of people together into a marketplace and getting them to trust each other and the marketplace. When they diverged from this (Skype, StumbleUpon) they failed. When Skype and StumbleUpon spun out from this cultural lens, they thrived. When eBay applied their cultural competence to Paypal, it worked beautifully because Paypal is fundamentally a trust network.
  • HP – has core competencies in manufacturing, distribution, and enterprise sales. What is their cultural lens? How does HP decide what opportunities to pursue and how to leverage its core competencies? They’ve floundered on this for quite some time.
  • Microsoft – has core competencies around desktop software, business applications, and selling through enterprise distribution channels. Their cultural competence has always been finding ways to make businesses more efficient with their PCs. They make a healthy profit in their servers and tools division since this aligns nicely with their cultural lens. Every time they stray away from this cultural competence, they struggle. Signal vs Noise businesses (Bing) burn cash and Entertainment (Zune, Xbox) operates at break even.

How Badass Entrepreneurs Deal With Cease and Desists

A friend recently received a cease and desist letter from a company (let’s call them SillyCo) that felt his product infringed SillyCo’s trademark. Instead of calling his lawyer or freaking out, he went over to SillyCo’s headquarters. He walked into the building (security fail on SillyCo’s part), went into the CEO’s office, and said “Your company is threatening to sue mine. We should talk about why this is a stupid idea.” The CEO was caught off guard and my friend seized the opportunity.

My friend explained why he was not infringing SillyCo’s trademark and said, “Clearly this happened without your knowledge because the person that did this is an idiot and doesn’t understand trademarks or copyrights.” The CEO, who had full knowledge of the c&d, was able to save face and said “You know, sometimes when you’re scaling a company, people take actions that you wouldn’t have taken yourself. I’ll look into it for you.”

Two days later, SillyCo’s lawyers sent an email to my friend: “We consider this matter resolved.”

Why do serial entrepreneurs exist

There’s a great talk from Robert Sapolsky about what makes us human (available on Hulu). It’s worth watching. After watching the talk, I had an insight into serial entrepreneurs — people who start multiple companies, even after they’ve made many millions of dollars. And some do it multiple times without ever making any money.

Working long hours, for little pay, for years (especially if  you have millions of dollars) doesn’t make sense to most people. But dopamine, a reward chemical in the brain, helps explain why these people exist.

How Dopamine Works

The way you might expect dopamine to work, is you would be rewarded for doing work with a nice big shot of dopamine.

Turns out, this is not how dopamine works. As with lots of fun discoveries, scientists ran an experiment on some chimps. The experiment involved having a monkey pull a lever (work) that would release some food (reward). The studies showed that dopamine is released before the chimp does the work, in anticipation of a reward. As soon as there is a signal to do work, dopamine spikes.

And if there is an element of uncertainty in receiving the reward after doing work, the dopamine spikes even higher!

Are humans like chimps?

From a neuro-chemical perspective, we’re very similar to chimps – we crave behaviors, such as eating, that release dopamine. And behaviors such as gambling that involve uncertainty are particularly gratifying and addictive. But as Dr. Sapolsky explains, we humans are uniquely gifted in our ability to extend the period of time between doing the work and receiving the reward. For most animals the reward needs to be near immediate. Humans, however, can delay receiving our reward for days, weeks, or years. And entrepreneurs seem to be uniquely gifted among humans in their ability to delay a reward for years. During this period of delay, entrepreneurs can continue to have dopamine spikes in the anticipation of a reward.

What does this teach us about serial entrepreneurs?
  • Dopamine is released by the anticipation of reward. Not when receiving the reward.
  • Dopamine spikes higher if there is uncertainty involved.
  • We crave actions that release dopamine (to the point of addiction)
  • The period of time between work and reward can be great, and entrepreneurs seem to be particularly gifted at delayed gratification

Put all of this together and it’s a recipe for the serial entrepreneur.

After an entrepreneur sells a company and makes millions, they’ve received a tremendous reward. But after the reality of the reward sets in, there’s a huge let-down. The dopamine disappears because there’s no more anticipation. And the uncertainty involved in entrepreneurship means the (now successful) entrepreneur is used to very high levels of dopamine, which is now gone. This person is uniquely well suited to waiting for years to receive a reward. A new venture allows the entrepreneur to release tremendous amounts of dopamine due to uncertainty for extended periods of time in anticipation of some, even greater reward than the last time around.

Of course, this is a descriptive observation and not everyone behaves this way. Some people make a lot of money and hang out on a beach for the rest of their lives. But so many entrepreneurs do it again and again that there’s some reason why serial entrepreneurs exist — my money is on the fact that we aren’t that different from chimps.

Dr. Sopolsky’s talks is one of my favorite videos on Hulu (and I’ve seen a lot). Check it out
http://www.hulu.com/embed/MZh6hHfrMrvCICjfzYGNuw?shared_ad_id=68930

Presentation on the skills college students need to thrive

Ken O’Donnell, Associate Dean of Academic Programs and Policy for the California State University system is giving a talk tonight at the Association of American Colleges and Universities 2012 Conference on the skills we should teach college students, in the context of modern labor needs. There’s a lot of very interesting stuff in his presentation, including a discussion of the 10x team strategy, how other companies use this approach, a brief history of the labor markets, and how educators should synthesize all of this history in preparing students for post-college work and civic life.