Solon Partners

We all have our favorite “computer guy,” “theater gal” or “tax guy” – to whom we turn to, and who’s sage niche expertise we blindly and gladly follow, because it just makes no practical sense to try to replicate their passion and depth of understanding. The system works great — a more personalized and astute human version of Amazon’s recommendation engine. Latest proof, a recommendation from my “quality reading guy,” and a very funny local author. He passed on this gem of an article New Yorker by David Owen “The Inventor’s Dilemma.”

David Owen’s story gives an insightful glimpse into Saul Griffith’s life – MIT’s supercharged “invention engine” who’s projects are financed by the likes of Google. Griffith gives a very practical description of how difficult it is sometimes to define from which side to approach global problems – technology or market.

Successful startups are lectured on the need to be addressing real market problems with their solutions. Easier said than done. Griffith found out that despite his invention of a simple machine that makes lenses for glasses so cheaply that they become affordable even to the poorest of the world, this was not the problem that needed solving. The solution actually already existed (cheap Chinese lenses), and the real problem was — lack of professionals to deliver prescription eye testing to the poor, for which Griffith had no technology solution.

Griffith’s also believes that capping greenhouse gases at levels currently recommended by climatologists to keep the global warming under control would require the biggest public works project in the history of the world and is financially and technologically impossible at this time.

It’s not the trilateral commission or some other shady organization blocking all the useful inventions – it’s just that coal (the most abundant fossil fuel) is simply too cheap right now, and the other energy technologies have not advanced far enough to be competitive. Griffith’s insights into power storage are concise and to the point:

Unfortunately the difference between the world’s best battery and gasoline, in terms of energy storage per kilogram, is not a factor of ten; it’s more like a factor of hundreds or thousands.

Griffith makes you wonder if sometimes we choose to narrowly solve technological problems because the alternative – changing social/market habits seems like a much more expensive quixotic quest. All start-ups, and especially “saving the world through green energy” start-ups, take pause to consider — will the technological solution you offer really solve the problem or merely expose the underlying social/market barrier.

yrjo books, cleantech energy

Buyology by Martin Lindstrom does not quite deliver on its cover claim of “How everything we believe about why we buy is wrong” but the book is a worthwhile intro to the topic of neuroscience marketing. People enjoy thinking that we are rational and calculating, but studies show that in reality we are often driven by chemical messages and backwards-rationalizing our decisions.

Companies have realized that using focus groups and self-reporting is often highly inaccurate because test subjects often do not know themselves why they prefer one product over another. This could also explain why 52% of all new brands and 80% of all new product launches, even if supported by major advertising campaigns, fail within the first few months.

This is where fMRI brain scans and STT electroencephalographs come in – measurement of target consumers allows advertisers to create truly effective targeted advertising. Now images and messages are tuned so that they have the maximum impact in releasing endorphins or dopamine. Interesting findings from the research in the book:

• Brainscans have revealed that the scary pictures and warnings how cigarettes “WILL KILL YOU” in fact actually activate the craving areas of the brain and increase cigarette sales.

• Seeing strong brand logos like iPod, Ferrari and Harley Davidson registered the exact same patterns of activity as viewing religious icons and symbols (crosses, Virgin Mary, Bible, etc).

• Cinnnabon’s pumping of bakery smells into the mall really does sell a more product.

• The new car smell is a specially designed aerosol spray that manufacturers apply before shipping their vehicles.

• Peanut Butter and Nescafe jars are specifically designed to release a maximum burst of product smell upon opening the lid.

• Bang&Olufsen’s remote includes inside a non-functional aluminum brick to add weight, because consumers were ready to accept the higher price for a more “substantial” product.

Maybe I am just too jaded, but I already believed that companies are using various subtle ways to increase our spending. So I have grown a thick skin and try to ignore the marketing messages. Apparently so do most people, as people could on average, according to Nielsen’s surveys,  recall details of only 2.2 commercials of all the commercials they had ever seen.

Lindstrom’s Buyology confirmed that companies are not satisfied with the dismal performance of advertising 1.0  and have taken sales to the next level by incorporating neuromarketing into the design of their sales campaigns.

yrjo books, reading books, marketing

The startlingly honest and straightforward admission by President Obama came under questioning by Steve Scully during the C-SPAN interview. President Obama cites the failure to fix the US health care system as the long term reason for this fiscal crisis, and in the short term the extreme demand for money to rescue the financial sector, the auto industry and address the “huge recession.”

The current US national debt of $11 trillion comes out to$36,000 pear each living US citizen, and has continued to increase on an average at the rate of $3.8 billion per day since 2007. Of course US is not alone in this situation as IMF has calculated that average government debt for the richest G20 countries will exceed 100% of their GDP in 2014, compared to 40% in 1980 and 70% in 2000.

The growing debt burden has been mainly financed by printing money (technical term - quantitative easing) as we have reported in our previous posts here and here. However, the concern for rising debt has now pushed UK and US creditworthiness to the brink and put their AAA national debt credit rating very much at risk. However, tough budget cuts must still wait a while, as current stimulus spending is necessary to bring life back to the US economy. This creates for a very tough challenge for any world leader.

Full transcript of President Obama’s interview is available from C-Span here, but the relevant portion of the interview went as follows:

SCULLY: You know the numbers, $1.7 trillion debt, a nationaldeficit of $11 trillion. At what point do we run out of money?
OBAMA: Well, we are out of money now. We are operating in deep deficits, not caused by any decisions we’ve made on health care so far. This is a consequence of the crisis that we’ve seen and in fact our failure to make some good decisions on health care over the last several decades.
So we’ve got a short-term problem, which is we had to spend a lot of money to salvage our financial system, we had to deal with the auto companies, a huge recession which drains tax revenue at the same time it’s putting more pressure on governments to provide unemployment insurance or make sure that food stamps are available for people who have been laid off.
So we have a short-term problem and we also have a long-term problem. The short-term problem is dwarfed by the long-term problem. And the long-term problem is Medicaid and Medicare. If we don’t reduce long-term health care inflation substantially, we can’t get control of the deficit.

yrjo books, economy economy

Challenging Goliaths takes something special

I have noticed that too often in exploring business ideas and considering projects I have come up against a strong established market leader and said  - ok there is no way to compete with that!  Maybe that’s the “safe” strategy, but you also miss out on some sensational opportunities.

Its a dilemma faced by many start-ups, as by definition they are just stating up while some market leader is already the preferred provider.  However, there are many ways that you can outwit the Goliath and service their customers much better.

Collis Ta’eed has written a great piece giving us advice for taking on the perceived  market leaders.  Collis is the co-founder of the successful start-up FlashDen. Here is my summary of the main points if you don’t have time for the full article:

• Specialize (Technorati and Kyak’s sites are getting nice traction in subniches despite the power of Google)
• Dramatically Change the Product Features (make a much better product, if you are cutting prices - make it dramatic)
• Position Yourself as the Alternative ( Pegging yourself against a big player raises your profile too)
• Internationalize (Bebo and Orkut can make money in markets underserved by Facebook and MySpace)
• Generalize (Superniche for the superbrave entrepreneurs who think they can be bigger, better and than anyone)
• Parallel Niches (same basic product idea as the Giant but apply it to different audiences in other contexts)

Obviously Collis, has no silver bullet and there are many other ways to do it as well.  Nevertheless all, giantslayer start-ups really must differentiate themselves. Your suspicions are probably right  -  just 10% cheaper, or 10% better is usually not enough advantage to overcome the big boys.

If you can be 50% better, or open up a brand new market there is no reason not to take on the Goliaths. You will know that you are really doing it right when the Goliath offers you an obscene amount of money to by you out.

yrjo books, entrepreneurship start-up

Printing money is hard work

When writing my March6 blog entry I wondered when we would the United States be added to the list of countries resorting to printing money to boost the economy.  That day has already come.

In the words of Goldman Sachs analyst Jan Hatzius, the Fed is going to the “kitchen sink” strategy of throwing everything it had to jolt the economy out of its downward spiral.

The Federal reserve is dropping a $1.15 trillion money bomb into the bond markets to boost lending. Yes this money will literally be eased out of the printing machine in major quantities (official term being “Quantitative Easing”). Ok maybe I am not using  exactly the proper description they teach in the MBA program.

Wickipedia defines QE as follows:

The term quantitative easing refers to the creation  of a pre-determined quantity of new money ‘out of thin air’ through open market operations by a central bank as the start of a process to increase the money supply. It can, more simply, be understood as an indirect method of printing money.

yrjo books, cleantech, economy, mobile apps, software, uncategorized, venture capital inflation

Dan Roam's Back of the Napkin

Dan Roam’s book The Back of the Napkin: Solving Problems and Selling Ideas with Pictures is a must read for people preparing to pitch a business idea or making other presentations where it is essential to  communicate complex ideas in a very limited time.

The book is a practical person’s dream - full of clear advice with the main ideas distilled to their essence, followed by how-to diagrams and explanations of actual application in real life. Roam is able to convincingly show that glitzy Power Point presentations are often unnecessary visual overkill if you do your homework properly. The static visuals used in Power Point may even detract from the audience “getting” the message. He recommends walking through the process of creating visuals with your audience so they see the images come alive as you dynamically create and walk them through your presentation.

Roam’s method involves the presenter first properly analyzing the topic of the presentation by using simple visual sketches and a basic framework of diagramming “who, what, where, when, how and why” to first clarify to himself what is the real message. Then the presenter uses the suggested SQVID scale to determine how to most effectively tell the story to the audience. The entire method presented in the book is essentially pulled together in one graphic (each element is seperately described and demonstrated seperately throughout the book):

Roam's Visial Thinking Codex

Those with very limited time, don’t let the 278 pages the page count scare you - pages are half size and full of pictures.  I finished half of the book on the three hour plane flight to Rome and the other half on the way back. Time well spent even if you so not often present to big audiences but seek an effective method for clarifying your own ideas.

yrjo books books, presentation

I thoroughly enjoyed Taleb’s Fooled by Randomness for his fascinating analysis of  various epiphenomena - illusions of cause and effect that most of us believe in. Much more often than we care to admit we make judgments regarding CEOs and companies based on their current performance figures - if profits went up 20% with the CEO joining the team, we believe that he must be an inspirational visionary and successful manager. In reality, most of the time this connection is tenuous at best, or down right wrong. Often the explanation is much more complicated and related to general market trends, dynamic business forces over which the CEO had no control, actions of competitors and other individuals, and numerous other factors. This is why so many intelligent observers  and commentators believed Bernie Madoff, Jeff Skilling, Richard Scrushy, Ken Lay, Bernie Ebbers and Rod Blagojevich to be great leaders, executives and role models. They appeared to be successful at that time.

Taleb has a great talent for detached and unbiased objectivity. Although at times his writing sounds almost aloof, he is able to show that what most of us regard as successful CEO’s skill, knowledge, success and causality can actually be shown to be luck, conjecture, coincidence and a result of survivorship bias. However, psychologically it is very difficult for us to accept that. We prefer the simple narrative - the story of a lone hero overcoming the odds.

Not only do we enjoy and believe the subjective narrative, our mind is biologically predisposed to look for the story as our brain has been trained through rigors of evolution to simplify and draw quick conclusions based on very limited  facts (thousands of years of dealing with mammoths,lions, and unfriendly tribes chose those that spent little time for analysis and reflection, and instead made quick decisions). As a result our brains are biologically subject to “attribution bias” - the need to establish causal links between facts to quickly create a coherent narrative. In addition, this kind of thinking is habitual for us - studies have shown that we attribute success to skills and failures to randomness. It is a survival mechanism that keeps us believing and going despite the long odds, and maintains optimism and self-esteem in the face of even repeated failures. As Taleb explains:

Lucky fools do not bear the slightest suspicion that they may be lucky fools - by definition they do not know that they belong to such a category. They will act as if they deserve the money.

Taleb also criticizes the confidence with which people make conclusions about the future based on past performance.  Robert Lucas won the Nobel prize for demonstrating that simple econometrics and calculations of future success do not work, as Taleb sums up Lucas’s work:

If people were rational then their rationality would cause them to figure out predictable patterns from the past and adapt, so that past information would be completely useless for predicting the future.

Purely calculating and rational behavior are not a normal human state and can only be observed in humans with brain damage, where there is an injury or defect in the amygdala region of the brain that blocks emotional attachment, thus making the person clinically a psychopath. However, much of economic science attempts to predict behavior based on such a profit-maximizing and rationilizing model. On the other hand, I guess an argument could be made that the most predictable and possibly successful CEO’s would be with such a brain defect.

What I learned from Taleb is that if I want to truly make good decisions instead of just arriving at subjective emotional reactions, I need to dig deeper than the current headlines, CV highlights and examine the subjects over longer periods of time (up and down markets, etc), and look for many more factors, points of view and references. The connection between cause and effect is rarely such a simple short linear path as I wish it was.

yrjo books psychology

I recently finished Phil Rosenzweig’s The Halo Effect, and wanted to capture some key points in a posting before going on to the next book, and clearing my mental cache.

The book offers an excellent deconstruction of the X steps to success style business books and reporting by financial media. Rosenzweig shows how the performance measures of ABB, Lego, Cisco and other companies and their CEOs were strongly influenced by the financial winds at the moment of writing. He exposes the strong bias that business writers have for telling the legendary success/failure story, but only after the outcome is perceived as decided. Writers and analysts are also overly critical once the strong performance recedes, even if the business decline is temporary or due to uncontrollable outside forces. Rosenzweig shows how Business Week and Fortune writers may caracterize the same exact decision as “bold” or “foolish,”  “straying” or “expanding,” “innovating” or “straying from its core”  and leaders as “timid” or “prudent, “confident” or “arrogant” depending on the fortunes at the moment of writing.

Simply put, his observation is that when things are going well - the CEOs and companies are depicted like mental giants that can do no wrong, and every decision is a stroke of genius and part of a well crafted master plan. When things are going poorly - then everything the companies or CEOs do is wrong, short sighted and reckless, regardless of the implications for the future. The writers connect the dots looking through the prism of the current events backwards in history, and thus see trends events tying together in light of the end result they want to explain.

This not unprofessionalism by the writers, but part of the human desire to tell compelling, simple and powerful stories. This is why urban legends spread a lot faster than sensible well balanced messages. We should not buy into the urban legends we are told about the CEOs and Companies as well. Lets all dig a little deeper.

yrjo books books, investment