Want A Good Candidate? Ask Them To Do The Job

April 16th, 2014

HR departments, hiring managers, college admissions officers… all of them spend inordinate amounts of time looking for better and more effective ways of determining if a candidate will be a good fit for the job. In essence, the problems usually boil down to two:

  1. Will they successfully do the job?
  2. Will the fit in with the people?

Number two, in many ways, is the hardest, because it cannot be measured. But number one is also challenging. We as a society use grades (GPA), test scores (SAT/GMAT/MCAT/etc.), school affiliation, past promotion, even past compensation all as proxies for trying to determine if a person can and will be successful at the job, whether it is as secretary, intern, college freshman or CEO.

In the last week, I have seen two interesting takes – one in college admissions, one in job applications – that simply say, “to see if you will be able to do the job, let us see if you can do the job.”

The first is Bard College. The New York Times reviewed Bard’s experiment that offered applicants the ability to dispense with the usual college-application “waste”, and simply write long essays on four of any of twenty-one offered topics. A grade of B+ across the essays means automatic acceptance. Assuming a liberal arts degree – or any real college degree – is supposed to be about thinking, writing, challenging, growing, what better way to see if someone will be able to write complex essays on complex topics than to ask them to do so.

Do four great essays mean the person will fit in culturally? Not necessarily. But someone who can sit, think and write not one but four great essays on challenging topics is far more likely to have the intellectual chops to fit with that sort of environment.

The other case was the famous venture capital firm Andreesen Horowitz, a.k.a. a16z. Apparently a16z is looking to build an engineering team. Since both founding partners, Marc Andreesen and Ben Horowitz, started as engineers – and engineering never really leaves your heart – it is unsurprising that they want the skills in house and want the best they can find. And how are they going about doing it? Right here is their online test. Write a particular program in any language you choose, from beginning to end, in a timed fashion. You can pick your language; they don’t care. You can pick your tools; they don’t care. They don’t even care if you have an engineering degree or no degree at all. They do care if you have a GitHub account and some interesting projects.

In short, a16z cares that you have done it and can continue to do it. All of the rest is secondary.

In my days of hiring, I always asked for engineers. Not developers, not coders, not administrators, but engineers. I didn’t care what they knew; I cared how they thought, and what their mindset was. It wasn’t about the credentials, nor even the skills, but the capabilities and thought-processes.

These are just two good examples of sanity returning to the recruiting process. All they are asking is if you want to do the job, show us you can do the job.

Heartbleed and Open Hearts

April 14th, 2014

The Internet is agog with the discovery of the critical bug in OpenSSL’s heartbeat, nicknamed “Heartbleed.” Bruce Schneier called it “catastrophic… On the scale of 1 to 10, this is an 11.”

What is heartbleed? I will leave it to other sites to explain; just Google it. Suffice it to say that it can accidentally expose in-system memory of SSL-secured servers. In that memory could be garbage, or it might be a user’s password, bank transaction info, or even the private key of the site (which would allow any site to spoof it).

It affects only certain versions of OpenSSL – 1.0.1 through 1.0.1f – so not everyone is affected, or everyone using OpenSSL. But OpenSSL is very broadly used. Put it this way: according to Netcraft, 54.50% of Web sites use Apache and another 12% use nginx. A combined 2/3 of all active Web sites are on one of the 2 servers that use OpenSSL. Granted, not all of those sites are secured (or need to be) with SSL, and those that are may not be using an exposed version of OpenSSL. But the statistics are still staggering.

One of the questions that has come out of this is, does this mean OpenSSL’s dominance was a “bad thing”? After all, Microsoft’s SSL library isn’t affected by the bug, nor is Apple’s. If there were more options around, more custom home-grown builds like Microsoft and Apple use, wouldn’t there be fewer vulnerabilities?

In short, no.

This is an argument I have heard before, but in an entirely different context. In the mid-1990s, as more and more powerful servers became available, there was a big push to consolidate services onto a single server. After all, a single server as powerful as 10 such servers may cost 20 times as much, but it is still only one server to maintain. Your space requirements in your data centre go down somewhat, but your labour costs go down dramatically. If you have 10 servers per system administrator, then a 10-to-1 reduction in servers means you can get rid of 9 administrators. Of course, it isn’t free; you need to invest in engineering, and a sysadmin who knows how to handle this powerful server may cost a little more. But not ten times as much.

But then you have a reliability problem. After all, if you had 10 servers, and one went down, one service was affected. But if 10 services are running on just one big server, and that one goes down, then all of them are affected. Aren’t your risks much higher?

The answer, of course, is yes… but with a much smaller number of servers to manage, it freed up resources to invest in the engineering to make either the server more reliable, or to make the services that run on them more reliable.

Eventually, the latter version won out. Most newer Internet-based services that are well-built can handle the loss of a server (or 2 or 3) without blinking. They are engineered to be fault-tolerant at the software level.

As an aside, the whole question of consolidating the services onto a big server became moot as virtualization, led by VMWare and Xen, took root.

The lesson there, though, was that if you have to choose between many diverse installations to manage and a few more risky but uniform ones, go for the uniform and invest in managing it and the services that run on it much better.

The same lesson applies to Heartbleed. Sure, OpenSSL had a catastrophic bug in it. But it was found and reported and is being fixed. How many similar or worse bugs would exist if there were dozens or hundreds of home-grown (a.k.a. “proprietary”) SSL libraries around, and would never be found (except by our dear friends at the NSA, of course)? We are much better off, especially in the security world, with open-source and broadly adopted – and constantly reviewed – products and libraries that are always being tested against and by the best.

I would rather have the heart of the SSL open for inspection, even if it sometimes leads to Heartbleed, knowing it will be caught as soon as is possible.

Don’t Drink the Kool-Aid, and Hire Grown-Ups

April 10th, 2014

I – along with just about everyone else involved in business or technology – have written about BetterPlace before, although I have done so entirely from the outside. I have had no privileged inside look or access, and have had no time as a consultant – and not a professional reporter – to go and interview people involved.

FastCompany, however, pays its people to do exactly that. To their credit, they have written a fascinating in-depth look at the rise and fall of BetterPlace, and how it managed to squander nearly $1BN in investment capital with, essentially, nothing to show for it.

The article should be required reading for anyone running a startup or established company, advising one, working at one, on the Board of one, investing in one, or even thinking about any of the above.

There are a number of really good lessons in the article.

Don’t Drink Your Own Kool-Aid

This is probably the most important one of all. Clearly, Agassi drank his own Kool-Aid. He really believed he could make everything happen by saying it is so. Well, there are things you can make happen, like wooing investors and sometimes bringing in some customers. But in the end, it is all about execution, which means actually delivering a product that customers want to buy, at a price they want to buy, at a profit margin that makes you money. Fail on any of those, and you are going out of business very quickly.

I fear this is part of the “Steve Jobs” cult. People read the books about him, see the films, and think that his famous “Steve Jobs Reality Warp Field” made things happen. It didn’t. He understood the real world – he actually worked on computers, he did calligraphy, he understood what it took to build something and what customers actually wanted. His Reality Warp Field was around pushing people beyond their comfort zone into something that was nearly impossible, rather than making it up.

Similarly, he was extraordinarily careful with what he said to outsiders – partners, customers, and especially the market. He reviewed presentations dozens of times to make sure he had it right, and had not promised something that wasn’t there. He never would have offhandedly said to General Motors that he would give a car away for free.

Which leads to…

Hire The Best

Don’t hire your brother, sister, mother, or high school / army buddy… unless you are confident they really are the best candidate to execute. Yes, it is important you hire people you can trust and fit with your culture, and so you should not be afraid of hiring those people you can trust. But always be sure that:

  1. You are equally willing to fire the one you hire; if you will not fire them, do not hire them.
  2. You are hiring the best for the job.

I worked years ago with a company called Simplewire, a great SMS message aggregation service. It was founded by CEO John Lauer… and his CTO was his brother Jim Lauer. While I was a little nervous about the company at first – what if it is just a nepotism hire – both of them proved highly competent and responsive, and I was glad I chose to do business with them.

Your family can be a good hire, but only if they are a good hire first and family second.

You need the best people who will execute. Your business will not just succeed, and you will not just bring your family along for the ride. Your business might succeed, but only if you hire the best people.

But to know all of this…

Hire Grown-Ups

You need people with experience in each major field in the room, and especially at the executive and even more importantly at the Board level. You need people who have seen success and have seen failure, those who have seen and lived multiple industries, who know what an economic downturn is and how to weather it, both as individuals and as a company, who have seen politics and finance and all that the world has to offer, both good and bad.

In short: you need grown-ups.

But to get all of the above, you need not just a great CEO, but:

Make the Board Work

Ultimately, the Board of Directors is responsible for the company. They need to hire executives, and they need to fire them, including the CEO. They need to believe in the company and its vision, but not be starry-eyed by it.

By all accounts, BetterPlace’s Board of Directors failed at its fundamental duty. I cannot think of a single other Board I have seen that would so blithely pass by the failures and foibles as the company dug itself a hole, filled it with TNT, and jumped in holding a lit torch screaming, “we are changing the world!”

  • Why did one Board member have responsibility to fire the CEO? It should have been the entire Board.
  • Why were there no regular performance reviews?
  • Where was the CEO’s budget?
  • Where were the replacements for the CFO and COO?
  • Where were the Board committees, who should have seen the spending, compensation, public statements and performance of the company?

In the end, BetterPlace was a failure of one thing: the Board in performance of it fiduciary duty to manage the company.

Could the BetterPlace vision have succeeded? Perhaps yes, perhaps no. It had no clean focus, no realistic deliverables, and a burn rate that would make the Greek government proud. But all of that is managed by the CEO, who is hired and managed by the Board, who could have used $850MM to achieve some real goals.

The CEO was in way over his head, drank the Kool-Aid, believed in himself way too much, and needed to be managed out. The Board failed.

Tipping Rears Its Ugly Head… Again

April 9th, 2014

I have written about my issues with tipping before, nearly a year ago. This week, the New Republic is taking a different approach on the issue: how to game the system (for the tippee, if such a word exists, not the tipper).  Apparently, blondes get higher tips than brunettes, drawing a smiley face on the bill (for women only), crouching next to the table, among other things, all helps get bigger tips.

The New Republic’s point, however, isn’t to help waiters and waitresses get more money, although that may be a side effect; it is to show how much the system of tipping itself is irrational.

Some of their arguments make sense, some do not.

On the one hand, if tipping really is discretionary, i.e. you as a customer decide how much to tip based on the pleasure you received in the experience beyond the food itself, then there is nothing unreasonable or unethical in tipping a waitress more because she wore a flower in her hair, which made her look better, you enjoyed it more, and you gave an extra dollar in tips for the more pleasurable experience. There is nothing irrational in the tipping system if it works this way.

Of course, one needs to be careful where the borders of discrimination and vice laws are drawn. Could it be illegal to tip a Caucasian waiter more than an Asian one, or vice-versa? These are a slippery slope which will, hopefully, remain in the purview of the free customer and not the subject of enforcement or lawsuits.

On the other hand, if tipping is structured to encourage better service, then is this system effective?

The real challenge to tipping is that companies in most industries are able to differentiate themselves on service, if they so choose – sometimes at a premium price for that service – without relying on transaction-by-transaction tipping. If you pay $95/year for an AmEx Green Card, or $450/year for the AmEx Platinum Card, you may be doing it for the benefits or cachet, but a core element is its service. It is really nice to have a representative answer in clear English, in under 2 minutes, and solve your issues to your benefit. Yet no AmEx representative gets a tip from you at the end of the call. Similarly, you do not tip the flight crew, whether you fly coach domestic American or Suites Class on Singapore.

These companies compete on their service levels and know how to compensate their employees based on those levels. In many cases, the real difference is not just the compensation level, but a combination of compensation structure – pay your employees for happy customers and you will get happy customers – and the all-crucial company culture; look in the dictionary under Singapore Airlines.

So why is tipping necessary in just the food service industry (and hotel and taxi industries in some locales)? For the consumer, it isn’t; for the serviceperson (waiter or waitress), it isn’t. Where it is, however, is for the restaurant business. Lower salaries plus tips, or the promise (and sometimes threat) of tips, can bring in employees at lower cost for restaurants, who historically operate on tight operating margins. Restaurant recurring salary costs can thus be kept lower, even allowing for hourly employees and seasonality of the industry, and give them greater flexibility in managing their cash flow.

Is it good for the customer? That depends on the definition of good. Without tips, restaurant prices would undoubtedly be higher to allow the restaurant to pay higher wages to serving staff, compensating for the lost tips. Would the increase in price be roughly equivalent to what you would pay at the old price plus tip? That actually depends on the company itself.

What would most likely happen is that you would have a further split in the food service industry. Currently, there are 2 key categories:

  • Low-cost / low-quality: the food is lower quality, the service is lower quality.
  • High-cost / high-quality: the food is higher quality, the service is higher quality.

Eliminating tipping while raising prices would create 4 options:

  • Low-cost / low-quality: as before
  • High-cost / high-quality: as before
  • Middle-cost / lower-quality food, higher-quality service: these would choose to charge a middle level of price for moderate food but much better service.
  • Middle-cost / higher-quality food, lower-quality service: these would choose to offer moderate service but higher-quality food.

The creation of 2 new middle tiers would allow customers to choose, at the same price, between better quality or better service, if they did not wish to spend the premium prices for the best of both.

Last, there is an interesting development that could eliminate the bottom tier entirely: the burger robot. Although starting only with burgers, one company has invented a machine to produce fresher cooked food at a cheaper cost and more reliably and quicker than humans. It can take an automated order and prepare a burger as requested – meat size, cooking level, condiments, vegetables, buns – in a fully automated fashion. Not only is this faster than a human, making 360 burgers/hour, but it is so much more cost-efficient, that a McDonalds-type fast-food place could use high-quality ingredients for the same operating margin is it could when using the low-quality food it currently uses with human workers.

Over time, then, the lowest-tier may disappear entirely, itself creating a new dynamic. What do you tip a robot, a can of WD-40?

Amazing: Ad Platform Company Discovers that Users Prefer Free Games With Ads!

April 4th, 2014

It is surprising, amazing, I cannot believe it! Gaming and now ad platform company WildTangent commissioned a survey from IHS Technology, and discovered that 71% of gamers prefer free games with ads over paid games. Next dairy companies will discover that users prefer milk, and Apple will discover that users prefer iPhones.

Even without the vaunted expertise of IHS, I think any of us could have predicted that users prefer free games with ads over paid ones, provided the number of ads is unobtrusive relative to the cost of the paid games. The definition of unobtrusive, of course, can change and directly affect the survey results. I suspect the numbers might have been reversed, and worse, if the question had been, “do you prefer paid games for $1.00 with no ads or free games with ads that consistently take up 50% of the game real estate space and block the game every 60 seconds?”

Nonetheless, taking the numbers as accurate, one might be tempted to conclude that it is better to release your new game for free rather than sell it for, say, $2.99 on the App Store or Google Play.

And you’d be wrong.

Here’s why. What matters is not the ratio of users who prefer free with ads over paid. What matters is that ratio multiplied by revenue per user. As Nassim Taleb pointed out in discussing how to bet on the market, it is expectation that matters, not probability.

Let’s take the survey at face value and say that 71% of users prefer ad-supported, and therefore 29% prefer paid with no ads. Let’s also assume that your game sells for $2.99 on the App Store. As of this writing, mobile CPM (cost per thousand impressions) is about $3.00. If each person who plays your game for free plays it 20 times (quite a lot), then they will see, at most, 100 ad impressions.

So for every 1,000 potential customers:

  • 710 will take it only if free, providing 14,200 plays, 71,000 add impressions, which, at $3.00 CPM, gives $213.00 in revenue.
  • 290 will take it paid, multiplied by $2.99 per user, gives $867.10 in revenue.

I am just a lowly consultant, but I am pretty sure that, for the same potential market, any business owner would prefer $867 in revenue over $213 in revenue.

Of course, these numbers change dramatically, depending on the free vs paid ratio, CPM, number of plays, time of play, number of impressions, and price.

But before assuming that it is the ratio that matters, first figure out how it affects your bottom-line. Or find someone who knows how.

Fight Competitors on Their Business Model, Not their Regulatory Model

April 2nd, 2014

When companies bring new products and services to market, they are addressing some unmet need. It might be an unserved or underserved market; it might be significantly lower costs – and therefore price to customer at the same margins – for a similar product; it might be a lighter and simpler product for a lower price; it might be one of myriad different ways that your company wants to differentiate itself.

What all of these have in common is that the new competitor, especially a smaller one, is challenging the incumbents’ business model. The competitor is claiming that the existing companies’ business model is rigid and leaves it open to attack in areas that it cannot profitably serve.

For the most part, this is a good method to approach defining your market. However, there is one area where this is rarely true, and never for the long-term: the government.

If your contention is that the incumbents’ business model is weak because it is subject to government intrusion – either in the form of regulation or taxes – and you can operate without it, you will rarely succeed over the long-term. Over the short-term, until you are big enough to be a serious threat, the regulatory and taxation arms will ignore you, because the incumbents are ignoring you. But if you become big enough to be on their radar screen – which you want to do, because being big means having lots of revenue, and, after all, didn’t you start this company to make the world a better place for a lot of people? – eventually the same regulatory and taxation rules will be applied to you as well.

Uber and its constant fights with taxi commissions are one great example of this; this past week, Airbnb provided another.

Both Uber and Airbnb have been trying to undermine incumbents – taxis and hotel, respectively – on 2 elements of their business models:

  1. Core: The products offered by the incumbents (yellow taxis for Uber, hotel rooms for Airbnb) are too expensive, too inconvenient, or both, for customers.
  2. Regulatory: The relationships between the incumbents and their governments (taxi commissions for Uber, city taxes for Airbnb) make the incumbents’ products too expensive, where they could be cheaper.

The Core argument is 100% valid, and a winning argument.

  • Who wouldn’t prefer to order a taxi in New York City of London using their smartphone, knowing where it is, who the driver is, what their ratings are, and having it all handled via credit card without fishing for small bills in your wallet while standing in the rain?
  • Who wouldn’t prefer to rent a lovely home near the beach in San Francisco with 3 bedrooms and a full kitchen from someone just looking to get some money back while away on vacation, over 2 overpriced small hotel rooms in the financial district?

At their core, both Uber and Airbnb offer a better business model than the incumbents for many customers.

The regulatory argument, however, is a poor one. Yes, in the short-run, Airbnb can get away without charging hotel taxes. And the law might even be structured in a way that never thought of renting out private homes. But eventually laws get adapted. The taxing authority has no great interest in not collecting from your version of hotel-room rentals for tourists while taking from formal hotels. As of summer 2014, Airbnb will collect those taxes in San Francisco; San Fran will not be the last place.

If you want to change the law – whether for regulation or taxation – there is an excellent process for that, but it isn’t via competitive business models, it is via the ballot box, public campaigns, and lobbying your local, regional or national representative. You may succeed in reducing those hotel taxes from 14% to 5%… but that would help the real hotels just as much as Airbnb.

Compete on the real business model, not on arbitrage and temporary blind spots in regulation and taxation; they will disappear before long.

Product Development is Like a Game of Chess

April 1st, 2014

It is a truism that engineers see the world rationally… too rationally. Everything has one or more defined answers, all you need is to find the right set of solutions.

Because of that rationalist (using the term loosely) view, many engineers who have succeeded at product engineering, building the product, have failed at product development, designing and successfully marketing the product.

The problem with product development, and especially new product development, is that you never really know if your market is ready for your solution, and even if they are ready, if they will accept the product/solution, if they will like and adopt the design, if they can and will pay a profitable price, if the packaging and channels are right. A thousand things have to go right with your product to succeed, and only a few have to go wrong for it to fail.

In response to these concerns, the entire Lean Startup movement – essentially Steve Blank’s Customer Development philosophy combined with Agile Development – has arisen. Don’t spend 1-2 years or more figuring out your product and then shipping; build the smallest, lightest, fastest time-to-market you can around each part, get it in the hands of customers, and learn quickly from the mistakes. It is easier to correct a small mistake every 2 weeks, then one 52 times as big (or 52 small ones) after two years… not to mention the lost time, competitors in the market, and investors and your own people losing faith.

Mike Bird, a long-time senior IT manager at BP and most recently the head of IT and then Digital Media at a British startup, coined an excellent turn-of-phrase:

It [Product Development] is like a game of chess: make one small move each term, and hope you correctly predict what your opponent will do. If they move unpredictably, respond and adjust.

This is a great analogy for how to do any form of new product development or material changes. You cannot win a chess game by moving all 25 moves before your opponent does his first move. You need to move one small piece at a time, both foreseeing your opponent’s moves but also reacting and responding to them.

Likewise, it is nearly impossible to succeed at new product development, or even Web site redesign, simply by spending years in R&D and rolling out a product you believe they want, even after 1,000 potential customer conversations. You need to get the smallest part into their hands, and watch and learn how they respond. Only from watching them can you learn what to do next an respond.

And like in a chess game, where the better you know your opportunity, the more steps ahead you can see, so in product development, the better you understand your customers, the more you can predict their responses and reactions.

Do chess players make better product development managers or entrepreneurs? I don’t believe that study has ever been done, but I would like to see the results.

Product Development is like a game of chess, you never know what you’re going to get.

Eat Your Own Lunch

March 27th, 2014

I love some of the old technology deployment phrases. According to legend, most of these – eat your own lunch, boil the ocean, etc. – came out of the heyday of IBM.

As an example, I know of one company that moved from customer support software to customer support software as a service (SaaS)… and their first customer was their own customer support department. While I like some things about how this company and runs its SaaS business and disagree with others, their willingness to take the plunge themselves has two benefits:

  1. It telegraphs confidence to the market. Nothing says, “I believe in my product” better than your willingness to use it. Conversely, a company unwilling to use its own platform tells customers, “do what I say, not what I do.” Would you buy a Ford when the dealer drives to work in a Toyota?
  2. It forces good behaviour. Both the software and the infrastructure departments actually use it, creating a close and quick feedback loop, and improving the software at a higher rate.

On the other hand, smart companies also have a “plan B,” or a fallback. After all, if you are running a cloud service, and customers call/chat/email in to complain because of performance or availability or bug issues on that platform, you will be hard-pressed to support them while the very same platform has those very same issues.

One company I worked with that was in a similar position had a non-platform-dependent fallback for just such a scenario. They hardly advertised it, because of the confidence issues raised above, but it was a very smart move. They received all of the benefits of market confidence and positive feedback loops, while ensuring that when it was needed most – when there was a fail – they could support their customers.

Interestingly, here is a company that doesn’t eat its own lunch: Skype.

Since the Microsoft takeover of Skype almost 2 years ago, I have noticed more and more issues with Skype. If Google Hangouts weren’t so difficult, and so dependent on email address (personal vs. work), I would think of moving over. Originally, I assumed these were just typical Microsoft underinvestment or lack of knowledge of the Mac platform, but searching the Skype community showed it to be an issue on Mac and Windows; it is equal opportunity bad engineering.

There are several ways to get support from Skype, and often the community forum is the best. But if you really need support, you can “live chat” with them from their Website. To their credit, their live chat agents respond quickly, and appear to have access to the correct systems. These are not sophisticated engineers, but when have you ever found one at first-level support?

Here’s the irony. First and foremost, Skype is a two-way real-time communications system, chat and voice/video. Why does a customer need to launch a Web-based live chat, which has far fewer features and capabilities than Skype, to converse with… Skype support? Should one not be able to chat with Skype over Skype? Even more ironically, Skype touts using their platform for exactly this purpose with their “Skype Buttons“!

Understandably, someone might want to talk to Skype support about a problem with Skype, and may not be able to use it at the moment, which is why, for that smaller percentage of cases, there should be a fallback; Web live chat makes a lot of sense.

But what does it say about Skype that they are unwilling – or, worse, unable – to use their own live chat product for support… live chat? Time for them to eat their own lunch.

Stores Are Dead, Long Live Stores

March 25th, 2014

Are physical (a.k.a. brick-and-mortar) stores dead? Or are they the future?

On the one hand, the total dollar amount of e-commerce far outpaces physical retail growth. In the 4th quarter of 2013, total US retail sales were $1,148 BN, up 3.8% from the year before, while e-commerce sales were $69 BN, up 16.0% from the year before. Sure, as a percentage of total sales, e-commerce was only 6.0% of total sales, but the shift is dramatic, from 5.4% to 6.0% in one year, and accelerating. The Web is the future.

On the other hand, name brand stores that were always online have gone heavily physical retail. Apple’s retail stores are famous, and represent 12% of its direct total sales for FY2013, although the brand and physical proximity value in driving other sales are in excess of that number. Microsoft has opened Microsoft stores, and there are reports of Best Buy and other stores having some success fighting “showrooming”, where people browse in the store and then buy from Amazon or other online sellers.

In the last 6 months, more than 30% of Americans have not even entered a bank branch. I suspect the numbers are even lower in Europe, where those medieval forms of inter-party funds transfer – the paper check (or cheque, for the Canadians and British among us) and cash – are almost never used.

And yet, as the numbers above show, retail sales – even without e-commerce – still grew last year.

So… are physical stores dead, or are they the future?

The answer, as always, is it depends on which of three classes of activities.

  1. Chores: For chores, efficiency is king, and stores are dead. The primary reason one went into a bank branch was to take care of a chore, a terrible waste of one’s precious time. If you need cash, you’d rather go to the ATM; transfer money to someone, use PayPal or Bitcoin; check balances or pay bills, do it online. Bank branches will become fewer and more specialized to the few tasks one simply cannot perform otherwise.
  2. Rational Purchases: For rational purchases – toilet paper, door handles, light bulbs – those items with which you have no emotional attachment and you know precisely what you need, purchases will shift further and further away from brick-and-morter. The only exceptions will be items you cannot buy online, those for which shipping costs are prohibitive relative to the cost of the item, or those you need today. I have no need to go into a store to buy a 10-pack of lightbulbs; I would far prefer to have them show up at my door.
  3. Emotional Purchases: For emotional purchases – those items that have an emotional impact – purchases will continue to be a mix of online and physical.

Emotional Purchases are emotional for one of three distinct reasons.

  • The item itself has emotional value and must be physically seen or touched before purchase. Examples are antiques or special gifts. Smartphones and some electronics sometimes fall into this category, as people become excited about the purchase and the idea of walking out of the store with this.
  • The item invokes purchase concern emotions due to the complexity of the purchase. These are usually big-ticket items like washing machines, laptops for personal use, or smartphones. These emotional concerns are alleviated by seeing and physically touching the item, or a similar or floor model, prior to purchase, combined with a salesperson’s assistance and reassurance.
  • The item invokes purchase concern emotions due to the necessity of post-purchase use. Even if the item itself is not expensive or complex, but the purchaser cannot truly afford to get it wrong, emotional concern about living with the wrong item come to play. A set of knives may not be expensive, but if someone has a big party at her house, she needs to know that she is getting just the right set for the party. These concerns, again, are alleviated by seeing and touching the item, combined with a salesperson’s assistance and reassurance.

The necessity of great salespeople for emotionally-laden retail purchases is a big part of why stores like Home Depot and Best Buy have stumbled over the years. Knowledgeable and experienced salespeople are very expensive, 50-100% more than the other salesperson. But those salespeople easily can drive 50-100% or more in purchases, and often at higher prices. A great salesperson in an emotional purchase pays for himself many times over.

Thus, the phases of retail, driven by a combination of technology and markets:

  1. In-person: In the past, the only way to buy was in-person retail. If you already had a relationship, you could place a phone order, but that was a small percentage.
  2. Catalog: With the rise of toll-free numbers and credit cards, combined with efficient shipping by UPS and FedEx, catalog orders became possible, the forerunners to e-commerce.
  3. E-Commerce: The Internet, combined with the advent of HTML forms and SSL (yes, I remember their introduction), enabled Internet-based orders, and the rise of Amazon, eBay and others.
  4. Specialization: With greater knowledge due to analytics and expertise, combined with automation like ATMs and digital funds transfer, whether PayPal-style or Bitcoin-style, we will be able to specialize our purchases. Emotional purchases will be performed mostly in person, while rational purchase and chores will be performed mostly online or via automated kiosks.

While store owners and managers have bemoaned the impact of the Web on their business for years, they really were mixing an effective business model (emotionally-laden purchases) with an ineffective one (rational purchases and chores). Technology has created the ability to distinguish between the two.

Stores that focus on fulfilling primarily the emotional purchases will staff correctly, display correctly, market correctly, price correctly… and thrive. Those that continue to focus on attempting to sell rational and chores will wither on the vine.

The rational store is dead, long live the emotional store.

The Difference Between Experience and Cynicism

March 24th, 2014

There was an extended article in the New Republic recently on the rampant “ageism” in Silicon Valley. In some ways, it isn’t surprising. Start-ups can be brutal on a family, so having less (or no) family to worry about makes it somewhat easier. Ironically, the culprits in the article don’t view those in their 60s or 70s as being discriminated against, but rather those in their 30s and 40s, those with real hardcore experience.

Beyond the societal need to avoid discrimination, there is a double price that these startups pay.

The Wages of Talent

Let’s say you are an engineer or product manager or marketer in Silicon Valley. You may feel young and brilliant at 23, and you just know that those 37-year-olds are over the hill. While you may feel invincible, you know that, in 10-15 years, that over-the-hill person will be… you! If you know you have only 10-15 years of real earning power, how much will you expect, will you need to earn in each of those 15 years, compared to if you believe you have 40-45 years of earning power in front of you? The price of your talent just went up.

At the same time, as an employer, if all you are willing to hire are those under 35, you have just cut out 75% of your supply, without reducing your demand. What happens to the price when supply is cut by three-quarters, but demand remains the same?

A focus on youth costs you a lot when capital is scarce.

The Cost of Inexperience

One of my favourite stories in the New Republic article, about three fourths of the way through, is when Nick Stamos, the founder on nCrypted Cloud, is asked to advise a young founder who is in trouble. Like Nick, as soon as I heard what the business idea was, I saw most of the roadblocks based on my own past experiences. I love it when the dumbfounded founder asks Nick how he “guessed all of this,” and Nick responds, “you see these gray hairs?”

Young startup founders – and investors – are right; sometimes experience and age really do equate to cynicism about the way the world works, and whether or not it really can be changed. But is that really a question of age, or of character. I have seen countless youth who accept the world for how it is, and countless adults in their 50s, 60s and 70s who have an energy and passion for changing it. Bill Gates is still changing the world in his 60s, and doesn’t appear to be slowing down. How many lawyers, straight out of law school and into their first year as associate at big Washington, DC, firms, are changing the world?

Experience can lead to cynicism, but what it really does is teach you what roadblocks will be in the way; youth often lacks that knowledge. Whether or not you view the roadblocks as insurmountable or just one more obstacle to go over, around or through, is the difference between cynicism and optimism.

If Nick’s advisee’s investors had gotten experience before starting out, they could have saved many millions of dollars.

The difference between experience and cynicism? It isn’t age, it’s character. But learning to evaluate that in a candidate is a little harder than evaluating Ruby on Rails coding skills; it  takes experience.