Sensemaking

Assumption-driven Entrepreneurship: Your Hidden Sustainable Competitive Advantage

Thesis-driven investment is the process of making investments based on theories about the future. The basic process is as follows

1. Make a prediction about the future based on economic, legal, technological, and social trends.
2. Figure out ways to create value based on the differences between the world today and the predicted future.
3. Invest in companies aligned with said world-view.

Having a better understanding of the future than everyone else is a great reason to invest. It's also a really lousy reason to start a company.

Don't believe me? Ten years ago I bet you could've told me that most people today would get their news online. Almost anyone could have told you this. Except of course for the newspaper owners themselves.

So why didn't you create Digg?

Don't get me wrong, a solid thesis is certainly non-trivial. But its importance is dwarfed by another less tangible factor.

Our understanding of human nature.

How does understanding influence our design decisions? Allow me to explain through example. Below is a list of three assumptions about human nature. See if you can figure out which startup(s) they go with.

• Web traffic is constant. Your website has the same number of viewers on Monday morning as on Sunday afternoon. So the best way to decide which stories are the best is to divide the number of votes by the time elapsed.
• The way people network in real life is as follows. The more networked person gives their entire rolodex to the less networked person and says, "have at it!" We should design our business networking websites to reflect this reality.
• Most couples meet in bars. When you are walking down the street and you see a couple holding hands, there's like a 98% chance they met in a bar. Because bars are so effective for meeting new people, our online dating sites should mirror the social atmosphere of a bar.

The problem with assumptions is that they're usually correct. For certain people, at a certain times, in certain places.

The danger isn't that you'll sometimes be wrong. The danger is that you'll always be right.

That is, your assumptions about human nature will be true, but less useful than those of your competitors.

Consider online video. Five years ago anyone could have told you that online video was going to be big. The truth of the thesis was self-evident. But it took Chad Hurley to figure out the money was in the half-hour after lunch when employees were too comatose work. YouTube didn't make it big by having a better thesis, but rather by having a better understanding of human nature.

This is why thesis-driven investment works for venture capitalists but not for entrepreneurs. For VCs, merely having the best thesis is good enough. After all, they get to look at every solution to a given problem and evaluate each on a binary basis. All the assumptions are built in, and the product either works or it doesn't. If you saw a prototype of Digg then you'd have probably been smart enough to invest. Or maybe not. But at least the decision-making process involved is relatively straight forward.

Compare this to actually solving problems. You don't get to choose your solution from a list. You need to solve it yourself.

All too often people start businesses after finding a cool new problem. Bad idea, because being the first to find a problem confers zero advantage. None.

Think about it. Now you have two problems instead of one. First you have to convince others that there is a problem. Then you have to solve it. In practice so much of your time is spent on the former that you're lucky if you even get to the latter. And even if you do, you're just as unlikely to be successful as everyone else.

But what do you do if you REALLY REALLY know what the future is going to look like. If you've found all the cool new problems. The ways to create value. The areas for innovation. What then?

Go have a beer and let someone else work on it.

Much better to wait until you've discovered something new about human nature. Something that makes your assumptions more accurate for more people, more of the time, in more places. Something more useful. Something more actionable.

Call it assumption-driven entrepreneurship.

The best part is that theories are invisible so they can't easily be found and copied. Your theory of human nature is your hidden sustainable competitive advantage. Make sure you have one. And use it wisely.

Does Your Startup Make Meaning? The Two Word Litmus Test

All websites are tools. But some websites are more than tools. They make meaning. That is, they define us as people.

How do you know if your website makes meaning? Easy.

Ask your users how they relate to the site. If their answer starts with "I can" then it's a tool. If their answer starts with "I am" then it defines them as a person.

"I can use Amazon to buy stuff" vs. "I am an eBayer."

"I can get news on CNN" vs. "I am a Slashdotter."

Not all websites should be designed to make meaning. Sometimes the best tool for the job is... a tool. But if you're out to make meaning, then for each proposed feature first ask yourself the following. Is this an "I Am" feature or an "I Can" feature? The results may surprise you.

What can Wikipedia learn from the Iliad? (The sociology of wiki management)

Wikipedia articles drift in quality over time. Some days they get better, some days they get worse.

The big question is whether Wikipedia as a whole will continue to improve, or whether it will "peak out" and gradually slide downhill. It's very difficult to say, since there are no precedents in the area.

Or are there?

Written between 600 and 800 B.C., the Iliad is the ultimate model for successful longterm asynchronous collaboration. Arguably the greatest story ever told, this epic was passed down from generation to generation. Each poet was free to add a little here or subtract a little there. The end result? Perfection.

This process is much the same as is used to create Wikipedia today. Which is hugely exciting, if only because it means that Wikipedia has the potential to be every bit as good. But there's no guarantee.

The biggest differences between the two projects are the social incentives involved.

1) The Iliad would have taken years to learn, but once memorized would have acted as a huge source of social capital.

2) Because of the time invested and the social capital at risk, petty vandalism was unlikely.

3) The project attracted only experts. Not because the Greeks were credentialist, but simply because of the intellectual barriers involved.

4) It's safe to say that the epic poets weren't going for edit count.

In the short term Wikipedia continues to improve, but in the long term it's hard to say. If we want Wikipedia to retain its value ten, twenty, or one-hundred years from now then perhaps we should design the social incentives of wiki contribution to mimic those of the oral tradition.

Either way, the next century for Wikipedia will be a hell of an Odyssey.

Triadic Implosion: The Great Paradox of Social Networks

You have five friends who ski. Three are on the ski team. You think about joining, but ultimately decide against it. But then the other two join, and soon so do you.

This illustrates the first law of social network growth: The probability p of joining an online community is a function of the number of friends k already in that community.

No surprise.

What's more interesting is this. If your friends are also friends, you're significantly more likely to join. Almost 2.5 times more likely. That's huge.

Social networking theory has this concept of triads. Let's say there are three people, A-B-C. Person B is friends with person A. Person B is also friends with person C. If person A knows person C, the triad is closed. If person A does not know person C, the triad is open.

So we know that having more friends in a group makes you more likely to join. And if your friends all know each other, your chances of joining go up even further.

The paradox is this: The higher the ratio of closed triads a group has, the slower it grows.

If each individual is more likely to join the group, how can the group as a whole grow more slowly? It seems impossible.

One possible explanation is that tightly connected groups become cliqueish. Indeed, there is some evidence that groups based around common bonds between users are harder to join than groups based around a common identity. However, if cliqueishness really were the reason these groups grew more slowly then why are individuals so much more likely to join groups with many closed triads? This theory seems questionable.

Another possible explanation is that when the network is growing very fast, the nodes don't have enough time to connect. When the rate of growth slows down, the nodes then play catch-up and connect along the edges. This theory also does not feel entirely satisfactory. Social networks go to great lengths to reward those with many friends, and users go out of their way to add anyone they can think of.

While more research is needed, the preliminary results already raise valuable questions:

Why should the fact that your friends in a community know each other make you more likely to join?

Does large density of closed triads represent cliquishness?

What are the structural features that influence whether a given individual will join a particular group?

What are the structural features that influence whether a given group will grow significantly?

The answers are still up for debate. There's still so much we don't know. But in some ways, just having the questions will give future designers an enormous advantage.

Source:

Backstrom, L., Huttenlocher, D., Kleinberg, J., & Lan, X. (In press). Group formation in large social networks: membership, growth, and evolution. [PDF]

Why Everyone Hates You: A Grand Unifying Theory of Blog Comment Incivility

You'd think that if you wrote something really great, you'd get praised. And if you wrote something really dumb, you'd get trashed.

But that's not the way it works.

Instead, if you write something really great then everyone tells you how dumb you are. And if you write something really bad, you just get ignored. Ask any blogger and they'll tell you its true. But why is this?

People naturally respond to what they read. If someone loves what you write, the natural response is to forward it to friends or post it on Digg. But what if someone hates your blog? They can't unforward it, nor can they delete it from the collective memory.

So they trash you. Because really, it's all they can do.

There are times when the blogosphere seems terribly uncivilized. Recent events like the Kathy Sierra death threats make this all the more salient. But not everyone hates Kathy. In fact, most of her readers love her. They express their love by reading her posts in the first place. But this support is largely invisible, so sometimes all that's left to see is the hate.

Transparent Etiquette: Moderating behavior in a post privacy world

How we act depends on who is watching.

Children act differently around parents. Students act differently around teachers. Employees act differently around bosses.

There's nothing wrong with this. It's human nature.

However, thanks to the exponentiation of technology we are increasingly able to be virtually present in all places all the time. This leads to some tricky situations. For example, something that might seem funny at a party with friends might not seem so funny if someone snaps a pic on their camera phone and posts it online. Because camera phones allow everyone to be "at the party," how is it appropriate for us to behave? And if you think camera phones are bad now, just stick around another fifteen years. You'll have your photo and biometrics snapped faster than you can say say pervasive mobile wireless ad-hoc mesh network.

I believe the solution here is design our social spaces with their own values and mores built in. There have already been several promising early attempts at this. For example, Starbucks works hard to set a certain ambience and climate for discussion. Remember the quotes on the cups that were meant to start conversations?

The genius of Starbucks is that it provides a safe place for teens and adults to hang out in public for the price of a cup of coffee. If anyone is able to out-compete Starbucks it won't be another coffee shop, but rather another "third space" with more compelling values and ethics.

The challenge for web entrepreneurs is two-fold.

First, how do we create compelling third spaces that encourage the desired social interaction? This is especially important since in a world where all platforms offer equally good functionality, users may well choose on the basis of competing values.

Second, how do we communicate the values of these third spaces to outsiders looking back from future? A lot of behavior that may look questionable at first may be perfectly reasonable in its proper context. How do we supply this context?

These questions present huge challenges, but also huge opportunities.

Cell Phone Software: The Billion-Dollar Sand Trap

We all know the advantages: Everyone owns one. We all know how to use them. Women love them and they fit nicely into a pocket. Did I mention they do wireless?

Cell phones seem like the obvious platform for the next generation of billion-dollar startups. But they're not.

Hundreds of web entrepreneurs have gone into mobile. How many successes can you name?

That's what I thought.

What follows is an explanation of why creating a successful mobile-wireless software startup is not just improbable, but impossible. Specifically, why

• The underlying technology is broken
• The business case is a proven recipe for failure
• The social aspects are more awkward than a middle school dance

The underlying technology is broken

1) There are hundreds of different phone models. Your software needs to run on all of them. How hard is this? Nokia makes a competitor to Loopt called Nokia Sensor. In the last five years, Nokia has only been able to get its software working on ten of its forty-three currently sold phones. And Nokia doesn't even have the challenge of porting its software across the operating systems and architectures of multiple manufacturers.

Modifying the software for each phone's display is a matter of brute-force labor. There's no intellectual way around it. Yahoo! is one of the few companies that's been able to pull this off, but only because they have an army of Ph.D. hackers working for them.

You won't have an army of hackers like Yahoo!, nor will you understand the hardware better than Nokia.

2) The carriers partially disable Bluetooth functionality to prevent customers from downloading their own ringtones. This also means all those good features you came up with in the last brainstorming session aren't going to work.

3) In order to load software, you need to buy the optional cable. No one owns the optional cable. Even if you gave your customers the optional cable for free, it only works with windows. Your early adopters use Macs.

4) You don't know how to install software on your own phone, so why would you expect your customers to know how to do it?

5) Any software that pings the cell tower will quickly drain the battery. Pinging the tower every five minutes completely drains the batter in two hours. So much for making calls.

The business case is a proven recipe for failure

6) Cell phone carriers will never partner with you. At least not on terms that allow you to make a profit.

7) Even if one carrier partners with you, the rest won't.

8) The next generation of WiFi will make your product obsolete in two years anyway.

The social aspects are more awkward than a middle school dance

9) Let's say that against all odds you get a few early adopters. To everyone else it will look like they are just sending text messages. Unlike the iPod, your software is invisible. Invisible software isn't viral.

10) You also can't flaunt what you can't see. So much for your idea of your product being a status symbol.

11) Cell phones don't fit into girl's pants. Remember how the women you asked said they would only use your software if it had a vibrate mode? Oops.

The canonical formula for business success is luck, pluck, and virtue. Success in mobile wireless is mostly luck. Maybe some prayer. It pains me to see some of the smartest people I know falling for the mobile trap. I've observed dozens of entrepreneurs go into mobile wireless. All have failed.

That's not to say there will never be a day when it's feasible for startups to venture into mobile. How will you know when the time is right? Ask yourself this question: Could I make money as a distributor of mobile software? If the answer is no (because there is no software to distribute) then find something else to do and check back again in a year. Mobile is still the future and it isn't going anywhere. But in the meantime, better to let others get stuck in the billion-dollar sand trap.