Black Swans

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A Bit About The Lean Entrepreneur

TL;DR: Brant Cooper & I have a new book coming soon. Go buy The Lean Entrepreneur AppSumo Bundle while you can. It is 96% off, has a bunch of apps + pre-order of The Lean Entrepreneur.

 

Lean Entrepreneurs Surf The Wave

Surf The Wave Art by @FAKEGRIMLOCK for The LeanEntrepreneur.co

 

It has been too long since I last blogged. This blog post will update you as to what Brant Cooper and I have been up to for the last few months, namely: finishing our new book, The Lean Entrepreneur.

We’re excited about The Lean Entrepreneur. It is a wholly new book that takes what we wrote about in The Entrepreneur’s Guide to Customer Development to another level, demonstrates the application of Lean Startup-like thinking in anywhere one desires innovation: social entrepreneurship, automotive manufacturing (ironic, right?), tech startups, music and artist development, and finance and investing, to name a few.

All of that, in it and of itself, is deeply interesting. But what we are most excited to cover in the book is the context and landscape of Lean Startup thinking.

Many a time, Brant and I have asked ourselves, “Why Lean Startup now? Why not 10 years ago? Or even 50 years ago?” The answers to those questions are explained by the coming social, economic and cultural sea changes we are rushing into headlong…whether we like it or not.

Think of yourself sitting on surfboard a hundred yards offshore, and a set of massive waves are visible on the horizon as they build towards the shore.

These waves are powered by the mobile internet and mobile devices, by the read/write digital fabrication technologies such as 3D scanning/3D printing, by “cultural technologies” such as crowdfunding, crowdsourcing and of course, by *Lean Startup-like methods themselves.

Currently mid-2012, we have only begun to feel the power of these disruptive waves. And when they start to converge upon the shore, suffice to say, we will be living in interesting times.

In the Lean Entrepreneur, we interview amazing entrepreneurs who are living in this future, and are kind enough to report back to us.

But back to the you on your surfboard – you have two choices:

1) You can paddle back to shore and build a fortification to protect yourself. (Think music labels in the last +10 years or so)

2) You can swallow hard, paddle farther outside (ie away from shore) and position your board and yourself to surf. (Think Lean Entrepreneurs)

If you choose 1) — you will be obliterated and washed away. Maybe not immediately, but certainly very soon. And when you do, it will be ugly; kicking and screaming the whole way.

Let me give you a contemporary example:

Entrepreneurial education (and education as we now know it) has just begun to feel the cold spray of this wave, and entrenched stakeholders aren’t happy about it. Direct competition like MIT OCW, New.edu, Udacity, Udemy and other learning platforms are going to displace traditional education. Moreover, hackathons like Lean Startup Machine and Startup Weekend are also disrupting entrepreneurial education. As are incubators — incubators aren’t just at the bottom of the investment ladder but also they are the top of the education ladder. Why go into debt for MBA, when someone will pay you to take a crack at a startup?.

Online learning platforms, hackathons, incubators are all initiatives that are surfing these waves, ie they have chosen 2). Now, listen for the unsheathing of the knives as those (eg student-debt-financial-industrial complex, tenured faculty, textbook publishers etc etc) in their fortifications find themselves about to be washed away.

Personally, I am very bullish about the prospects of unlocking human capital and creativity globally vis-a-vis this sort of disruption in education. This will make the world a better place, but the transition to this will be painful.

Now back to you: WHO are you? Where are you relative to these coming waves? Are you paddling out into deeper waters? Or are you scrambling to get to shore?

More on this later….

BUT TODAY you should get go buy The Lean Entrepreneur AppSumo Bundle while you can. It is 96% off, has a bunch of apps + pre-order of The Lean Entrepreneur.

*Yes, that is an argument for endogenous effects.

I see dead startups

My buddy, Dave Binetti of Votizen came down this last Monday to present on False Prophets at LeanLA.com’s last meetup (a meetup I co-organize).  In his talk, about the subject of False  Negatives and False Positives came up.

In the context of startups, a False Negative means that while your startup is not getting any traction or love with the market, investors and talent and doesn’t appear to be inching close to Product-Market Fit  —–  there is a high probability that it is actually a really, really super-duper idea and you could exit for $100m in 3 years.  You don’t want to give up because you, in your heart of hearts, know this — even though no one else believes it.  The fear of the False Negative is giving up too early and letting a good idea die or worse yet, seeing someone else take it and blow it up in a big way.   IMO this is a very legitimate fear.

In contrast, a False Positive is a lot like the living dead, a zombie (Dave’s analogy) or even better yet, Malcom Crowe of The Sixth Sense*.

Cole Sear: I see dead startups.
Malcolm Crowe: On TechCrunch?
[Cole shakes his head no]
Malcolm Crowe: At Coupa Cafe?
[Cole nods]
Malcolm Crowe: Dead startups like, in books about startups? In textbooks?
Cole Sear: Operating like regular startups. They don’t see each other. They only see what they want to see. They don’t know they’re dead.
Malcolm Crowe: How often do you see them?
Cole Sear: All the time. They’re everywhere.

Remember, neither Malcolm Crowe nor the audience know Malcolm is actually dead until the end of the movie.  And that is the danger of the False Positive; the high probability that your idea really doesn’t have any merit but you limp along and persevere because you a) ignore or eschew relevant negative feedback b)  listen to false prophets that look and feel like progress but are anything but —- all the while, hoping for a positive Black Swan to stumble over.  And then when your money runs out, it all comes back to you, in a scary montage, about how you had ignored all the creepy signs of being dead.

Every startup founder has to ask oneself is:  How do I avoid them?  Which is more likely?  The probability of a False Positive or that of a False Negative?  They’re both real fears — but which is materially worse?

As always, there are no easy answers to questions like these.

However, you might guess that I (and Dave btw) think that the False Positive is orders of magnitude more likely, more insidious and more evil — and that one reason why Customer Development and Lean Startups make sense to me.

*Thanks to Robin Ahn for suggesting this analogy.  Brilliant.

Cutting to the chase

My final analysis on Diaspora’s hyper-successful crowdfunding strategy demonstrates that they sold 1,942 more $25 pledges than they “should have” because of their t-shirt strategy, resulting in additional $48,550 just for the $25 pledge category!

Take a look:

Here is what that chart “should” look like:

This was because to get a Diaspora t-shirt, a person had to pledge at least $25.  Diaspora succeeded in nudging people who had a willingness to pay something, say $5 or $10, up to a $25 price point.  In one word:  Clever.

But why a t-shirt? Because a Diaspora t-shirt provides significant, visible and hard-to-fake social proof of geekness (being “cool” amongst geeks), which translates into social capital.  (Clearly, this is nothing new.  Rock bands have been doing exactly this for who-knows-how-long with concert tour t-shirts.)  If you plan on crowdfunding a project, it would behoove you to draw the right lessons from Diaspora, although I am not sanguine about the possibility of replicating what is essentially a Black Swan.

Namely:

  • You need to think of pledges/sponsorships in terms of products, pricing and value. In other words, WIIFM – What’s In It For Me (the buyer)?
  • Reward your backers appropriately. Anything that combines social proof + “cool” is probably a good bet.
  • If you can harness yourself to a growing/popular social trend, you may benefit in an extraordinary manner.
  • Don’t forget about reference pricing. My reference price for a generic “cool” t-shirt is around $20. Meaning, that is what I would expect to pay in a store for a t-shirt that was adequately “cool”. The Diaspora t-shirt, in that light, seems like a bargain.

Assumptions

First off, I don’t have access to all of the real data points. My data are gleaned directly from the fund-raising page itself.  This means I don’t “see” the exact amount pledged in many cases, if someone pledged $645.21, for example.

Second, my major assumption is that each pledge bucket is not a different product, ergo each pledge does not have its own unique demand curve. What I think we are seeing is that Diaspora is selling one product at various prices (hence, one demand curve).

A pledge is a product that signals you are:

a) a geek
b) in-the-know
c) a trend-setter
d) elite

while also providing:

e) the satisfaction of sticking it to The Man (Facebook)
f) the good feeling you get from being philanthropic

Nuts and bolts of it

I threw the publicly available data in an Excel file and given the non-linear nature of the data, I applied a natural log  transformation to both price and quantity before running an OLS regression. The regression fits well and the log transformation preserves the $25 spike.

The regression predicts a quantity of 6.5 for a price of 3.22 — to make sense of that, we simply take the antilog of 6.5 to get 664 t-shirts.  Plugging 664 into the original data set for the expected number of t-shirts to be sold at $25 pledge level generates the second image from the top above.  The one with the smooth curve.  Here, I’ll show it to to you again.

And of course, my new regression is even a better fit (no surprise given that I have plugged in one of its own outputs).  :)

If you want to see the actual regression outputs, download this Excel file: Diaspora Regressions for Blog Post

[BTW my previous thoughts on Diaspora can be found here and here as guest posts at Brant Cooper's blog.]