Cogblog

I thought I would be the first to blog on this, but Google already has 796 results for this term.  Le’sigh.

I have Morton’s Toe – the name for a foot where the second toe is longer than the first.  One could say I suffer, but apparently it was an idealized form in Greek sculpture and my mom (fellow sufferer) always told me that it was a sign of perfection.  Not much suffering there.  Apparently this is a condition common to 10% to 30% of the population, depending on who you believe.

Anyway, Vibram Five Fingers don’t have long second toe’s!  The result is a sub-optimal fit.

Apparently, Vibram’s CEO also suffers from Morton’s Toe, yet his advice to fellow perfect people is to simply buy a bigger size.  Allow me to offer my beta-testing services should they make the wise decision to roll out perfect shoes for their perfect customers.

Everyone I know is tweeting about Dave Troy’s new post: What your “Good Job” is costing you. (That link love is indicative of how much I love Dave)

Now I am a classic example of a guy hiding out in corporate America, and while I generally agree with his themes, I thought the assessment was not appropriately risk-adjusted.

Here are the tricks:

1) He pushes aside risk of failure with a few comments:

• #1: “…failure cannot be counted strictly as downside. There is recoverable value in failure.”
• #2: “Too often people cite general statistics about entrepreneurial failure that include all entrepreneurs everywhere and in every sector; these metrics are all but anecdotal in nature.”
• #3: “Not being stupid helps (we already established you’re smart), and your position in social networks likely has more to do with success or failure than any other factor…”
• #4: “And please don’t counter that I’ve inaccurately accounted for the capital required to create a startup, how “impossible” it is to get funding, and how doomed you might be for whatever reason before you start: startup capital requirements are lower than ever before – you can get started for as little as $10-$50K with a seed of an idea and the right partner.”

Let’s break that down:

1. What is “failure” of a 5 year business worth?  I say, $100k, because, like him, I think it is worth a lot.
2. Is 90% failure rate anecdotal?  VCs seem to swear by it and they have money riding on their bets.  I bet this is less anecdotal than one might think.  Further, they use these numbers even with respect to their investments.  I assume the deals they pass on have a higher failure rate.  I don’t think that we should write off the fact that most new businesses fail.  Of course, I apply an exit curve:  10% shot at $3m, 40% shot at $300k, 50% odds of $100k ($0 + $100k failure value).
3. Does being smart reduce failure?  Sure.  Although I think that is taken into account in the failure rate.  Everyone that quits their job to do their own thing thinks they are smart.  Much of an exit is luck, in my experience.  Loose correlation.
4. “THE RIGHT PARTNER” – now there is an interesting rub.  You just cut your equity in half.  And I think a good partner is important to getting to your exit.  If you can’t convince your best friend or someone else smart to do it, it may not be a great idea.

So the failure rate model needs to be taken down by half, except for the failure value.

So if we wanted to risk adjust the $3m exit your company could achieve, it might look like this:

$260k value of exit (NPV of 90% failure rate model with a partner and no investors).

Now, there are a lot of problems with this model.  The 10% could be a $30m exit!  What is a reasonable exit?  Dave implies $3m, but that is simply a number pulled out of the air.  I think there are a range of options.  Maybe $3m is actually the risk adjusted number:  10% of $30m?

Is there a salary along the way?  What if it looked like this:

1Y: $0

2Y: $35k – struggling

3Y: $35k – struggling

4Y: $90k – taking off

5Y: $125k – nice business and exit

Now the value of the start-up is $535k.

All this illustrates the range of unknowns we are talking about here.

If there was a 1% chance of a $30m exit, it completely blows the model apart.  The biggest mover of numbers in this story is the possible exit range.  This is why VCs like people going after big markets: Big markets mean there is room for a big company.  If you only have a few million in revenue, you can only exit for so much.  Big exits require big upside potential for the company.

THINK BIG.

I was reading “Spirit”, the Southwest Airlines magazine on a Southwest flight the other day.  They had a quiz that you could use to tell if you have what it takes to become an entrepreneur.

They thought you should not become an entrepreneur if:

• You would rather work by yourself than with others.
• You love to try new things.
• You will shift gear quickly to solve problems.
• You don’t pay attention to criticism.

Err, call me crazy, but I think those are all (maybe with the exception of the first), great traits for entrepreneurs.  And the first may or may not be a great trait, but it certainly describes me.

Where do they get this stuff!

I have been working on more provocative blog titles.  Rawr.

I was reading AdExchanger’s interview with Eric Wheeler and I suddenly realized a few things:

1. Eric is awesome.  Great company name story.  As well-connected, awesome, and likely to be successful a guy as any that you will meet.  Would LOVE to work with him one day.
2. Despite all this, I think the idea is a bad idea.  I have documented this a ton and continue to be concerned.  And remember, I have every reason for it to be in my best interest to be wrong about this.  Straighten me out somebody!
3. Premium inventory are to RTB/Exchange concepts as oil is to water.

Specifically what got me thinking was Eric’s comment: “Using 33Across, marketers can use our Social Proximity segments to target users across the web via exchanges, not just within social media.”

Well, you could.  But….

Premium inventory typically costs a lot.  If you are targeting a behavior and OK with social media inventory, you probably aren’t valuing the brand association that comes with premium content.  If you can buy UGC inventory for $1.00 or ESPN for $15.00, is it worth it for a media planner to go get ESPN?

The behavioral data provider doesn’t really care.  He layers on one or two or three dollars in value either way.  But to the media planner, two impressions that had similar value for their behavioral data cost a lot more to buy from the publisher.  Tough.

Also, premium publishers are moving much more slowly to the RTB/Exchange model – and with good reason.  The risk they have of channel conflict is dramatically hire than a social network.  Social networks are monetizing inventory in the $1 – $5 range.  ESPN’s sales force is selling theirs for $15 – $35.  The opportunity cost of liquidating unreserved inventory in a fashion that might lead a marketer to buy using RTB tools rather than premium direct reservation is quite a bit higher.  The sell-through rate for premium content is typically higher than UGC social networks as well.  The result is that the potential percentage of revenue for a social network is a lot higher.

I ran some numbers:

So you see here that for a social networking site, remnant inventory could easily be more than 25% of their revenue, whereas a premium content site is probably looking at more like 3%.  You could squish the numbers around a bit, but you see the concept: This unreserved stuff doesn’t really move the needle for content guys, but social networks stand to reap huge benefits.  The result is that people like Yahoo, Google, and MySpace: people who could never hope to sell all their impressions, are the first to jump on the RTB bandwagon.  The really good brand inventory is going to take longer to get there.

Also, these numbers highlight that you probably need order of magnitude changes in value to really move the market for these kinds of publishers.

Take that to the bank.

There has been a lot of news and a lot of “advice” to Apple that they should be aggressively lowering their prices and partnering with Verizon to maximize distribution of their iPhone platform and achieve “vendor lock-in”.  To those people, I say this:

It is the first out of the first inning of the game.  Just because Apple is winning, doesn’t mean it is a sure thing.  Despite the pure awesome of the iPhone, this technology is still in its infancy.

While everyone talks about the application market as a key to vendor lock-in in the smartphone market, I don’t think there has been a single application that is so insanely differentiated and “must have” (Flight Control?) that people are buying an iPhone for it.  In fact, I suspect that what we are seeing is the long-tail at work and no single application will have some mass market dominance (Facebook?)

Furthermore, the industry is still set to experience massive change.  And I am not just talking about Verizon’s 4G network.  Technology like WiMax could completely devastate the cellular market.

Finally, I think from an application perspective, application vendors are more cognizant of vendor lock-in and making applications available across a range of platforms.  Also, customers remember their Microsoft experience and are pushing open standards.