Getting to "yes" in a world of "no"…

bacon-small

 

It struck me the other day that if The Lean Startup is as good an idea as its evangelists like to claim, why not apply Lean Startup principles to real life? Hey, that would work perfectly… errrrm, wouldn’t it? Well…

Dating

  • No, sweetie, I’m not being ”unfaithful”: I’m merely A/B testing you and her. Oh, and six others… <sssssssslap>
  • No, sweetie, I’m not “dumping” you: I’m merely iterating fast towards a better product/market fit… <sssssssslap>
  • Hey, babe, wanna see my MVP enter a rapid scaling phase? Let me cross your sweet little chasm… <sssssssslap sssssssslap sssssssslap>

School

  • Following in-depth UX testing, I pivoted from homework to Call of Duty 11 : Rendition to Guantanamo…
  • I’m sorry, Ms Taffenheimer, I really don’t think Geography is going to be one of my “engines of growth”…
  • No, Jake, in exams you are not allowed to “build-measure-learn” from other students’ test sheets…

In Restaurants

  • Wow, I’ll have what he‘s having. Errr… no, I mean I’ll have what she‘s having. No, what that other guy’s having. No, wait…
  • Can I order a mouthful of everything on the menu? I’d really like to iterate fast to my perfect meal…
  • I’m going to persevere with super-hot curries, even though I’ve lost all sensation above my knees…

In The Slush Pile

  • Yeah, we hire workers in pairs, set ‘em at each other’s throats for a week, then fire whoever flinches first. Never fails…
  • We’re not “firing you”, we’re just “pivoting you into an externally managed role stack”…
  • I keep iterating my CV based on my rejection speed metric – if it takes a whole week, I must have been at the top of the pile…

On The Phone

  • “We like to pivot fast. Press ’1′ for BlueFab Corp. Press ’1′ for defunct.ly. Press ’1′ for cloudnproud. Press ’1′ for…”
  • “Hello, what product would you like us to make for you? Press ’1′ for cloud, press ’2′ for virtual, press ’3′ for 3d printing…”
  • “We’re sorry, but fooddood.ly pivoted before we could ship your food order. Can we make up the order with LED pens instead?”

Elsewhere On The Planet

  • Yeah, Morty, we just put “Snakes On A Plane 2.0” into production, it tested real great on the Internet…
  • The nuclear industry is so responsive now we’ve introduced continuous code deployment… <bawooooooooooooooshhhhhhhhhhh>

Eric S. Raymond famously contrasted the ordered (but rigid) “Cathedral” of Big Software Development [e.g. Microsoft Windows] with the disordered (but dynamic) “Bazaar” of Open Source Software [e.g. Linux]. His intention was to try to demonstrate how the Bazaar approach is The Right Answer to the challenges of the modern world, and (conversely) how the Cathedral approach was dead in the water.

As I often tell my young son, anytime someone offers you an either-or choice, the chances are that you’re being conned (or at least coerced). Coke or Pepsi? Errrrm… I’ll have a nice glass of water, if that’s ok with you. So I think Raymond’s dichotomy is something of a forced-argument fallacy, in that by fixing the terms of reference around two massively distant poles, he was trying to make his argument seem more convincing than it actually was.

All the same, I agree it was good that Raymond opened up the whole open-closed debate, because the world of software has historically been very closed. But then again, a lot of software now seems to use open-source libraries on closed platforms (i.e. iOS), so it would seem that neither position actually “won”: rather, the whole idea of software became both more complex and more financially compromised. Even Linux (Raymond’s poster-child for the Bazaar) has itself become a heavily politicised and contested development area, with a tightly controlled feature “funnel” and significant corporate involvement.

The other big issue opened out by Raymond’s open-closed debate was whether the Cathedral-Bazaar / closed-open continuum could usefully be applied to anything apart from software. Having tried for several years to do this with historical research in an online forum, I can say with confidence that it simply doesn’t work. In that context, an online community degenerated into what was more like a third-rate Pub Quiz team, a rag-tag rabble which couldn’t even decide its own name, let alone work together towards a shared purpose.

All of which is why I found this interview with Jaron Lanier in the Smithsonian Magazine so interesting. Despite having helped ‘found’ many of the ideas & ideals of the World Wide Web, Lanier now seems to see it as a socially dysfunctional mess – as having transitioned from utopia to dystopia. Summarizing, he now feels that the endless trolling and schadenfreude gets in the way of any of the kind of positive virtual social interactions he hoped for from the Web, which he sees it as an imminent “social catastrophe”. He seems to see anonymity as a thing that gives people the power to destroy social capital far more readily and easily than anything else can build it.

Moreover, Lanier thinks that what started out as digital libertarianism (of ideas) has become a kind of incultured piracy (of digital property). And don’t get him started on the death of the middle class (which he seems to blame on disintermediation, but it’s not entirely clear how).

 “I think it’s the reason why the rise of networking has coincided with the loss  of the middle class, instead of an expansion in general wealth, which is what should happen. But if you say we’re creating the information economy, except  that we’re making information free, then what we’re saying is we’re destroying  the economy.”

Perhaps the most audacious part of his argument is that he tries (inexactly, I think, but in broadly the right spirit) to connect rehypothecation with digital piracy – that somehow the virtual copiedness of piracy is the same as infinite rehypothecation.

“To my mind an overleveraged unsecured mortgage is exactly the same thing as a pirated music file. It’s somebody’s value that’s been copied many times to give benefit to some distant party.”

This is, I think, where Lanier’s argument train leaves most people’s rails: there may be parallels, sure, but did the web really cause the current (far from finished) Recession? Actually, I would argue that the Recession came about as a consequence of the laissez-faire financial deregulation set in motion by Prime Minister Margaret Thatcher, but that ended up being so brutally amplified by commodities speculation during the period 2001-2007 that the resulting volatility caused the whole system to collapse under the pressure.

Computers played their part in that, sure, but the overall development arc was quite independent of the World Wide Web or anything virtual. Basically, “virtual” is a useful catch-all phrase for ‘non-physical system’, but it really doesn’t have anything like the rhetorical or logical power that Lanier is relying on for his argument.

I think Lanier sees Bad Stuff going on and wants to be The Canary Of Impending Doom: but this isn’t good enough. At any given moment, you can discern a heady mix of Good Stuff and Bad Stuff all around you, but only a pessimistic idealist would think that the Bad Stuff is going to win. The right question is surely how to give nudges to the Good Stuff to keep it all in some kind of ongoing dynamic balance, but I’m not sure Lanier is enough of a pragmatist to do that. Oh well!

For me, the Cathedral and the Bazaar are both unhelpfully idealistic ways of looking at the world, and I can’t help but conclude that Jaron Lanier views the Web in that and similar dichotomies (virtual-physical, wealthy-poor, political-naive etc). This is, however, a fairly impoverished weltanschauung, far from the nuanced realpolitik that holds sway in most human affairs.

I suspect that what is emerging as the major alternative to the Cathedral and the Bazaar is the Tank: a self-contained, self-reliant, compact, Nietzschean powerhouse. In an increasingly paralyzed and purposeless world, what I call a “tank” is a powerful unit with its own self-constructed epistemology and ideology, but where the powerlessness of its context magnifies its own power (relatively speaking).

In the US, the Tea Party movement was surely the first political tank: and perhaps UKIP will turn out to be the UK’s first political tank. By which I mean, the Tea Party and UKIP don’t seem to be built on strong arguments, but the paralysis of their opposition makes them relatively strong. Perhaps the Lean Startup “movement” is also a tank, made powerful largely by the paralysis of the startup funding landscape.

Here’s some stuff that turned my startup finance world upside down, perhaps it will do the same to yours.

One of my favourite mad economics topics is rehypothecation. If you’ve managed up till now to avoid the word, it’s because you’ve been living in a financial la-la land, a dreamworld where banks and brokers are honest & straightforward, and the world financial system is basically sound.

Of course, they simply aren’t, and it isn’t. But however bad you think everything is, rehypothecation makes it all worse… much, much worse.

The quick version goes like this: that when a bank or broker lends money secured against an asset, they can then borrow against the same asset they’ve lent against. And that the bank or brokers who lend them money can then repeat the process. The initial mortgaging is hypothecation: the subsequent chain of mortgages is called rehypothecation.

As explained on the excellent Zero Hedge site, there is a fundamental asymmetry between US rehypothecation rules and UK rehypothecation rules:-

Under the U.S. Federal Reserve Board’s Regulation T and SEC Rule 15c3-3, a prime broker may re-hypothecate assets to the value of 140% of the client’s liability to the prime broker. For example, assume a customer has deposited $500 in securities and has a debt deficit of $200, resulting in net equity of $300. The broker-dealer can re-hypothecate up to $280 (140 per cent. x $200) of these assets.

But in the UK, there is absolutely no statutory limit on the amount that can be re-hypothecated. In fact, brokers are free to re-hypothecate all and even more than the assets deposited by clients. Instead it is up to clients to negotiate a limit or prohibition on re-hypothecation. On the above example a UK broker could, and frequently would, re-hypothecate 100% of the pledged securities ($500).

And this is why the financial crisis actually started in London, in a little office in 1 Curzon Street, where AIG ran its UK operation - specifically there so that its boss Joe Cassano could sell credit default swaps (CDS’s) within the UK’s lax rehypothecation regime. Errrm…. $2.7 trillion of the b*gg*rs. And when that clever-arse scheme started to unwind, the whole financial world caught a cold. If not actually syphilis.

Of course, the UK government has dramatically responded by… leaving it all in place, exactly as it is. So, no danger of a repeat performance, then? Dream on!

All that’s actually happening is that US legislators are now making it harder for US companies to silently shift assets to London to rehypothecate them many times over. And this kind of activity makes up the core of what is known as the “shadow banking sector” (though the phrase has a different meaning in China).

Even though people know this is going on, they don’t often see what it has to do with them. And in particular, why should any given startup care about this kind of fairly abstruse systemic bad behaviour?

Well, I’ve always thought it was really central to understanding the way banks behave: and today I found this comment that crystallized all my thoughts into one single, chilling iceberg moment. The commenter writes:-

It always seemed strange that banks would accept accounts receivable as loan collateral, but not inventory. Now it makes sense – inventory is too real.

That which is real can be stolen, wither, rot, age, depreciate, fall out of favor, or die. Convert into a journal or book entry, and its value becomes more opinion than fact.

So, it would seem that the actual reason working capital has fallen so drastically out of UK banking fashion is that it’s fundamentally to do with real things. If it were more virtual, it could be endlessly rehypothecated. It’s not that there’s no money in working capital, it’s that there’s no capacity for rehypothecation. And that’s nothing that’s going to change in the UK in the obvious future… the City’s making far too much money out of it.

Hence you can see the UK financial regulation regime as one that has become irreversibly skewed away from the physical to the virtual – that for all the poxy pure software play startups that pop up in Shoreditch, the really virtual part of the economy is the one that attracts foreign assets to the Square Mile to be played endlessly with.

Who’d run a UK startup, eh?

For me, entepreneurialism is simply about…

  • using intelligence, cunning, and sociality
  • to convert opportunity, agility and (limited) capital
  • into action, profit, and (sustainable) growth.

i.e. using different kinds of knowledge…

Intelligence‘ = technical brains, forward reasoning, deductive logic
Cunning‘ = sales, reverse reasoning, inductive logic
Sociality‘ = social brains, PR, outreach, persuasion

…to make the most of internal and external resources…

Opportunity‘ = imbalances in external markets, systemic distortions, inconsistent behaviour, arbitrage
Agility‘ = moving fast, prototyping, iterating, listening to customers, rolling with the punches
Capital‘ = cash, resources, time, goodwill, support

…such that your enterprise finds a growing place for itself in the world through action…

Action‘ = actually doing something or building something, rather than just preparing endless slideshows
Profit‘ = selling products or services for more than their amortized cost (and the earlier the better)
Growth‘ = finding ways of competing and winning in more and more market segments

So… which bit of the above don’t you yet do?

2013 Startup Manifesto

I Am An Entrepreneur

While they laughed at my ambition
the world around us changed.
They may not be ready for me,
but the world certainly is.

I am neither pirate nor cavalry,
neither saint nor sinner.
No: I am a surfer, alert and fast,
atop the wave that will wash them away.

I will build a tower ten miles tall,
where each brick is a customer.
Customer service is my trowel
and goodwill is my mortar.

2013 – bring it on!

Starting up in 2013…

 

build_your_own_death_ray_or_stop_moaning

Through 2012, you may well have seen a fair number of examples of UK entrepreneurs ably demonstrating two key skills they apparently have in abundance:-

  1. Moaning how US startups are plainly in a vast unsustainable funding bubble (but can we have some of that here, please?)
  2. Moaning how UK startups are plainly in a vast unsustainable non-funding lull (and why-oh-why can’t the government fix it?)

Yet as we move into 2013, both of these are ringing quite hollow. Unless you’re trying to get a refund on an unflattering top from a department store, moaning does not give you any kind of competitive advantage. Moreover, moaning about something that isn’t actually a problem is just pathetic.

For example, the real reason US startups are in a funding bubble is because (a) an unbelievable number of startups try to start up every year in the US, (b) US entrepreneurs are actually quite good at getting startups going, and (c) they genuinely try to create A+ startups with a real possibility of scale, for which ambitious VC-class investment is a sensible path. Contrastall  that with UK startups’ business plans, most of which seem to be based around C-grade social media hacks. Somewhat unpopularly, I would argue that it is UK entrepreneurs’ collective lack of ambition and vision that has made an effective seed-level VC sector pretty much untenable in the UK.

If you want to change this whole game, aim higher, go bigger, and astound the world.

But it is the non-funding lull moaning that makes me even more annoyed. Too many entrepreneurs assume that their only possible way to make a workable company is via a financial leg-up from someone else’s money. Yet the entire business landscape has changed: have they not noticed eBay, Amazon Marketplace, and a hundred other diverse routes to market that have opened up in every crack?

In fact, I would go so far as to say that a 2013 business plan that specifically relies on someone else’s money to make things happen is nothing short of dead in the water. Rather, a workable 2013 business plan says:

  1. Here’s how my company is making money right now in niche sector A
  2. Here’s the size of the much, much larger market B it can address if you come on board with £300K
  3. Let’s get to it…

The most damaging thing about seeking funding is when it absorbs so much of your time and effort that it ends up costing you your company. So don’t do that: the sexiest thing you can put on a whiteboard is ongoing sales. Prove that you can both sell and deliver, and people will want in, big-time. Make that your goal in 2013, OK? :-)

The Unwritten Lean Gospel…

To my eyes, the whole Lean Startup thing seems to be little more than a nicely crafted piece of contemporary rhetoric, that sings an alluringly timely song engineers desperately want to believe is true… that through the magic of fast iteration, their crappy little startup can prosper despite knowing nothing about positioning, sales, marketing, buyer psychology, or indeed human nature.

Essentially, Ries sells a kind of techno-pipedream that Yes You Too can build a purist company that doesn’t need to sully its hands with all the grungy, old-fashioned business kruft (that every other business book ever insists you need to have as some kind of grounding), because by experimenting fast on eager early customers, you (supposedly) get to find out what works.

Put it all like that, it should be clear that this fetishizes incrementalism (i.e. ‘if made rapidly enough, many small steps can carry you far‘), and is in fact the opposite of (software and hardware) engineering as a discipline, sales as a discipline, marketing as a discipline, pretty much anything as a discipline… it’s anti-every-other-kind-of-knowledge. Put “The Lean Startup” on your bookshelf, and you should surely be able to throw all your other books away. Beguiling, isn’t it?

However, there are many other foolishly impractical messages I suspect The Lean Startup implicitly preaches, but which may not be immediately obvious:-

1. Hope big, dream small.

2. Fail fast, learn little.

3. Self-fund till you die. (For who on earth has a Sugar Daddy rich enough to fund such open-ended stuff?)

4. Alienate lots of early customers by testing lots of rubbishy iterations on them.

5. Don’t trust anybody’s goddarn theory, just iterate instead.

6. If you can’t A-B test if something works, don’t do it.

7. Customers are test subjects for your experiments, not people you have business relationships with.

8. Keep on iterating while the market changes around you (invalidating all your earlier tests).

9. It’s not a product business or a service business, it’s an iterating business.

10. Oh, and don’t forget to A-B test people on your team, that’d be a great way of [mis]managing people, right?

Have I missed any?

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