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.

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?

• 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?

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!

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?

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?

The longer I work in the world of startups, the more I realise that most revolutionary inventions have to be delivered to their markets wrapped up in equally radical business models for them to succeed at scale. And the reasons for this are many and varied:-

• If your new widget is half the price of existing widgets, by putting it on the same shelves as them you run the risk of its being seen as a me-too cheap Chinese clone quality-killer (by end-users) or a make-less-per-sale-on-that margin-killer (by retailers). Yet by finding a different route to market to your competitors that your new widget’s dramatically lower price-point enables (say, corner shops, service stations, mobile phone shops, etc), you can get to walk all over your competition.
• If your new widget has 2x or 3x the working life of existing widgets, by putting it on the same shelves as them you run the risk of its being seen as a mystifying product variant (by end-users) or a sale-complexifying variant (by retailers). Yet if you instead give your new widgets away and live handsomely off the super-long support contracts, you can get to walk all over your competition.
• If your new widget is 2x or 3x as powerful as existing widgets, by putting it on the same shelves as them you run the risk of being seen as a “Rolls Royce” (by end-users who are looking for Mondeos) or as an overfancy version of what’s already on sale (by retailers). Yet if you find a real-world application that that extra power suddenly makes possible and can get it to people’s attentions by other retail channels, you can get to walk all over your competition.
• If your new widget is far, far more configurable than existing widgets, by putting it on the same shelves as them you run the risk of being seen as a confusing product variant (by customers) or an unnecessary support headache (by retailers). Yet if you build an online scripting forum and active user community around it, you can build a direct connection with your market and so walk around the the need for retailers at all.

Hence if you are running an innovative startup, remember that on its own your invention is no more than a pair of shoes. But if you find a route to market & a business model that actively reflects the key difference they have over the competition, then they become a pair of boots that can walk all over your competition. Hence any time you need some direction, let Nancy Sinatra (or Jessica Simpson, if you really insist, *sigh*) show you the right way forward for your young business:

“These boots are made for walking, and that’s just what they’ll do
One of these days these boots are gonna walk all over you.”

So, how are you going to do it? Well… government grants are leaky lifebelts that help keep you afloat (but only for a short while). Oh, I should mention that to get them, you have to swim 50 miles and back, leaving your part-constructed boat behind you to sink ignominiously beneath the waves. EU grants are the same, except that you need to swim 1000 miles while also collaborating with people building their own sinking boats in different countries. then you’ll probably be turned down anyway.

You’re not swimming completely alone out there, though. Business angels enjoy motoring past in their speedboats to see how your funny little tech construction project is going. Even so, they rarely bring along anything of use with them: most are content to have a chat with you over a cup of (salt watery) tea, and to share their reminiscences about how difficult they found it to build their own first boat way back when (at a time when, curiously enough, banks were happy to lend to boat-builders). Then off they motor, leaving you freezing in the water, scavenging nails to fix passing planks together.

Occasionally a VC cruise liner will sashay past you, sending bloggy ripples that confuse and annoy. Their captains wave, but never actually stop: though you can see all the waste food being chucked over the side, seagulls get it all before you can reach it. And although it’s sometimes nice to dream about building your boat in a shipyard (the way that VCs claim to do), sadly that’s not an option for you either.

Coaches tell you how to dive deeper to find the nails you need: while mentors tell you which planks they’d choose to build with. But even with all their “help”, your best case startup scenario will almost always be a leaking,hacked-together contraption that is barely sound enough to keep itself afloat, never mind keep you afloat as well.

Errr…. do you still want to be an entrepreneur?

* * * * * * * * * *

OK, I completely accept that all human endeavour is, to a very large degree, no more than an attempt to create small bubbles of order in a vast ocean of entropy and doubt: and that in those terms, starting up a company is no different to any other exercise. But all the same, what is the sense of having such a complicated network of non-funding funders, inept financial gatekeepers and pointless service providers when so few young tech companies ever manage to start up both successfully and scalably?

Has nobody actually noticed how unbelievably cold it is out there? Even if you are an experienced ice diver, you may not arrive in port…

The #1 way to pitch your startup is with a high-speed presentation, that…

• can use numbers to get its point across, but is not actually a numerical argument.
• is a selling aid, not a business-school case study
• is a glossy brochure made flesh, filled with richly-saturated emotional appeals to the audience.

And just in case you haven’t worked it out already, the brochure is you and the audience is potential investors.

But before you try out your pitch on anybody who might conceivably be able to respond, write it all up in a shiny four-page brochure format. If you find yourself unable to do that, be very afraid (because it probably means you’re lacking some important sales skills) – and then immediately find someone who can do it for you. And in fact, lots of people can – the hardest bit is admitting that you can’t do it, and that you need their help.

So, if you find that this is the case, don’t be proud, be effective – see what you’re missing and find a way to beg, borrow or buy it in.

In fact, there are three big reasons for doing this:

1. Many potential investors respond better to shiny glossy material in their hand than spoken stuff in their ear
2. Many people you pitch to will pass the material on to other investors they know (for a whole variety of reasons)
3. Finding effective soundbites for your brochure will help you do the same for your pitch presentation

But what are you actually trying to say? Actually, a pitch says nothing more than:-

“This is the world I see, and it looks totally money.“

Overall, if you’re saying much more than this in a pitch, you’re probably trying too hard. The point of a pitch is to find people who agree with you that what you see is indeed “totally money“, i.e. a great big juicy, succulent, mouth-watering opportunity for everyone involved to get rich several times over. So, work out what the top three reasons why investing in your startup is a fantastic, solid-gold, never-to-happen-again, buy-in-or-kick-yourself-for-the-next-decade good idea, and spend whatever time you have getting those three reasons across to your audience.

A pitch is not the place for carefully-constructed, highly-detailed rebuttals overcoming various sales objections you’ve encountered along the way, it is a place for enthusiasm and excitement. In modern movie terms, it is a Call To Adventure in the Hero Investor’s Journey: given that the second stage is called “Refusal Of The Call”, it is your job to find ways of dragging people past that Refusal by connecting them up with the gift of Supernatural Aid that propels them into your adventure. For example, this might be an article in the Financial Times bigging up your sector, or a shared LinkedIn connection that strongly endorses you at precisely the right moment.

However, what is arguably most important in a pitch is the way that you say all this. If you have never sold anything before in your life before trying to sell shares in your startup, be afraid. Few salesmen are particularly good at selling big-ticket items – and, let’s face it, a startup is (even at this early stage in its lifetime) a very big ticket item, making it a very hard sell.

So if you’re an entrepreneur trying to do this, look over at your bookshelf. If what you see says “Agile Development With Rails (4th Edition)”, “Linux Device Drivers, Third Edition”, “Programming Perl” or (dare I say it) “The Lean Startup”, I can only suggest that you consider broadening your repertoire… and fast. Say, “Close Every Sale” by Joe Girard, “Secrets of Closing the Sale” by Zig Ziglar, ”Presentation Zen” by Garr Reynolds, “Mastering the Complex Sale” by Jeff Thull… you get the idea.

Put another way, you wouldn’t put yourself in the seat of an F1 car without a lot of training beforehand… and standing in front of a room of investors is a high-octane context where the stakes are high, one where people in the audience expect to be sold to vigorously (and to resist just as vigorously). And you’re just going to wing it, like you’re talking to some mates down the pub? Riiiiiight.

The big modern mythology that has polluted this whole discourse is that “some ideas are so powerful that they sell themselves“. Well… it may indeed be the case that this is true for one or two ideas in a generation. But please take this on board: it’s not personal, but the chances that your (say) urban social media hack falls into that extraordinarily elect group is basically at lottery-like low levels of probability. But you aren’t Mark Zuckerberg, your startup isn’t Facebook, so trying to achieve your success by emulating his outlier success is hopefulness bordering on idiocy. Let’s face it: you’re probably going to have to take a slightly different route.

If you’re an entrepreneur, 95% of what you do is now sales. If you don’t like that, tough luck - at some stage, you’re going to have to get over it, and get with the programme. Learn from people who really know how to sell. And then sell like you really mean it – because you do.

For ever and a day, startups have written business plans - miserable, useless, charm-free slabs of cruft that serve no obvious purpose other than killing trees. Presuming that you did want to kill trees, of course (though personally, I try not to).

And so it should be no great surprise that I hate startup business plans, I really do. And though I have a hundred or more different reasons why this should be, they all boil down to one useless little lie entrepreneurs try to foist upon an disbelieving world: that they can control stuff in the outside world.

But they can’t – in fact, most entrepreneurs can barely control the stuff they’re building and/or doing internally, never mind anything roaming wild far beyond their work desk. Control falls in the realm of persuasion and politics (not in the sense of party politics, but of business politics), and we must have hundreds of ways to describe its shaded variants – influence, sway, pressure, give, push, shove, edge, nudge, wink, pull, yield, desire, want, need, hypnotize, beg, plead, offer, tempt, horsetrade, negotiate, and so forth. If you can’t outright control your customers’ behaviour, how do you plan to influence them? How do you plan to tempt them? How do you plan to sway them? These are things you really need to be honest about (both to potential investors and to yourself), because if you do somehow get funded (despite your rubbish business plan) these form the meat of what you’ll actually be doing for the next five years.

Yet how many times do you see any of these ‘shaded control’ words in a business plan in any way that that goes beyond mere buzzword bingo? Hardly ever, I’ll guess, even though these are arguably the key activities and forces which determine startup success and failure more than anything else. Given that (as I’ve long said) building a startup is a lot like trying to start a social revolution, it should be clear that these activities are in much the same way the basic political tools of the social revolutionary. Come the revolution, all your industry incumbents are like totally dead, mate.

Digging a little bit deeper, the underlying problem here is the (sadly widespread) misconception among tech entrepreneurs that they somehow wouldn’t need to engage with business politics because ‘people’ (some mythical perfect audience that’s never actually specified) will telepathically ’get’ what they’re doing and start throwing gold coins the minute their crappy MVP website soft-launches in Guatemala. As if!

Recently, I’ve taken to saying that 90% of being an entrepreneur is sales, and that the phrase “tech entrepreneur” shouldn’t somehow fool you into thinking that tech is even 50% of what’s important. (At best, the “tech” part is 50% of the 10% that isn’t sales… i.e. 5%). But from writing all the above, I can see that what I’m reaching towards is more like this: that 90% of being an entrepreneur is business politics, of which sales is merely the most obvious manifestation.

So: while your pitch needs to be pure psychology (a passionate riff on hope, ambition, greed, and profit), your business plan should be pure politics. When will you start using shaded control words in your business plan? That’s almost certainly what it’s missing!