A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here.

Obviously, opportunity and entrepreneurs go together.

There are dozens, if not hundreds, of opportunities that could serve as the basis for a company.

It is a wise entrepreneur who at least tries to consider the long-tern implications of the opportunity they choose.

Not just the financial potential, but the possible effects on society and the world.

While no one can see the future, there is one thing you can count on happening.

Humans will act the same way online as they do in the real world — only more so.

More so, because they can indulge their worst thoughts/desires with little-to-no chance of repercussions and a much broader reach.

Anything that has ever been done offline will be done — more so.

Political dirty tricks will get dirtier,  bullying will be more vicious, the haters will be more active, and on and on.

Could Mark Zukerberg have foreseen this when he started Facebook?

Maybe not.

Did he try?

Probably not.

Did he even stop to think?

Unlikely.

Does he think about it now?

Only to deny it.

Image credit: HikingArtist

Yesterday I described how I came to start my company Quant Price. Today is the story of what happened after that decision.

I first did the Founder Institute program that helps entrepreneurs create companies. They introduced many concepts that are hard for first time founders to grasp. Things of HUGE importance ranging from talking to potential customers to validate the idea to seeing how buying decisions are made.

There are many things that can make a startup fail. Each of these factors are risks. A successful startup has avoided each of these pitfalls in succession.

There is a step by step process to developing the idea and de-risking it. The founder Institute program helped me think through them.

One shortfall of the program was that it has a cookie cutter view to creating startups. It requires that everyone fit into a mold. This may not serve every startup well. I’d probably have taken it to completion if I were not “terminated” for having a hard time getting a sufficient number of video interviews.

Though to be rational, I’ve to admit that it’s also possible that I just have a very bad idea or am not really cut out for this. I may only know very late because “I’m drinking my own Kool-Aid”.

The risks are huge. There are a lot of things that matter to a startup being a success. There has to be value in the product. There has to be a way to reach a big chunk of the market. There has to be a way to convert all those gains into money. People have to believe in the dream and be willing to contribute for free for the duration that the cash flow doesn’t exist.  It takes a lot to keep a startup together.

It was very hard to find my first customer. I didn’t even have my marketing material when I went to interview Katherine Krug the founder of Getbetterback.

Partially because I didn’t realize that I was supposed to bullshit my way through such meetings and, frankly, partially because I didn’t know how to bullshit about it if I had to.

Fortunately, Katherine is one of those people who tests things like prices. I think she was lucky to not have a mentor who had a strong opinion about pricing. (I still can’t believe that people don’t test their prices.)

Katherine first did a price test with Optimizely. Unfortunately, Optimizely is not really geared to do price tests. Additionally, putting Optimizely code on your web page makes it load a lot slower for the end consumer. That itself reduces conversion rates.

It made me wonder if people don’t know or just don’t care about the impact this has on the browsing experience.

Optimizely targets conversion rates, so once Katherine was done with the test it told her how many people had converted to buy at different prices. Obviously at the higher price, fewer people converted.

But the real question was which price lead to better margins?

And was the test significant?

That is when she realized she needed Quant Price.

I salvaged the Optimizely results to guess what the next prices for the next test should be.

We used our pricing engine and did an A/B test. It turned out that seemingly identical prices $49 and $59 were over 26% different from a revenue perspective.

We also realized that changes to the web design and the holiday season could change the optimal price. So much so that at some point $69 was 22% better than $59 because of the Christmas buying spree.

Hidrate, my second client, was easier to find after we put up a video interview with Katherine.

With Hidrate, we seemed to run into some bad luck. The $59 price for them was identical to $49 from a profit perspective. But as luck would have it, they were running out of inventory. Now, at the $49 price they were burning through 45% more inventories to make the same amount of money as at $59.

Once we told them about it, they raise their price to $59 to save inventory. They kept their customers happier for longer AND made money to buy more inventories without losing the company to investors.

Here are details from our first two clients,

• Test your prices
• Prices Change
• Inventory And Pricing

We did all this by using technology developed for finance. Quants in the financial industry are usually tasked with pricing securities worth trillions of dollars based on market data. There are multiple factors that affect the “fair” price of a security.

I learned how this valuable task of pricing can be automated incorporating available data.

Many companies now quote prices and sell exclusively online. Computers can be used to make pricing decisions based on price sensitivity of individual customers, business specific parameters, such as inventory availability and market conditions and the current season.

Airlines and Amazon already do this on a massive scale and are very profitable as a result.

SaaS companies and large-to-medium scale retail operations could be next in line.

Fortunately, our market is easily defined. We are looking to help companies with more than 300 distinct customers. This is desirable because with more data we can get statistical significance on more complex models.

We are looking to help SaaS companies that want better pricing models. For them, we have a solution that reduces churn and increases revenue at the same time !

To justify building a company-specific solution, we need to be able to service a pool of revenue of over 10M$/year.

Quant Price’s free app Qbot is available to smaller companies in the Shopify app store.

In order to make our technology more accessible we packaged it into APIs and apps, that help us expose this functionality to more companies.

Two final points.

• I’m happy to pay a bounty for referrals. Contact me at info@quantprice.com for details.

• We are looking for talented people  who can participate in the development of our product.

And if you have any questions or comments you can respond here or use the email address above.

After I got my Masters in Computer Science and Optimization from USC,  I worked for banks for a while as a quant (people who do quantitative or mathematical stuff such as build complex models to evaluate financial securities, risk and reward).

Contrary to what most people would tell you about working for a bank, I found the work very interesting—not surprising, given my math background.

But much as much as I enjoyed my work, I was bitten by the entrepreneurial bug and wanted to do something original.

I’m an engineer at heart and I like inventing things that makes life better or improve what people are already doing.

Innovation seems to happen overwhelmingly in small to medium companies and then big companies usually buy the promising smaller ones.

Doing my own thing would also gave me the ability to try out new things at an amazing pace that makes the process of discovery a lot faster.

Initially I had the bright idea of trying to beat the banks at what they do best: price securities.

I invented a way of making models that could learn more from purchase data about pricing than conventional models do and put those models to work trying to outguess Wall Street computers.

Eventually, I realized that even though my algorithms were smart, the networks that were affordable to me were too slow to use this information for the strategy I developed.

Even though I could predict prices, I couldn’t get ahead of computers that were closer to the exchange to make the profitable trades.

I had to make a pivot or bet even bigger and buy access to the necessary networks.

I paused to think for a while and it occurred to me that the world is full of things that need to be priced.

So, why stick to the business of securities where so many quants and fast computers were concentrated in solving a problem with a lot of history?

Why not solve a Main Street problem?

I began looking for a niche where there was a significant problem that I could solve.

About that time I heard a story on the NPR money podcast.

Two sets of people were asked to guess the weight of a cow shown in a picture.
They first asked a bunch of experts what the weight might be and each gave a different answer.
They also gathered answers from a crowd of non-experts on a website.

The median value in the crowd of non-experts was much closer to the true weight of the cow than the group of experts!

That led me to think about how the wisdom of crowds could be used to help small companies make better decisions.

Of course, I wanted to monetize the information in the buying decisions that people make.

How about learning the perfect offer to make to shoppers at an online store?

 I’d recently built complex pricing models to value financial securities, so I knew I could do this.

I quickly noticed that small businesses were leaving a lot of profit on the table. They were essentially using rules-of-thumb, instead of measuring price sensitivity and making optimal offers for peak profit just like the airlines, Airbnb and Amazon are already doing.

How much of an advantage can optimization bring?

For example, the average retail store runs with a 5% net margin.
What  if the store could raise the sale price (after any discounts) of the average item by 1% without affecting demand?

That would raise their margin a staggering 20%!
And that is what happens with just a 1% change.

Imagine what can happen with a larger price change.

In our experiments with stores on Shopify, we noticed that they were so far off the optimal price that they were making less than 70% of what they could be making if they could tune into the crowd.

That is beyond a big deal!

So I began working on an app with the vision of using optimization to create better offer management strategies.

Over the last year I created the company, Quant Price. You can try our first app for free on Shopify.

Join me tomorrow for a closer look at what Quant Price does.

It’s funny how things we read decades after a minor happening will bring that memory to the fore.

In the 1990s, when I was a tech recruiter and the original net was booming with startups, a young man asked me if I worked with startups, because he wanted to join one. I told him that startups had been my main market since the late Seventies (when I went to work for MRI).

He scornfully informed me that was impossible, since there weren’t any startups before the Internet and he wanted a recruiter who understood what he was looking for.

I was grateful, since I didn’t have any clients interested in his combination of arrogance and ignorance.

That memory was triggered when I read The VCs of BC and learned just how wrong he was — entrepreneurs were alive and well 4000 years ago; I think anyone who toils anywhere in the startup ecosystem will also enjoy reading it.

These letters survive as part of a stunning, nearly miraculous window into ancient economics. (…)  during one 30-year period — between 1890 and 1860 B.C. — for one community in the town of Kanesh, we know a great deal.

And the parallels of today, including a vibrant entrepreneurial approach complete with venture capital, Wall Street-style players, esoteric financial instruments and risky deals.

The traders of Kanesh used financial tools that were remarkably similar to checks, bonds and joint-stock companies. They had something like venture-capital firms that created diversified portfolios of risky trades. And they even had structured financial products: People would buy outstanding debt, sell it to others and use it as collateral to finance new businesses.

There are a lot more fun details and interesting stories — the kind that are great to share over a few beers or a bottle of wine.

Hopefully it will encourage you to enjoy a bit of downtime — you’ll be more creative and productive for doing it.

Guaranteed!

Flickr image credit: Carole Raddato

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

Background: Long-term readers know I spend a lot of time in my yard. It’s taken 10 years for me to actually like it, although people have been stopping to compliment me for at least five years.

Back then a friend gave me a split-image picture showing two yards, one lush and the other bare dirt with a few scraggly plants. The lush image is labeled “fantasy” and the other “reality.”

Imagine my surprise when I scrolled through my LinkedIn feed (a rare occurrence) and found the startup (all life, actually) version of my split-image garden.

It was posted by Andy Adams CEO, GreenEcho, LLC and it speaks for itself.

So remember, nobody ever said reality was easy — doable, but not easy.

Image credit: HikingArtist

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

Who should make money when you finally cash out?

Most commentary I see talks about what investors and founders walk away with, but what about the rest of the team?

In an interview, Steve Blank addresses this in terms of the impact on valuation and cashing out after a large investment and how it affects what founders receive, but not its effect on the team.

If the founders walk away with a few million each after the investors take their 3-5X return, what will be left for your people?

Those are the people who made the company successful enough to be bought in the first place.

Most of you will agree that the great majority of startups will not have exits similar to Facebook or Google.

Knowing that, it is your responsibility to honor the social contract you made with your employees, when they traded their compensation for equity in your startup.

Therefore, it is of paramount importance for founders to never lose sight of the numbers; the more investment you take the lower your team’s return when the company is acquired.

Image credit: HikingArtist

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

Are you familiar with the old saying “a fool and his money are soon parted?”

So are a fool and his startup.

In the situation I’m talking about both could happen—will happen unless the fools with the money dump the fool from his startup.

The founder fool has great talents, but his best is wooing and managing money fools, i.e., investors.

He’s also good at wooing people to join his fledgling company, but even better at being the author of their destruction.

He is a master of disparagement—eye rolls, winks, smirks and, of course, sarcasm.

This founder fool’s arrogance is based on his ability to manage upwards, but mostly on fear; fear that someone who works for him may somehow, somewhere, become more successful than he.

That arrogance, combined with his unfettered belief that anybody who works for a living, including in his own company, is a lesser person creates an environment that destroys people by damaging their self-respect.

Not only does he take out the (in his mind) competition, he also improves retention, since those he undercuts are less likely to leave.

As Jeff Haden says, “Self-respect is a lot like trust. Once lost, it’s almost impossible to regain.”

Almost. It can be regained, but doing so takes careful rebuilding and support by a manager skilled at seeing diamonds where others see a lump of coal.

And that means either the investor fools rise up to oust the tyrant or the people find the courage to walk away.

Option Sanity™ enhances self-respect.
Come visit Option Sanity for an easy-to-understand, simple-to-implement stock allocation system.  It’s so easy a CEO can do it.

Warning.
Do not attempt to use Option Sanity™ without a strong commitment to business planning, financial controls, honesty, ethics, and “doing the right thing.”
Use only as directed.
Users of Option Sanity may experience sudden increases in team cohesion and worker satisfaction. In cases where team productivity, retention and company success is greater than typical, expect media interest and invitations as keynote speaker.

Flickr image credit: HikingArtist

Writing as a guest at HBR Lara Galinsky, senior vice president of Echoing Green, a non-profit that funds social entrepreneurs globally, uses the story of a woman she mentored years ago to demonstrate that being a social entrepreneur doesn’t always mean starting a company.

Galinsky says that if every person who wanted to change the world did so by starting a company there would be no one to work at or support those companies.

She argues that social entrepreneurship is just as much a way to live your life as to build a company.

I agree with everything she says except…

Galinsky constantly refers to young people just starting out and the need to encourage and support their efforts.

I think her message applies to people of all ages.

I do not believe that only the young can effect change.

In fact, change is driven faster when people of all ages embrace and actively encourage the change as opposed to dragging their feet or actively fighting a reactionary battle.

I really don’t believe that Mahatma Gandhi had a specific age in mind when he said, “Be the change you want to see in the world.”

You can be a social entrepreneur at any age, whether you do it by starting a company or living a socially responsible life, just do it.

SUBMIT YOUR STORY
Be the Thursday feature – Entrepreneurs: [your company name]
Share the story of your startup today.
Send it along with your contact information and I’ll be in touch.
Questions? Email or call me at 360.335.8054 Pacific time.

Flickr image credit: Care2

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

For years I’ve told managers ‘you are who you hire‘ and offered them tools so they become more proficient at hiring; this is true whether the company is a startup or it’s been around for decades.

Startup hiring happens in phases, which have a predictable pattern—

1. hire your friends,
2. hire friends of friends,
3. hire ‘outsiders’.

The first two phases usually go smoothly, since friends typically share similar values and, therefore, are at the least synergistic as to the company culture.

Phase three presents a totally different and disconnected challenge.

Accurately identifying a stranger’s values and evaluating how well they mesh with yours is not only difficult, but also time-consuming.

And therein lies the problem—not the difficulty, but the time.

When this subject comes up entrepreneurs often tell me that I don’t understand how busy they are.

They say it’s hard enough just finding the actual skills they need without adding an extra set of cultural hoops for candidates to jump through.

If that doesn’t shut me up they use the ultimate argument, “You haven’t actually done it, so you wouldn’t know.”

However, there must be a reason that Tony Hsieh pays people not to work at Zappos after they go through training and that hiring is number one on his list of how to build a company.

Hire very carefully — you’re creating an enduring culture.
“I’d rather interview 50 people and not hire anyone than hire the wrong person,” Amazon.com chief Jeff Bezos told a colleague in the company’s early days. Why? “Cultures aren’t so much planned as they evolve from that early set of people.” New employees either dislike the culture and leave or feel comfortable and stay. So the culture becomes “self-reinforcing” and “very stable.”

I wrote about using culture as a screening tool way back in 1999 and have reposted it often, most recently in February.

Your culture, no matter how young, is the best filter you have for finding the kind of people you need to follow in the footsteps of Bezos and Hsieh.

Assuming, of course, that you think they are worth following.

Option Sanity™ mirrors and reinforces culture

Come visit Option Sanity for an easy-to-understand, simple-to-implement stock allocation process.  So easy a CEO can do it.

Warning.
Do not attempt to use Option Sanity™ without a strong commitment to business planning, financial controls, honesty, ethics, and “doing the right thing.” Use only as directed.
Users of Option Sanity may experience sudden increases in team cohesion and worker satisfaction. In cases where team productivity, retention and company success is greater than typical, expect media interest and invitations as keynote speaker.

Image credit: Image credit: kevinspencer

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

You may run a startup, but that doesn’t negate the value of a new study (includes link to the full study) by Unum and Monster.com that says culture is more important than compensation.

Number one on candidates’ list was a company “that truly cares about the well-being of its employees.”

The next three are

1.  A challenging and fulfilling position, which 84 percent of respondents identified as very important.

For the person attracted to the startup world this is a given, but it requires good interviewing skills to ensure that the attraction is real and not a product of media-driven startup fever.

2.  Job security, rated very important by 82 percent.

Many denizens of the startup world will scoff and stop reading at the words “job security,” but there is such a thing in startups. Startup job security is a function of a clear vision backed by knowledge of the target market; good business planning as opposed to shooting from the hip; strong financial controls from the beginning; good hiring practices, instead of “try it and dump if you don’t like it.”

3.  An attractive benefits package, which 74 percent of those surveyed rated very important.

Benefits are different strokes for different folks; for those in the startup world ‘benefits’ translates most frequently to equity, but that doesn’t eliminate the value and need for health insurance; people engage more fully when they aren’t worried about their families.

And salary seems to still be in fifth place just as it was 30 years ago.

• An attractive benefits package and an ethical, transparent culture were more likely to be viewed as very important in attracting and retaining staff than were a high starting salary and job security.
• Being a company that cares about the well-being of its staff was twice as likely to be viewed as very important in attracting and retaining staff as providing a high base salary.

Like it of not, benefits of any kind are concrete proof of caring and how those benefits are distributed is a reflection of an ethical, transparent culture—or not.

Option Sanity™ is integral to an ethical, transparent culture.

Come visit Option Sanity for an easy-to-understand, simple-to-implement stock process.  It’s so easy a CEO can do it.

Warning.
Do not attempt to use Option Sanity™ without a strong commitment to business planning, financial controls, honesty, ethics, and “doing the right thing.” Use only as directed.
Users of Option Sanity may experience sudden increases in team cohesion and worker satisfaction. In cases where team productivity, retention and company success is greater than typical, expect media interest and invitations as keynote speaker.

Image credit: Bun in a Can Productions