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  1. The madness of the bailout in Cyprus

    March 17, 2013 by max

    Last night the finance ministers of the eurozone decided on a bailout package for Cyprus. The small country with around 1 million inhabitants has an overstretched banking sector that is in dire straits. The primary reason for this is that the Cypriotic banks hold a lot of Greek sovereign debt – debt that took a serious haircut a few months ago when the EU decided that holders of Greek bonds would only receive 60% of their money. Cypriotic banks have been sympathetic (and maybe under pressure from the ECB) and have loaded up on Greek bonds. This is the primary reason for the trouble in Cyprus. The rest of the economy (GDP per capita, debt, etc.) is around average for a euro country.

    But because the banks are stuffed to the gills with Greek bonds that are now only worth 60 cents on the dollar they need a bailout.

    The big problem for the government is that the banking sector is extremely large in comparison to how small an economy Cyprus is. This is partly due to the fact that the island has always been a bit of a tax haven, with sympathetic banks and a corporate tax rate of 10%,  the lowest in the eurozone. This means that the government is unable to bail out the banks. They just don’t have that kind of money. This is why The IMF and the ECB has stepped in and bailed out the banks. Rumor has it that without the bailout Cyprus two largest banks would be bankrupt in a matter of days. A situation no economy can survive, especially not one with a disproportionally large banking sector.

    The bailout, as usual, comes from  the other Euro countries through the ESM flanked by the IMF.

    Cyprus is a small economy (around 0.2% of the Eurozone), and bailing out its banking sector is cheap compared to Spain, Italy and even Greece. But since the EU and thus the Euro is basically a political construct a bailout has to make political sense as well as economic sense. Unfortunately sometimes the two seem to be two mutually exclusive. As in this case.

    The terms of the bailout are that all funds in Cypriotic banks will be subject ot a one-time tax of 9.9% (6,75% for accounts holding less than €100.000)  This tax is being withdrawn immediately from every Cypriotic bank account over the weekend.  Everyone with a bankaccount in Cyprus will find that when they when the banks open on tuesday (monday is funnily enough a bank holiday) there will be less money than there was on friday. This goes for everyone, from instutional investors, private savers, checking accounts and pensioners. If you had a lot of money saved up for your retirement stashed away in a Cypriotic bank, well bad luck for you because on tuesday only 90% of it will be there.

    What happened after this was announced was entirely predictable. A bankrun. People are currently lining up outside ATM’s to get their money out before they’re taxed. The response from central hold has been to close down all electronic banking and not restock ATM’s so people can’t get their money out before tuesday when the tax has been withdrawn from the accounts.

    Bankruns are what every economist, policymaker and banker fear the most. The whole banking system is based on trust, if even 10% of customers withdraw their cash from a bank it will be bankrupt in  matter of hours. No bank has the money in its vault to pay up if everyone wants their money at the same time. This is a vicious circle – when there is even the smallest doubt about a banks solvency some people will begin to pull their money. When people begin to pull their money everyone else will follow, knowing that the last one in line won’t get a dime. This is why most countries have a state-backed insurance in the case of bank bankruptcies. Even if the bank goes down the state will pay you the money you had in your account. It is paramount for an economy that people trust that their money is safe in the bank no matter what happens.

    This whole thing is entirely unfair for the people living in Cyprus. The average citizen had nothing to do with the banking sector stocking up on Greek debt, but now they have to pay for it. The reason, apparently, being that the other Euro members , headed by Germany, think it would be fair that the southern nations learn to pay for their excesses instead of relying on bailouts from the Northern countries. An assessment that is, at best, inaccurate.

    The result is that the Euro areas finance ministers have shown that freezing all bank accounts in a country and withdrawing 10% without warning is a tool they’re willing to use. They’re calling it a one-off and promise it won’t happen again, but it’s a large crack in the faith of the Europen banking system, and it sends a clear signal to all savers, companies and investors in the Eurozone: If you have funds in banks in a troubled euro country there’s a chance it will be taxed without warning. You could wake up one day and see that your €1 million has shrunk to €100.000 overnight. What does it matter that our money is federally insured against bankruptcy, if the state can just decide to take it away from one day to the next?

    So what do investors, businesses, and savvy savers do? They pull their money from banks in the troubled euro countries. No need to take the risk, even if it’s small.

    In other words: Because of the idiotic idea that the Cypriotic people should pay for the bailout of their banks by simply taking 10% of the funds in every single account in the country the market now knows that money isn’t safe in troubled eurozone banks.

    Don’t be surprised to see a bankrun in Greece, Spain, Italy or Portugal next week.



  2. Tesla’s ingenious strategy

    February 5, 2013 by max

    Tesla motors has huge ambitions. Tesla founder Elon Musk has said he envisions Tesla as an independent automaker, aimed at eventually mass producing fully electric cars at a price affordable to the average consumer. This is a very difficult goal to achieve for several reasons. If you want to produce cheap cars you need a finely tuned, automated and hugely expensive factory because that’s the only viable way of producing a cheap car. You also can’t expect to get it right the first time. There will always be beginners mistakes, inefficiencies, regulations, things you hadn’t thought of and all sorts of other hurdles you need to jump through before your factory is ready for primetime. Mistakes in a full car production environment are notoriously expensive.

    Maybe the biggest hurdle towards producing a cheap car is conservative customers. In an interesting focus group study that Phillips did to find out what color they should make a new electric kettle they invited groups of people to come in and discuss the merits of the different colored kettles on display. There were kettles in red, blue, yellow, green, and the traditional white. Most people liked the colored ones, and praised them for their looks and fresh approach. After the study they were told that as a thank you they could pick one of the kettles to take home. Almost all of them chose the white one. People are conservative creatures. Especially when it comes to big investments, such as a car. You need a history, brand awareness, and a fleet of cars already driving the roads to make average customers pick a Tesla.

    These are huge obstacles, and is probably why there hasn’t been a new major auto maker in the United States for 90 years. The fact that Tesla is making electric cars doesn’t make it easier.

    Tesla’s strategy for overcoming these obstacles is ingenious; Start at the top and work our way down.

    If you drive a roadster you're cool. And rich.

    Their first car was the ubercool, expensive Roadster that goes from 0 to 100 km/hr. in less than 4 seconds. Faster than most ferraris. It comes at a base price of $109.000 which, along with the looks and performance is sure to place it firmly in the “I wish I had one of those” category.

    The roadster is the first step in the grand strategy. The point isn’t to sell a lot of roadsters, it’s creating a brand. People that can afford a roadster are a minority and it will always be a niche car- Less than 2.500 have been sold to date. But since they are early adopters and thought leaders  it elevates the Tesla brand from unknown to somewhere between BMW and Ferrari. Every car enthusiast worth his salt talks about the merits of the Tesla Roadster, and lots of average Joes know it exists, and that Tesla is the coolest thing that happened to cars in the last 50 years. The low production volume also gives the company a chance to learn how to run a car factory on a small scale while mistakes are still cheap to make. If 10% of the cars fail, that’s 250 cars.

    If you drive a model S, you're still Cool and rich. But probably also a dad.

    The next step is the model S. With a price tag of around $50.000 (depending on which battery pack you choose) it’s still an expensive car, but with a broader appeal. Due to the lacking gasoline engine and accompanying drive shaft, gearbox and other heavy machinery it’s a very roomy family car. It’s got two baggage compartments – one in the front and one in the back. If anyone doubts the target market the baggage compartment in the back can be converted to two child seats with the children facing backwards looking out the rear window. With a broader appeal, and the brand recognition of the roadster it’s expected to sell well for a car in this price range. On January 30, 2013, it was reported that production had reached 400 per week. That’s more than 20.000 cars a year. The ramp-up in production will also teach Tesla motors how to do mass production.

    This is where we are now. Notice that this is a classical Silicon Valley strategy. Start by targeting early adopters with an expensive product, knowing that this demographic will be forgiving of small glitches as long as they get the newest and coolest tech. The heavy price tag pays for your research and development, and battle-hardens your technology. This is how cell phones, flat screen TV’s and laptops are sold. Use your initial experience to iterate on processes to make the product better and cheaper. Then lower the price and grab a larger market share.  Tesla is now an excellent brand, and has processes and production methods that are built from scratch and iteratively tested to deliver cost-effective cars.

    Notice how, unlike many other electric cars, Tesla doesn’t primarily market their cars as electric vehicles. They know that outside a small circle of enthusiasts nobody cares whether it’s electric or not. What they care about is how it looks, how it handles, fuel economy, range and how nice it is to drive. Tesla cars look great, they’re so concerned with the finish they invented a special red paint that has extraordinary depth and shine. All their cars handle extremely well due to the low center of gravity (the heavy battery pack is located under the car), the fuel economy is good, and the range is almost as good as a gasoline fueled car. They also know that if they are to take on the giants of the car industry they need an edge. With their knowledge of electric vehicles, batteries, and electronics, and some experience in mass production of these they are well positioned for a future of electric cars. Arguably Tesla has more expertise in this area than any other car manufacturer.

    The next step is to move one rung lower down the ladder with a cheaper car. This is the Bluestar with an expected price tag of $30.000 and a production schedule starting in 2015. This moves Tesla closer to the large and profitable consumer market, where cars are sold in volumes of hundres of thousands, if not millions. Eventually cheaper cars, specialised cars such as vans and trucks, and eventually self driving cars (Google is close by!) wil be produced in their Fremont production facility in California. The fact that the majority of the Tesla factory still sits empty waiting for the volume of the mass market is a sign of the ambition.

    If the future of cars is electric, and a lot of things point that way, Tesla is uniquely positioned to lead the market. They have the brand, they have the technology, they have the production expertise, and they have the facilities.

    If I was General Motors I would be afraid. Very afraid.


  3. HTML prototyping

    January 22, 2013 by max

    Paper prototyping is a great way of developing webbased software that meets the users needs. The basics are simple. You take a piece of paper, and you draw the elements you need on a piece of paper. One piece of paper for each webpage. Then you talk to a user, and ask him to evaluate your prototype. You show him one piece of paper at a time, and ask what he would do. When he “clicks a link”, or “presses a button” you show him the piece of paper that corresponds to his choice.

    paper prototyping

    Paper prototyping - here a user is shown three tabs.

    Paper prototyping has some distinct advantages.

    • It’s easy. You can go from idea to paper prototype in less than an hour.
    • It’s easy to show users.
    • Users don’t get caught up in criticising your design, since there isn’t really any design to criticise. The conversation is only about usability.
    • It’s easy to change when you get feedback – just draw another piece of paper.


    The proper way of paper prototyping is to iterate your way to something your users understand and feel comfortable with. Make a paper prototype, talk to users, get feedback, make a paper prototype, talk to users, you get the idea…

    I’ve had some success taking this idea one step further. A few years ago I was contracted to redo the backend for a large webshop. The job was basically to get a lot of external systems (supplier systems, automated customer e-mails, postage tracking, inventory handling, etc.) to play nicely together and make it all available to the employees in a well designed web interface. I’ve always liked paper prototyping, but thought it had a few drawbacks, primarily that users get confused and can’t keep track if there are too many pieces of paper, and that you have to be there in person with the user for each iteration, which can end up taking a lot of time. So I did HTML prototyping instead, and it worked great. There are some simple rules I followed to get a good result:

    HTML prototyping

    HTML prptotyping - using simple HTML instead of paper.

    • No design. One of the great things about paper prototyping is that users don’t comment the design because there isn’t one. You need to carry this over to HTML prototyping.
    • Don’t use a lot of text. If you have lots of text users will focus on that instead of the interaction design.
    • No backend code. Use only HTML, once you start doing back-end code you’ve gone too far.


    HTML prototyping worked amazingly well for me and for the client. I could have more than one person testing just by sending them the link. The manager in charge could follow along. I didn’t need to be there in person, except for the initial meeting where I brought the first iteration and explained the concept.

    After a few iterations where we caught some bugs, stupidities and inconsistiencies the interface was exactly as the users of the new system wanted it to be. They had time to click around at their own pace without an obnoxious consultant hovering around waiting for them to make a choice or perform an action, they could spend some time thinking about their actions, and they could click back and forth and familiarise themselves with the new system. Under these circumstances where they weren’t stressed by external factors (me!) and could get a good feel for the whole system they provided some amazingly good feedback.

    When everyone agreed that the interface performed as it should, it was handed over to a designer to make it fast, slick and good looking. After the design process, I spent some time writing up documentation for the development team that would actually impement all the functionality behind the scenes. It turned out that HTML prototyping helped both the designer and the programmers tremendously. The designer could quickly get an overview of the job by clicking around a bit, and he could implement his design by changing the HTML and inserting the appropriate images and CSS. The programmers received an almost finished frontend that wouldn’t change mid-development, and only needed to code up the underlying functionality.

    How did the new interface perform? I spoke to the manager after 6 months and he told me that they had seen a 60% drop in the time employees spent handling orders in the backend system.

    Not bad.

  4. Dreamers and doers

    August 6, 2009 by max

    I know a lot of people that have started their own company, and I have even more anecdotes from forums and other sites on the web. I’ve noticed that there are two types of entrepreneurs. The dreamers and the doers.

    Kevin Rose, the founder of showing the dreamers how to run a company

    The dreamers often have a romantic view of what it means to be an entrepreneur. They’ve seen Kevin Rose of Digg fame, they’ve seen Larry and Sergey and they think they can do it too. When they read about what made the stars what they are all they see is the success story that they want to be. They’re helped along by the fact that successful founders rarely tell you about the pain they went trough, the long nights and the futile attempts at stardom they encountered before their eventual success. And since very few people that didn’t make it for one reason or another have the guts to tell the world about it you’ll probably never read about the outright failures. These are the vast majority.

    The dreamers get their cues from secondary sources, PR material, and success stories posted on Techcrunch so they have a skewed view of what it takes to do a startup. The media, the blogs and almost all other sources of information are heavily biased towards the successes. Who wants to write about the failures? Who wants to write about the boring stuff Kevin Rose does every day to keep Digg alive, let alone the countless hours he presumably spent getting it to where it is today? Stories about fuck-you money, private planes, champagne and oysters are much more fun. This bias in information gives the dreamers a wrong view of what doing a startup is all about, and what it takes to succeed.

    The problem, of course, is that this is wrong. Doing a startup is hard. Your chances of success aren’t good. A great idea is simply a starting point. The doers know this. They know that the odds are stacked against them and that they have to work hard just to survive. They know that a great company is built one customer at a time, and often requires years of hard work before it becomes successful. They know, and more importantly they act. They get stuff done. 99% of the work required in a startup isn’t sexy, but they know that if they don’t do it nobody will. They sweep the floors and clean the toilets.

    So how do you know the difference between a dreamer and a doer? Here are some cues.

    • Dreamers think the primary ingredient in a startup is a good idea. Doers know the primary ingredient is hard work.
    • Dreamers say “wouldn’t it be cool if…” Doers say “I’ve tested this cool….”
    • Dreamers talk about grand ideas. Doers iterate their way to a grand idea.
    • Dreamers go to conferences, meetups and other events to talk about their great startup. Doers stay at home and finish one more thing or close one more deal.
    • Dreamers think that if you build it they will come. Doers know that if you sell it they might buy.
    • Dreamers think it’s a straight road to stardom. Doers know it isn’t.
    • Dreamers always have one more feature to do before launch.Doers launch when it’s good enough.
    • Dreamers think that getting mentioned on techcrunch will make their company successful. Doers see it as a nice addition to their marketingmix.

    Most entrepreneurs start out as dreamers. After all, the dream of freedom, riches, oysters and champagne are appealing. I would even say that you need to have a bit of a dreamer in you to even attempt to do a startup. But the pragmatic dreamers soon realise the extent of what they have gotten themselves into and become doers. They realise that companies are built one small step at a time. And they get to work.

    If you’re looking to found, join or invest in a startup the distinction between dreamers and doers is important. doers will deliver results, dreamers will deliver hot air.

    Avoid the dreamers.

  5. Economists don’t know what they’re talking about.

    July 22, 2009 by max

    Classical macroeconomic models are in trouble. They have difficulty predicting even the most basic things. As is apparent to anyone who bothers to go back and check the predictions and forecasts that are made by economists they are mostly just random numbers. Not because of bad faith, but because of bad models.

    In the current economic crisis one major school of economists, the Keynesians, propose massive government spending to stimulate the economy while another major school of economics, the Austrian School, warns that this will inevitably trigger high inflation and should be avoided at all costs. Both schools of thought have an impressive amount of Nobel laureates backing up their respective views, and are well respected for their views and models of the world. So should the government spend massively to regain its footing? Nobody knows.

    In an economic stagmire such as the one we are experiencing now economists look back at similar scenarios of the past to get an idea of how to move forward . What triggered the great depression that started in 1929 and didn’t end until the second world war? The keynesians believe that underconsumption and overinvestment caused it. The Austrian school of economics believe it was caused by the fall of money supply. Or as the Wikipedia article on the causes of the great depression states:  “historians lack consensus in describing the causal relationship between various events and the role of government economic policy in causing the Depression.” In other words: Nobody knows.

    What about housing prices? Since they are at the heart of the crisis there’s a keen interest in knowing whether they have reached the bottom or are still sliding. New numbers have just come out telling us that U.S. house prices rose 0.9% from April to May on a seasonally adjusted basis. Most experts had expected them to fall by 0,2%. Is this a green shot that will soon turn brown, or is it the start of a recovery? Nobody knows.

    These examples are in no way unique. The June edition of the 1993 OECD Economic Outlook may have the best example of just how useless our macroeconomic models really are. The official GDP growth and inflation forecasts of the G7 countries from 1987 -92 were compared with a model that simply predicted that next year will be the exact same as this year. And they were equally good. The inflation forecast was even a little bit better. In other words, guessing that next years inflation will be the same as this years is a good a guess as the one government econmists spend vast resources deriving from complicated models. And these forecasts are the ones we base our econnomic policy on. And they’re random. Nobody knows.

    Why are we still using these models? Probably a combination of several reasons. Tradition is one. These models and their assumptions are the ones we have always used. Career economics is another. It is not unknown in science that the practitioners tend to stick to their models, since they have been using them for all of their careers. Old habits die hard, and it’s hard to teach an old dog new tricks. Thirdly it’s a question of mathematics. Most models assume that all human beings act in a rational way which anyone can tell you is not true. As a matter of fact a famous study has shown that the only two groups of people that act as economically rational beings are economists and psychopaths. Most models also assume that people don’t interact. And that they all have perfect information about the market. Which is obviously not true. But these things are hard to model mathematically, so most economists just stick to their guns. The famous physicist Max Planck once remarked that in early life he had thought of studying economics, but had found it too difficult.

    Where do we go? The problems of classical economics run deep. Macroeconomists can’t agree on the most fundamental of things, give random predictions and advice, and base their models on assumptions that bear no resemblance to real life scenarios. It’s not just the little things that don’t work, it’s the whole thing. What is needed is a fundamentally new way of thinking. People aren’t rational. They don’t have perfect information about the market. Supply doesn’t always follow demand. We need a whole new framework. Behavioral economics, which Vernon L. Smith and Daniel Kahneman won the nobel prize for studying might be one way. Complexity and Chaos theory might be another.

    Will we ever fully understand macro economy?

    I don’t know, but I do know one thing.

    Right now the emperor has no clothes on.

  6. A case for online office apps

    July 12, 2009 by max

    A friend just sent me his thesis on Business angel networks in Denmark as a word document. I promised to read it through and comment on it before he turns it in some time next week. I’ve spent the last two hours trying to open the damn thing.

    The core of the problem is apparently that the document is created in word 2008 and my version of word is 2003. So I get an error message, and a prompt with a Microsoft URL where I can go and download a word converter. Fine, no problem. I try to download the 30mb. program using firefox, but it continually hangs around halfway through the download. After around ten tries I give up, and try an office converter program that is linked from the Microsoft download page. After a few false starts I manage to download the program. When I run it I find out that it doesn’t work with my version of Word for some reason. Back to square one. Maybe the download will work better with Internet explorer, after all Microsoft program have been known to be hostile towards Firefox. No. “The connection was reset”.

    In the end I had to ask my friend to resend the document saved as a word 2003 document.

    If he had used an online office suite such as Google docs or Zoho I wouldn’t have had these problems. Microsoft should really be better at covering one of the areas where they are most vulnerable. Sharing documents in online apps is as simple as sending a link, not a 2 hour ordeal that ends up in failure.

  7. Why Google is making an operating system

    July 8, 2009 by max

    Today Google announced that they are launching an operating system called Chrome OS. This is a strategically very smart move.

    Google makes money off the web, their primary source of revenue is adsense which brings in billions of dollars a year. They are quickly diversifying their offerings with google apps, gmail, analytics and a host of other applications. All of them webbased. They are an Internet company by heart: This is where their soul lies, and this is what they do best. Their back-end technology is unsurpassed and their brand is phenomenal. Their future and financial success depends on the Internet. Or more precisely it depends on having as many people and corporations as possible moving most of their information and work online. Preferably to one of Google’s offerings.

    There are two gatekeeper products between the user and Googles products: The browser and the OS. A user needs an OS and a browser to reach Google’s products, and whoever controls these can put up roadblocks between the user and Google. I’m talking about Microsoft here of course. And since many of their products compete with Google, Office being the prime example, they have have all the incentive in the world to make the users way through the OS and browser as hard a s possible before they can reach Googles products. It’s a good strategic decision, Office is a major cash cow and accounts for a large part of Microsofts revenue. It would be stupid to make it easier to use a competitors products if you can do something about it. Which Microsoft can because they are the gatekeepers.

    Google knows this, and are trying hard to change the status quo. That’s why they have long supported the Mozilla foundation who make the Firefox browser. It’s also why they launched their own browser last year. Microsofts Internet explorer has always been buggy, and not quite up to date. The newest technology often isn’t available in explorer. This isn’t because Microsoft engineers are stupid, it’s because Microsoft management is good at strategy. They want people to use the Internet for browsing news and finding information, not to start undermining the goldmine that is office. And you need a state of the art browser to use the heavy javascript that makes online productivity apps possible. When Google launched a browser it was a jab at the gatekeepers. It was much faster and more responsive than Explorer, and the javascript engine blew them out of the water. This put Microsoft in a strategically bad position, they didn’t want to make the browser so good that online apps could eat away at their core business, but if they didn’t follow suit they would start losing marketshare quickly. Damned if you do, damned if you don’t. Note that Google’s browser doesn’t need to have a large marketshare, indeed that’s not the goal. The goal is to show the world what can be done in a browser, and thereby forcing Microsoft to innovate. And it worked: The newer versions of explorer are faster and have particularly gotten better at executing javascript, the backbone of online apps. Google won the browser war, with the help of Mozilla. The important point here is that Google doesn’t care what browser you use. They don’t make money on browsers, they make money on online offerings and apps so all they care about is that your browser is fast and supports the newest technologies.

    Now they are launching an operating system, and attacking the last gatekeeper technology between the enduser and their offerings. Strategically the situation is exactly the same as the browser war, Google doesn’t care if you use their OS. All they care about is that you can get to their products quickly, and that you start moving your data onto the web instead of keeping it on your own harddrive. And the way to do this is to launch an operating system that shows how easy it is to use the Internet for almost anything. That’s why they have been boasting about ridiculously low startup times. Turn on your computer and 10 seconds later you’ll be at And they’ll use the OS to show how little you actually need to have on your computer, how few programs you need installed, and how much easier it is if you find your information with Google, use Google docs for your work, share your family pictures with picassa, and check your website stats with Google analytics.

    Microsoft will have to adapt, and follow along. If they want to keep their marketshare that is. Of course they’ll be destroying their core business in the process. Damned if you do, damned if you don’t.

    This one will be hard for Microsoft to counter.

  8. Worst case scenario

    June 10, 2009 by max

    When you start a company it’s common to write out a best, expected and worst case scenario analysis to see how many yachts you’ll be able to buy if all goes well. And how bad it’ll be if nothing goes according to plan. The worst case analysis is often just the best case with little or no sales. “The worst that could ever happen is that we create a product, and not a lot of people will buy it” This is often wildly optimisitc.

    This is a true story involving theft, pregnancy, heart-attacks and ruined friendships of how bad a worst case scenarion can be. All names and traceable details have been left out to protect the innocent.


    Some years ago a friend of mine made a small social website that got him invited to a lot of parties. It was a great idea, and it was wildly popular among his peers. He had no intention of scaling it up and making it into a commercial company, so I asked him if I could use the idea and try to make a company out of it. He didn’t mind, so I got started.

    I wrote out a businessplan and a budget, and approached a designer I knew and asked whether he would be willing to do the design for a cut of the company. He agreed. We had a couple of meetings about the look and feel of the site, and he started working. Or so I thought. After a few weeks where nothing had happened I confronted him and asked whether he was motivated to do this. He excused himself with other projects, lack of motivation and a grudgy girlfriend, and agreed to prioritise it. A few weeks later there was still nothing. I had tried supporting him as well as I could but to no avail. In the end he conceeded that he probably wouldn’t get it done, and we parted as friends. I talked to another designer I knew second-hand and he agreed to give it a shot. The same thing happened, and after a few weeks it was obvious that he wasn’t going to follow through. Again we parted as friends, and still have beer sometimes.

    Next I did something I’m normally against – I contacted an old friend I’ve known for more than ten years and asked whether he wanted to go into business with me, and do the design part of the site. He has an amazing talent when it comes to design and usability, and has a cunning strategic mind. But I’m extremely wary of mixing business and friendship, often one of them will suffer severely. We went ahead anyway, and he got down to some serious design business. Unfortunately he isn’t good with code, so I agreed to learn HTML and CSS and do the front-end code. He delivered some amazing designs, and we picked one. We were getting a good feel for how the site should look, feel and function.

    Next I contacted a programmer I knew from two previous upstarts where he’s been absolutely amazing. Codes anything from assembler to PHP, delivers code that is virtually bug-free, does so on schedule, is a member of Mensa, and overall a great guy. I always liked him, and the feeling was mutual, so it was easy to get him on board. He thought that he could do the back-end code in a month if I did the front-end code. I’d been learning HTML and CSS and didn’t find it too hard so I started doing the front-end and he started doing the back-end. After three weeks there was a break-in at his house. They stole his server, his laptop, and even his sofa. Everything was stripped. Including the closet where he kept his backups on DVD’s. Everything was gone.

    So we started over.

    After a a few weeks where things progressed as planned the poor guy had a heart attack. We were almost done rewriting the whole thing. I obviously backed off, and gave him some slack thinking that he had more important things to deal with. We spoke on the phone, and agreed to wait a month and see how he was feeling. In that month I finished up the front-end and got pretty good at HTML and CSS in the process. I also had a lot of discussions with the designer, primarily related to how much to include in a version 1.0. My stance was to include as little as possible, his was that there was noway it would work without this and that feature.

    I didn’t want to initiate contact to the developer, thinking that he should take his time to get well before we started working again. When he called me he would be ready. That happened after two months. Having known him for a long time I could hear that he wasn’t up to his good old self. But he wanted to go ahead, so we did. Things went a bit slower this time, and I didn’t want to push. After a while he stopped answering my e-mails and didn’t pick up his phone. I was torn between pushing for some code and thinking about the guys health and well-being which obviously wasn’t good. Eventually I got an e-mail stating that he had to pull out due to personal reasons. I understood completely and wished him well. But I was back to square one.

    I didn’t know any other programmers that might want to do this, so I put up notices on the net to find potential partners that would want to program the website. I found a girl that seemed like a good match – smart, had gotten a lot of stuff done in her life, and very down-to-earth. We agreed to the terms, and she started working. After a while she called me up and told me she was pregnant, and that she would have to stop working on this as she wanted to devote time to her husband and future kids. I tried to persuade her, but to no avail.

    So I put up another notice on the net looking for a partner. Eventually I found a guy that wanted to do it. After a few meetings I started noticing that his experience and knowledge wasn’t quite what I was used to. I shrugged it off, and told myself that if he was motivated, which he was, he would be able to do it. Eventually he did get it done, but it took months, and I had to tell him how to structure his database, after having learnt how to do it myself.

    During this time I saw my friend the designer becoming more and more grudging and angry. He was blaming me that things didn’t work out as planned. I tried to calm the waters, but maybe I had oversold the promise of fame and fortune. We started falling out and not speaking as much as we used to. It was starting to cost me a friendship. And it was hard for me to keep up the optimistic facade after this cascade of problems.

    But the programmer churned away, and one day we had a working site.

    My plan for marketing was to contact a whole lot of powerusers of some of the popular sites in the same category and convince them to help us make this work. Normally I’m good at social engineering, and have a knack for turning people over to my ideas. However, all this trouble had taken its toll, and I was starting to feel it. I was the one that had to keep up morale, and constantly convince the developer and the designer that everything would work out. And now I also had to convince strangers to use the site. It was hard, and I was pretty alone.

    But I carried on.

    A few weeks after launch something terrible happened. The programmer had made a mistake when programming up against the phone carrier API, and one night a whole load of overtaxed text messages were sent to a large number of users of the site. One user received more than 100 messages. Each with a pricetag of $2. The first problem with this was that once an overtaxed textmessage is sent it can’t be retracted, and only 50% of the money goes into our account. The rest is charges for the carrier. So this would cost us some money. The sceond and more serious problem was that we lost all credibility with our users. Since we relied on overtaxed textmessages I had all the phonenumbers of the involved users. I got a list from the developer and had to bear the heavy burden of calling each one of them, telling them that this was a mistake and that we would reimburse them the money. Some of them were nice, most were not. The site suffered severely.

    Two things happened that definitively killed it. First, the sites I was using to draw in users blocked my profiles, and I had been too stupid to back up the information and contact info on the users I was talking to. So I couldn’t contact a lot of them, and worse they had put mechanisms in place that prohibited me from making new profiles. So I had no way of contacting new users.

    Second the income model we were using was made illegal because of a new law that was hurried through parlaiment due to issues unrelated to us. This was the definitive blow. With no near-term prospect of turnover in a country where it isn’t easy to go out and get external investors aboard there’s nothing more you can do.

    Now that’s a worst case scenario.

  9. Moving a boat

    April 26, 2009 by max

    This is a story about what it takes to start a company. It may not seem like it, but it is.

    I live on a boat in a harbour. It’s an amazing place with just the right mix of artists, yacht owners and fishermen. As in all small communities there’s a strong invisible pecking order. The fishermen are on top. They are the real men. They have survived force gale 12 storms in the bay of Biscay, they haul cod out of the freezing water with their bare hands in the winter, they move crates around the harbour like children moving toys across the lawn. And, of course they know all there is to know about boats. When it comes to boats they are the unquestionable authority. They have seen it all before, and they are always right. They are where you go for buying, selling, moving and fixing boats.

    I like the fishermen. Without them I would have no idea how to fix all the things that inevitably break on my old boat. And I can tell they enjoy sharing their vast knowledge. But to them I’m not a real man. I’m an academic. I can’t lift the heavy crates, I’ve never been in a real storm. And I can’t haul cod, not even in the summer. To them I’m a boy.

    On the outer edge of the harbour there’s a small man-made island to break the waves coming in from the sea. Like many small man-made islands and piers it’s surrounded by heavy stones that are piled up around the edge of the island to keep the waves from washing it into the sea. I imagine that a hundred years ago when it was established the local fishermen would start by collecting huge stones and throw them in the water from their boats, slowly building the perimeter. Once an atoll of stones were sticking out of the water they would have filled the middle with soil, gravel, and old garbage. If you dig a bit you can still find old bricks, wood and heavy chains hidden in the belly of the island. It’s a beautiful island, with wild roses, long grass and willows hanging over the water. It’s great for barbecues in the summer, and just perfect for chilling out. And best ot all, it’s accessible from one of the piers that leads from the harbour right out to the island.

    So one day when the fishermen were scrapping an old wooden fishingboat I asked whether I could put it on the island. The wheelhouse and deck was gone, and all that was left was the hull. It was pretty small for a fishing boat, around 20 feet. When I looked at it I saw the old oak planks meticolously carved out and stuck together to fit just right. Once a talented boat builder had taken a lot of pride in building it. Now it had reached old age, but it still had the smell of tar and sea, and if you closed your eyes you could almost see the old fishermen out to sea hauling cod from it. It would fit well on the island. I imagined that it should sit on the side of the island, and that there should be a small table, a few chairs and a barbeque inside it. Then you would be able to sit in the boat, looking across the railing and out over the sea, dining with friends, telling stories about storms in the bay of Biscay. It would be perfect.

    So I asked the fishermen if I could put the boat on the island, and told them how perfect it would be. They smiled and agreed, and told me that if I could get it there I was very welcome. I sensed that I was somehow being held for a fool, but didn’t quite understand why. So I asked what was the matter. “Listen son, that old boat weighs in at maybe a tonne, it doesn’t float because it’s so full of holes, the pier is too narrow to haul it across, and it’s gonna be pretty darn hard getting it over the wave breaker stones. It would take at least ten strong men a day to get that done, and we’ve got better things to do. But if you think you’re man enough we’d love to see you give it a try.” They smiled. They had just told me I couldn’t do it. “Doesn’t seem so hard” I tried. They smiled. “Oh yeah, watch me, give me a week, and I’ll be having a barbeque in the boat on the Island. I’l do it, and I’ll do it without your help. Or anybody elses for that matter.” More smiles. I had taken the bait, and was now on the hook.

    The ruling class of the harbour had told me that this couldn’t be done by boys, only men. A lot of men. And they knew, they had done this kind of thing for decades. There were unwritten rules and tricks passed from one generation to the next without much change, and according to these rules I wouldn’t be able to do it. Much less do it alone. But I had to. I didn’t have a choice. It was my test of mandom. My generation against theirs. And I wouldn’t fail.

    I knew that I wouldn’t be able to do it on their terms using brute force. I knew that they were so superior to me that if I ever got in a barfight I would rather have a 50 year old fisherman than Chuck Norris on my side. I never had the guts to go to the joints where you get in barfights in the first place. I had to use my own strong sides to make up for my vast inferiority of raw strength. I had to be smart instead of strong.

    So I came up with a plan. The fishermen would lend me their crane to lower the boat on to a barge for me, but the rest I would have to do myself. The plan was to get the boat to stand on its stern with the bow pointing straight up in the air and the keel pointing to the heavens. I would fasten it with ropes to the sides of the barge to make sure it didn’t fall over. I would then tow the barge to the island, and moor it alongside the wave breaker stones, cut the ropes and let it fall. Hopefully it would fall with the keel across the stones, and onto the grass on the other side. From there I would use an intricate system of pulleys and sticks that could leverage my missing raw strength to pull it into place. I thought it was a good plan.

    I got the boat onto the barge using the crane without much trouble. It did take me some time to secure it in its awkward position pointing straight up, but I did it. The fishermen watched and laughed. It would never work. If the keel of a boat isn’t horizontal you’re in trouble. It’s against the unwritten rules. Nothing good had ever come from a keel being vertical instead of horizontal. I didn’t care, and happily towed the spectacle across the harbour out to the island. Cameras snapped and fingers pointed my way, but I just knew it would work, so I swallowed my pride and reminded myself of who would have the last laugh.

    I got to the the island, and moored the barge alongside the stones, as close as I could to the spot where I wanted the boat to find its final resting place. It was only ten meters away. When I tipped the boat from the barge I would get the keel across the stones, and the worst part would be over. I started cutting the ropes, and the boat fell, exactly as planned. Then something terrible happened. One of the ropes holding the barge to the island slipped, and the boat started drifting outwards away from the stones. It slipped down over the stones and into the water, and came to rest halfway into the sea before I could throw a rope around it and secure it to a tree.

    This was catastrophic, my plan for getting across the stones had failed miserably. It was the hardest part of the venture, and I had no idea how to proceed. I knew the fishermen were expecting me to give up, and that I would have to endure their mocking for years to come. They would happily come and pick me and the half sunken boat up just to ridicule me. I didn’t know what to do, but what I did know was that I couldn’t fail. The stakes were too high, I had made a commitment and told everyone about my venture. My pride simply wouldn’t allow me to give up.

    I tried to move the boat, but it was wedged between the stones, and didn’t move an inch, even when I put in all of my strength. But I knew that I had one thing the fishermen didn’t: Brains. I could think my way out of this, I wasn’t held down by their inbred old beliefs. I could come up with some clever scheme that would save me. Maybe their unwritten rules about what could and couldn’t be done were just crap. Maybe nobody really tried to do things differently.

    So I sat down on a stone and assessed the situation. The boat needed to be pulled one metre up and two across to get over the stones. From there it would need to be pulled five or six meters across grass and on to the small hill where I was determined to have a barbeque in less than a week. I had some four by fours that I could lay on the stones with one end in the water below the boat, and the other up on the grass. That way I would have something to slide it on, over the stones. On the small hill where the boat would end up there was a tree. If I tied one rope to the tree and another to the bow of the boat, and had some kind of leverage system connecting the two ropes I was sure I would be able to pull it all the way up to the tree. The rope needed to be strong, and the leverage system needed a big exchange for it to work. The boat weighed as much as a car, and it wouldn’t be easy to pull it across the stones. I started working on my leverage system.

    I took an old oar I had lying around and cut the upper part of it in two. Now I had two pieces of round wood. I took a length of rope and tied it to one end of one of the pieces of oar. Then I brought the rope around the tree and back to the piece of oar where I tied it to the other end. Now I had a piece of oar secured by a rope at each end in a loop around the tree. I did the same thing on the boat. One piece of oar was secured with a rope to the boat, and another to the tree. The two pieces of oar were roughly five meters from each other. The idea was that if I tied a rope to one of the pieces of oar, and pulled it back and forth across the two pieces of oars I would have a pulley system. If I put the ropes three times back and forth between the pieces my exchange would be three times. I would have to pull the rope three times as far, but only with one third of the strength. I had replaced ingenuity and hard work with raw power.

    I strung the rope three times around the oar pieces, and started pulling. Nothing happened. The leverage wasn’t enough. Five times. Still not enough. Eight times. That did it. The boat creaked and the ropes whined as it moved an inch or two out of the water and came to a stop. It was too hard, and I couldn’t pull anymore. I took a look at my pulley system, and found a flaw. The ropes around the pieces of oar were so strecthed that I couldn’t move them sideways at all. The tension as they dragged over the old oar was too much. I got an old can of grease from my boat and smeared it across the rope to make it glide easier over the oar. I tried pulling the rope again, and after a few false starts it started working. The boat slowly but surely rose out of the sea, and started its journey across the stones. It worked. It was hard work, and every half meter or so something would get stuck. I was sweating, covered in grease, working like a horse, and didn’t even notice the sun setting over the harbour. I was busy doing what couldn’t be done. It was midnight before the boat arrived on the little hill, but arrive it did. I was exhausted, and felt like most of my bones were broken. But it didn’t matter. I had done what the fishermen said couldn’t be done. I went to bed and fell into a long dreamless sleep almost before I hit the sheets.

    When I woke up the next day I felt on top of the world. My body was hurting, I had ripped my trousers, and bruised my hands. But it didn’t matter. I had used ingenuity, leverage, determination and hard work to achieve what the unquestionable authority of the harbour said could only be done by men. A lot of men. And I had done it alone.

    In the afternoon when the fishermen came in from the sea they saw the boat standing on the small hill on the island as a monument to my triumph. I knew they would see it, because they sailed right by the island on their way in. But they never mentioned it. Maybe they couldn’t acknowledge the fact that an amateur could beat them at their own game. Maybe they couldn’t swallow their pride. Maybe they thought I had cheated somehow. But the result was there for all to see, and the next day I invited some good friends over for a barbeque in the boat.

    Over the next few weeks I did notice small changes. I would be invited in for a beer more often, and the fishermen would tell me stories from their youth about storms in the bay of Biscay.

    And whenever I looked one of the old fishermen in the eyes we both knew that he wasn’t looking into the eyes of a boy. He was looking into the eyes of a man.

  10. Getting product pricing right

    April 16, 2009 by max

    Setting the right price for a product has always been one of the most difficult hurdles for startups. Of course it only makes it worse that the pricing of your product is one of the most important decisions you as a businessowner will ever make. So how do you do it?

    If your product happens to be webbased, here’s an interesting idea. But first some basic economy on what the right price is.

    According to classical economics the higher the price you charge for your product the less people will buy it: as prices rise demand decreases because less people are willing to pay the higher price, and supply rises since producers can get more for their wares. The market price is where the two meet. This is how a free market with perfect competition works. On a graph it looks like this:

    Your goal as a businessowner is to maximise your operating income, which is the amount of money you have left when you have paid for your operating expenses. Operating expenses can be divided into variable and fixed operating expenses.

    So your operating income can be defined like this:
    Operating income = units x (price-variable expenses) – fixed expenses

    Your fixed expenses are pay, rent, and other things you have to pay no matter how many customers you have. (Strictly speaking your fixed expenses will of course become variable as you grow since you need more people, bigger offices, etc.)
    Your variable expenses are the expenses that can be related directly to how many units you sell. Support calls, server costs and delivery fall into this category. (again, strictly speaking most variable expenses are incremental: you either have one or two servers, not 1,4 servers)

    Since you know, or can at least estimate, your variable and fixed expenses it is possible to calculate what your operating income is at different prices. The right price is of course the one where your operating income is as high as possible. If you had a graph of the demand curve for your product this would be easy: You could just find the price where (price – variable expenses) x units sold is at a maximum. Since you sell your product at the same price to all consumers your supply curve is vertical, No matter where the demand curve meets it the price is the same: everybody pays the same price. By changing the price you can slide your supply curve left or right. For instance, if your product costs $1 to produce you would rather sell 10 units at $5000 ($4990) than 2000 units at $3 ($4000). The problem is that you don’t know how the demand curve slopes. Maybe your customers will start using your competitors cheaper product once you reach a certain price, maybe there’s a psychological price barrier somewhere, or maybe a large percentage of your customers are willing to pay much more than you anticipate. You just don’t know for sure.

    If the demand curve goes like this the best option may be to sell expensive to a few customers that are willing to pay big bucks.

    But if your demand curve goes like this you will be better off selling cheap, since none of your customers are willing to pay in buckets, but a large amount are willing to pay a decent amount.

    Since there’s really no way to know, except experience and looking at your competitors pricing most people and corporations just guess. Sometimes highly paid consultants are brought in to make a better guess. Large companies like Procter and Gamble have teams of experts committed to the game of guessing a price.

    But for upstarts that sell their wares on the net there might be a better way.

    Let’s say you start a company that sells socks on the Internet. You have one product: a ten-pack of beautiful blue socks. Your competitors sell ten socks for ten bucks. so should you follow their price, make it cheaper or more expensive?

    Webbased companies have done A/B split testing for many years to optimise their sites. The idea is that you show 50% of the users one page and 50% of the users another page and see which one performs best. Performance is usualy measured in terms of how many people buy something. Using this method you can continually test your site, try out new ideas, and micro-optimise it. Amazon is known for doing this.

    What if you do split tests to optimise your price?

    If you have a lower bound and an upper bound for the price of your ten socks you can hack a splittest together that will find the optimal price. The lower bound is the variable expense for the socks. The upper bound is a really high number. The program will start with a series of price points evenly distributed between the upper and lower bound. It will show a price of $10 to some customers, $8 to others, and maybe $20 to others still. Since you can capture how big a percentage of potential customers accept the price (by entering their credit card information and buying your socks) at different prices you will be able to micro-optimise the price. Using splittest technology and clever hacking you can actually test your way to the perfect price.

    You start off with random values between the upper and lower bound, calculating your potential operating income for each price.

    Let’s say you have 1000 visitors that are shown five different prices randomly, and thus have different percentages of accepting the price – the higher price the less visitors will buy.

    Price: $8 $10 $12 $14 $16
    Percent that buy socks: 30% 25% 22% 19% 14%
    Turnover for 1000 visitors: $2400 $2500 $2640 $2660 $2240
    Variable cost for 1000 visitors: $300 $250 $220 $190 $140
    Fixed cost: $1000 $1000 $1000 $1000 $1000
    Potential operating income for 1000 visitors: $1100 $1250 $1420 $1470 $1100

    This will give you a rough demand curve with five pricing points: $8, $10, $12, $14 and $16. And from this you can see in which range the optimal price is. In the above example it is obvious that the optimal price point is somewhere around $14, since that is where the operating income is maximised. Now you can repeat your test in the $12 to $16 range, and iterate with smaller and smaller numbers until you find the perfect price.

    I’m not oblivious to the potential problems of this approach, namely that in the test phase a number of customers will get wildly varying prices, which is probably not undesirable: It could affect your brand, customers might get angry hearing that they’ve paid twice as much as someone else, etc. But to get a statistically significant result you will probably not need to run that many visitors through the test. And I think you’ll be able to get around it by letting users know that that they’ve been part of a test, and they’ll gt the product cheaper than they expected.

    What do you think? Will it work? Is it insane?

    And if you’re thinking about actually building something like this shoot me an e-mail at I’d love to consult 🙂