Maximise | Startups, economics, technology and a wee bit of poetry

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.

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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 max@maximise.dk. I’d love to consult 🙂

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Let the engineers rule

March 26, 2009 by max

For the last decade the people that have had success have primarily been bankers, brokers and othe money-pushers. I think the current crisis will mark a big shift in where money and power is centered. It will pass from financial engineers to real engineers.

Barack Obama has on The tonight show pinned the zeitgeist with this quote “What we need is young people instead of them wanting to be an investment banker we need them to decide they want to be an engineer”

In a free-market society the individuals that make the most wealth are the ones that should prosper and make the most money. Wealth isn’t the same as money – money is an intermediary form of exchanging goods and services, wealth is, according to Paul Graham “stuff we want: food, clothes, houses, cars, gadgets, travel to interesting places, and so on” Creation of wealth is the innovation of goods and services that drive society forwards, and is what should be rewarded.

For the last decade society has mistaken the creation of money for the creation of wealth.

We believed that bankers and brokers must be innovationg and creating products that drives society forwards simply because they were so financially successful. Their money also made them something to aspire to. If you wanted to become rich and powerful finance was the way to go. But we were fooled – the financial industry didn’t create wealth, they merely printed money and built ponzi schemes. And they kept most of the money themselves.

Money is power. Power corrupts. Absolute power corrupts absolutely.

Douglas Adams has a great story about power in The restaurant at the end of the universe. The heroes of the book set out on a quest to find the true ruler of the universe, which is not as easy as it seems because of an insight the galactic rulers have had eons earlier: The man who most wants to rule the universe is the one that is least suited to do so. Absolute power corrupts absolutely. So a sneaky scheme has been devised: The ruler of the universe doesn’t know, or care for that matter, that he happens to rule the universe. He lives in a small shed on a far-off planet and people in spaceships come to ask him questions every now and then. His answers are, unbeknownst to him, what rule the universe.

This is of course a comedy, but like all great comedies it holds some significant truths and insights. And this one may be the biggest of them all.

What Douglas Adams is pointing at is that the people who want money and power are the ones most likely to get it, qualifications play second fiddle to ambition. And the financial industry has been very ambitious indeed. And they ruled the universe until it all came crashing down because it was exposed that they didn’t create wealth, but merely printed money for themselves.

So there is a vacuum in power. The financial industry has been broken, Wall Street humiliated and many of the players have gone bankrupt. Society must, of course, move forward and someone must carry the torch that has been taken from the bankers and brokers. And the ones that should carry the torch should be the ones that create wealth.

So who creates wealth? In short: People and companies that make stuff better than before. The innovators and the engineers. The Googles, the Xobnis, the reddits and the Linus Thorvalds of the world. The ones that make our life easier, better or more enjoyable. They are ultimately the ones you depend on for your car to run, your house to be heated and your Internet to work. And they are the ones that truly drive society forwards.

But many innovators and engineers suffer from one problem in relation to power: they aren’t the ones who want it the most. Linus Thorvalds has no ambitions about building a global multimillion dollar powerhouse, in fact he gives his products away for free.

If we don’t want to be caught in the same trap as we are now in ten years time the innovators and engineers should be the ones that hold the power, simply because they are the ones that truly drive society forwards.

I see two solutions.

Either the engineers will have to step up to the plate and start playing the powergame – people like Larry Ellison show us that engineering and powergames aren’t exclusive.

Either that or the rulers of the universe should be engineers livíng in sheds on faraway planets where strange people come to ask them questions about life the universe and everything.

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Online news and the prisoners dilemma

March 9, 2009 by max

Would you pay for a newssite on the Internet? If you won’t you’re in the vast majority.

But what if we rephrase the question. Would you pay for a newssite on the Internet if there was no other free alternative? The answer would probably be yes, since there would be nowhere else for you to get that constantly updated dose of news that you’re probably addicted to. So for a consumer a newssite is obviously worth paying for – yet publishers can’t charge a dime for their content.

Quite a paradox.

Here’s how the whole thing has played out in the real world, and why news has ended up being a free commodity you can’t charge for, even though it has value for the consumer and a very real production price.

Back in the 90’s publishing houses were worried. They saw the Internet coming, and it was obvious to them, and everyone else, that news was a natural fit for the Internet. They also saw that this would eventually doom their hundred year old income model of selling a daily paper made out of dead wood. But they didn’t know exactly how it would play out, what technologies to bet on, what kind of news would work on the Internet, and who would ultimately be the winners and losers of the coming great news war. The only thing everyone agreed on was that the whole industry would change dramatically.

So many publishing houses were proactive and launched newssites early on that were updated often. This is the New York Times from november 12, 1996 Since they were still in the experimental phases the news was free. Besides there weren’t really any good ways of charging users for this new beast of a technology.

Eventually more and more publishing houses started getting an Internet presence, and their sites grew and were updated more often. None of them saw this as an income model yet, but they all acknowledged the potential and importance of having an online brand.

As more users joined the Internet the big newssites started to get more and more traffic, and entrenched web properties such as www.nytimes.com and www.cnn.com were established. Consumers loved it because they could now get constantly updated news for free.

Eventually, a few years ago, online news started becoming so mainstream that a majority of people would start checking news online several times a day. Many of them also started cancelling their daily subscriptions. This was, of course, expected. The quest was to move as many users as possible to your online property, and losing as few subscriptions as possible in the process. “Onwards and Online”

The next step in this evolutionary tale was to start thinking about income models. It was obvious that advertising alone would not hold up the expensive machinery of a news organization, so some kind of subscription model was inevitable. And planned.

And this is where the problems started.

Consumers had gotten used to online news being free. This is what they had come to expect, because this is how it had always been in the past. So they barked and often refused to pay for online access. The implicit threat made by the consumer when a newssite would start charging for content was “OK, I’ll just move on to your competitor, who covers pretty much the same news and has a free site”. The ramification of this was that the sites that charged for online content would be decimated by the ones that offered free content. And there would almost always be a competitor that was free.

This is the classical game theory problem of the prisoners dilemma. It goes like this:

Two suspects are arrested by the police. The police have insufficient evidence for a conviction, and, having separated both prisoners, visit each of them to offer the same deal. If one testifies (defects) for the prosecution against the other and the other remains silent, the betrayer goes free and the silent accomplice receives the full 10-year sentence. If both remain silent, both prisoners are sentenced to only six months in jail for a minor charge. If each betrays the other, each receives a five-year sentence. Each prisoner must choose to betray the other or to remain silent. Each one is assured that the other would not know about the betrayal before the end of the investigation. How should the prisoners act?

These are the possible outcomes of the game:

	Prisoner B Stays Silent	Prisoner B Betrays
Prisoner A Stays Silent	Each serves 6 months	Prisoner A: 10 years Prisoner B: goes free
Prisoner A Betrays	Prisoner A: goes free Prisoner B: 10 years	Each serves 5 years

So the dilemma is whether you can trust your partner. If yes, you can choose to stay silent and get 6 months. You can also betray him, and go free. But if your best choice is to betray him, why should he trust you? If you betray him, and he betrays you you both get 5 years.

A dilemma indeed.

This is the problem online news is faced with. Here’s an example of an online world with two news sites. The combined ad revenue is $2 million, and if there is no free alternative ten million users are willing to pay $10, a total of $20 million in subscription charges.

	Site B doesn’t charge	Site B charges
Site A doesn’t charge	They share $2 million in ad revenue	Site A gets $2 million in ad revenue: site B gets nothing
Site A charges	Site B gets $2 million in ad revenue: site A gets nothing	Site A and B share $22 million in ad and subscription revenue

If there is a free alternative consumers won’t pay for a subscription, so if the sites don’t cooperate they will share the $2 million in ad revenue, since the potential income from subscriptions will never materialise because there is a free alternative. But it is to their advantage to trust each other and share the additional $20 million in subscription revenue. In a game with two players they might get together and agree to charge.

But what happens when a new player enters the market. Suppose the two sites have agreed to charge. A new player that enters the market with free news will instantly take away all the customers, because the new service is free, and the new player will get the $2 million in ad revenue. If the old players can’t convince the new player to start charging they only have one choice: revert to the free model.

The problem, of course, is that there are a lot of sites out there, and making each and every one of them agree to charge is almost impossible, and probably illegal. If just one site defects it will instantly take over the whole market and get all the ad revenue.

This is the problem that online news faces today.

So what can publishers do?

The theoretical game assumes that all newssites are equal, and can be substituted for one another. This is not always true. Gossip newssites are pretty generic, and the same pictures of Brangelina will inevitably appear on all of them with pretty much the same captions. These sites are to a large degree interchangeable, and thus hard to charge for. But newssites with unique content that is valuable to a consumer and is not easily interchangeable for another newssite can get away with charging for their product, even though the competition is free. The requirement is that the consumer finds that the site is not interchangeable with other newssites. The Economist have managed to do this by giving in-depth coverage, wit and editorial not found elsewhere on the net. Users are willing to pay for it, since there is no obvious substitute.

So if you want to do online news you either have to provide something valuable noone else provides for free, or rely on ad revenue.

Oh, and this analysis applies to most online markets. If you’re bright you might even see how this implies that many VC’s are a hinderance to online business…

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Getting lucky is hard work

February 12, 2009 by max

I have a friend that’s always incredibly lucky. Everything she wants just seems to fall into her lap. When she moved to Copenhagen a few years ago she found an apartment in less than a week. Not just any apartment either, but one that was cheap and located in one of the best Copenhagen neighborhoods. And it’s notoriously hard to get an apartment here, let alone a cheap one. When I asked her how she did it, she told me that she just met some guy in a bar that happened to have an apartment he was letting out.

I mean how lucky can you get!

Then I dug a little deeper, and the truth started to materialise. For weeks she had the word out among her friends, had ads in the paper, put up small notes on the streets and asked people on the bus if they happened to have an apartment on their hands they didn’t need. She even went to random bars and chatted with strangers with the explicit goal of finding someone that had an apartment for rent. And eventually she got lucky.

All I initially heard was the last part of the story where she just met a random stranger and luck fell right into her lap. But of course she was bound to get lucky at some point, she’d worked intensively at it for weeks.

People often forget how hard it is to get lucky.

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Why you should fail early and fail often

January 18, 2009 by max

You hear the “a href=”http://blogs.msdn.com/micahel/archive/2005/08/17/FailFast.aspx”fail early and fail often/a” mantra quite a bit. The basic idea is to find out as early as possible whether the project you’re working on is going to be a success, and if it isn’t let it fail. This is a hard thing to do: You have to accept the project as a failure, and implicitly accept that for whatever reason you didn’t have what it took to suceed. There may, of course, be external factors such as luck, market conditions, partners etc. that are out of your control but you will still have to live with a failure under your belt no matter who was to blame. The normal human reaction is to keep going, prolonging the inevitable, so that you don’t have to face the failure. The idea of failing early and often is that the sooner you let go the sooner you can go to work on a new project that might have a better chance of suceeding.br /br /This post will give you some numbers to show that failing early and often is a good idea.br /br /Let’s presume you have ten years to make a million dollars by starting a company and selling it. And let’s presume that there are two scenarios: one where you start a company and keep going at it for ten years, and one where you start a company and if it doesn’t work out after a year close it down and start another one.br /br /The first scenario is simple.br /br /Let’s presume there’s a 10% chance of suceeding in starting a company and selling it for a million dollars. Your chance of becoming a millionaire in ten years is obviously 10%br /br /The second scenario is a bit more complicated.br /br /With the same presumptions as in scenario you have a 10% chance of becoming a millionaire after year one. If this doesn’t work out you have another 10% shot in year two, and so on. This adds up to a 65% chance of success after ten years. Quite an improvement! But maybe this doesn’t tell the whole story: Surely you will have a higher chance of succeeding with a company you spend ten years on than a company you spend one year on. Let’s say you only have half as big a chance of succeding if you only spend a year on your business. This will still give you a 40% chance of success after ten years. As a matter of fact for the two scenarios to give you an equal chance of success after ten years your chance of success with the one year company needs only be 1%.br /br /Here is a graph that shows it more clearly.br /br /img src=”http://www.maximise.dk/blog/success.GIF” /br /br /This is, of course, a simplified explanation that doesn’t take all factors into account. If you initial idea doesn’t work out you could morph your company into something else, you may need more than one year before you can sell your company or maybe your goal is to only make $100.000. You may not even know whether you’re doing great or are on the brink of bankruptcy. br /br /The question to ask is: If I was offered this company for free would I take it? It’s a hard question, and ideally you should put it to other people that don’t have an affection for the idea, and haven’t spent many hours pondering over it. br /br /You may be surprised at the answer, and if you are maybe you should start something else.

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Business plans for hackers

January 8, 2009 by max

I’ve noticed that a lot of hackers and other technically capable people have problems understanding the reason for the existence of a business plan. And often fail to realise how hard a task it is to compose a good one.br /br /This post is an attempt to explain business plans in terms of programming languages.br /br /A business plan is just like a program, it’s just written in the strange and difficult programming language of psycholgy instead of C++, Lisp or Java. When you write business plans you use a number of classes that are relevant to the task, such as the budgetting and marketing classes. These are relatively trivial to understand compared to the main language.br /br /Psychology is an inherently difficult language to master for several reasons:br /olbr /li Programs written in psychology are run on computers called humans. The inner workings of these computers is poorly understood, and makes it difficult to write programs that work well. Furthermore all of the computers that your program will run on only have certain overall commands and functions in common. Once you get into the lower level programming they all behave differently, so if you need a top-tuned program you will need to write it specifically for one recipient, or at least a subset of recipients such as bankers or angel investors./libr /br /li Not all human computers have access to all classes, and you do not know if your intended recipient has installed all of the classes you use in your businessplan. You can of course make some deductions – your banker will probably have the budgetting class installed, but you can never be sure. Ideally your program should be written in such a way that any human can run it whether or not he has the classes you use installed./libr /br /li You can not write directly for the main computer in humans, which is the primary reason that this is the hardest programming language of all. There are no such commands as “invoke joy”, or “instill fear” – all programs that you write must go through a filter before they are executed in the main computer. You only have sparse knowledge of how this filter works as you can only observe it indirectly by invoking a command and seeing the result./libr /br /li Human computers do not fail when you write bad programs, they just get pissed off. This means that there are few absolutes, making it very hard to debug programs. Furthermore you can not measure the failure or success of your program, only observe indirect clues such as facial expressions, voice patterns and word usage to deduct how well your program works. The recipient will often try to hide this from you./libr /br /br /li The language has evolved, and there is no single author to describe how it works and what the commands are. Some of the commands are completely useless, and some only work in certain special cases. On top of this the language is continually evolving – there is no guarantee that commands that worked five years ago will still work./libr /br /li There is no manual, only hints and cases from pshychologists and other social scientists as to which commands invoke what result. Everything is done on a trial and error basis to figure out what works./libr /br /li The language is non-deterministic, a command may invoke different results depending on usage, recipient, mood and other external factors over which you have no control. Your program will never have the exact same result, even when run on the same computer in a slightlly different setting./libr //olbr /br /Despite of its shortcomings. and the fact that it takes decades to master, pshychology is a language worth learning simply because it is the only language that humans understand. It’s like writing applications that run inside a browser; If you want to do it you have to learn javascript.br /br /If you master it you will not only be able to write good businessplans, but also write other programs that are intended to be deployed on human computers such as writing books, picking up girls, getting friends and all the other social activities that human computers seem to enjoy.

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The entropy of code

December 23, 2008 by max

Physics deals with an interesting concept called a href=”http://en.wikipedia.org/wiki/Entropy”entropy/a that measures the state of disorder in a closed system. a href=”http://en.wikipedia.org/wiki/Second_law_of_thermodynamics”The second law of thermodynamics/a looselly states that over time a closed system will become more disorderly and chaotic if nothing is done to prevent it. If you haven’t been to your basement for a while you can go down there and see for yourself that this is true: Things have become more disorderly and chaotic over time. And you will have to put in some work to get things back in order.br /br /Code is the same – if you don’t do something to actively prevent it the chaos and disorder of your code will increase when you work on it. This is why a lot of old code is a mess, nobody has worked actively to keep the entropy low.br /br /Preventing entropy in your code is fairly easy, and it’s a good habit to get into. Whenever you write new code for a project make sure you lower the total entropy of the system by beautifying or simplifying something in the codebase. It doesn’t have to be the code you’ve just been working on – the key is to lower the entropy of the whole system.br /br /If you work actively to keep the entropy of your code low it age gracefully.

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Why the singularity may never arrive

November 26, 2008 by max

a href=”http://en.wikipedia.org/wiki/Ray_Kurzweil”Ray Kurzweil/a has been advocating for the past years that we are nearing a technological singularity. He has tracked technological progress from the slide rule and up to the present day and has found that technology moves forward at an ever faster pace, and that this pace is surprisinglys constant. The slide rule could do very few calculations at a very high price. Vacuum tubes were a lot better and cheaper than slide rules, transistors better and cheaper than vacuum tubes, and so on. This fits very well with a href=”http://en.wikipedia.org/wiki/Moore%27s_law”Moore’s law/a that states that every two years you can get twice the amount of computing power for the same amount of money. When you plot it all out on a graph you get a nice exponential rise.br /br /This all seems reasonable, and very well documented. He then goes on to extrapolate the graph and postulates, backed up by his extensive research, that eventually the graph will become so steep that it is effectively vertical. This is the singularity where technology moves at a pace so fast that it is more or less instantaneous. According to Kurzweil this spells a new paradigm, and we have no way of knowing shat will happen after the singularity has arrived. But it will be exciting times. Or scary if you are so inclined.br /br /br /br /If the current trend continues, a href=”http://www.kurzweilai.net/articles/art0134.html?printable=1″according to Kurzweil/a, a 1000$ computer will be able to match human intelligence within 15 years. Extrapolating further he argues that within 41 years a 1000$ computer will match the intelligence of the entire human race. While hard to grasp mentally it makes sense when you look at the data – the graph pointing to the future seems believable and filled with good data backing the theory.br /br /img src=”http://www.maximise.dk/blog/progress1.gif” /br /br /But there’s a problem.br /br /a href=”http://en.wikipedia.org/wiki/Thomas_Malthus”Thomas Malthus /aPut forth his theory of limits to human growth in 1826 that bears some resemblance to Kurzweils theory. He found that historically human growth had grown exponentially, and that global food supply had grown linearly. When he extrapolated the two graphs into the future he saw disastrous consequences – since food supply would grow slower and slower compared to the human population he predicted widespread famine, wars over food and other miseries. What happened was that a href=”http://en.wikipedia.org/wiki/World_population”population growth declined and has halved since its peak in 1963./abr /br /If you look at a lot of natural growth phenomena, such as population growth, a href=”http://en.wikipedia.org/wiki/Rabbits_in_Australia”rabbits in Australia/a, or the growth of bacteria in a petri dish, they initially follow the same trend. It starts out with a few bacteria that multiply, these bacteria multiply again and so on. This gives the initial exponential growth that is very common in nature, and that human progress has also followed since the invention of the slide rule. But the bacteria don’t grow out of the petri dish to consume the lab, the country and eventually the entire world. Why is that? Because they need resources to keep growing. When the resources start to run out the graph stops the exponential growth and flattens out like an S.br /br /img src=”http://www.maximise.dk/blog/progress2.gif” /br /br /The same thing will happen with technology – eventually we will run into insurmountable barriers to growth and progress will stabilise at this level. It’s just a question of what the barriers are – the food for progress so to say.br /br /The real question is what these inurmountable barriers are, and when we will run into them.

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Sovereign and transient applications – why SAAS will win

January 31, 2007 by max

Everything on the web seems to be about AJAX and software as a service (SAAS) these days – but is it just another fad, or will it change the way we work? I think the latter, and I will explain why.br /br /In 1996 Alan Cooper wrote “a href=”http://www.chi-sa.org.za/articles/posture.htm”your programs posture/a”, where he split the programs we use in our daily lives in four distinct categories – Sovereign, transient, daemonic and parasitic. Sovereign programs are the ones we work with for hours on end – Word, Outlook, and Photoshop. They are our main working horses. Transient programs are helper programs that are used for a specific task and then quickly closed again. Calculators and Apple’s finder are examples of this. Daemonic programs don’t usually require any interaction, but will work quietly behind the scenes. Printer drivers for example. Parasitic programs are small programs that give quiet feedback, such as the clock, or the task manager.br /br /He lays out the design principles for each of these in his essay. Here’s an overview of sovereign and transient applications:br /span style=”font-weight: bold;”Sovereign applicationsbr //spanulliUsers are experienced. Since users by definition use the program for extended periods of time they will quickly become experienced users. Certainly everyone will start out as a novice, but only for a relatively brief period of time in relation to the amount of time they will eventually spend in the program.br //liliSpeed and power. Experienced users know their way around, and need powerful ways of interacting with the program. Keyboard shortcuts, complex controls, and toolbars that may seem daunting at first sight.br //liliMuted graphical appearance. Since the user will be staring at the application for hours each day the visual presentation of the program should be muted and subtle. No normal user can stand looking at a bright colored application all day.br //liliRich output environment. The program should give the user little hints about its state in the form of small icons or other graphical representations. These might not be noticed at first, but as the user gains experience he will experimentally interact with them and start using the program more productively.br //liliRich input environment. The input should be controllable in several ways.br //li/ulspan style=”font-weight: bold;”Transient applications/spanbr /ulliUsers are inexperienced. The program is only used once in a while and users will forget how to use it.br //liliSimple controls. The program should be simple to use since it is not used often. Buttons should be marked “print this document now” instead of “print”.br //liliSelf-explanatory. The program should explain itself – a novice should be able to carry out a task in the program without instructions. /liliLarge buttons and bright colorschemes. Since the user needs to re-learn the application every time and doesn’t spend a lot of time with it cheery colors and large buttons are preferable.br //li/ulbr /A webbrowser is a special case: The browser itself is a sovereign program – we use it as our main tool for hours on end, but the webpages we look at are mostly transient applications – we go to a specific webpage for the weather, news, gossip, or other information and then leave.br /br /But users can do pretty much everything in a browser that they can do in sovereign programs (maybe with the exception of Graphical designers, 3d artists and a few others) – with the added benefit of being able to better share their work, never have to worry about backups, and being able to work off any computer. So why don’t they?br /br /The answer lies in the way we interact with our sovereign programs. When I visit a webpage there is normally a small lag whenever I press a button or a link because a round-trip to the server is needed, and the whole page is redrawn. When I go to weather.com to see tomorrows weather I don’t mind because it is a transient task, and I don’t have to do it for hours on end. But when I work in a sovereign application this is unacceptable and would drive me nuts in a few days. How would you feel if there was a half second lag in photoshop every time you pressed a button?br /If a program that I use for five hours a day has a lag of half a second, or even 1/10 of a second, every time I press a control I will get extremely frustrated. I expect Word to react instantly to my commands. Until a few years ago there was no way around this, and so webdesigners all over the world accepted their fate and designed their websites to be used as transient programs.br /br /But the world has changed, and the technology is now much more advanced than it was just a few years ago. Using ajax technologies it is now relatively trivial to create websites that react just as fast as programs on your computer – the primary barrier for moving applications to the web has fallen. With ajax it is possible to create sovereign applications in a browser that have no discernible disadvantages over installed programs. They even have the added benefits of portability and easy sharing between many users.br /br /But a lot of websites that are building the sovereign applications of the future on the net are making the mistake of treating them as transient applications. Instead of building sites with rich outputs, expert user interfaces and muted graphical experiences, they are stuck in the tradition of making transient applications that are self-explanatory with simple controls and large buttons.br /br /If you are making an application that works in a browser you have the possibility of making a sovereign application instead of a transient one – but you have to design for it.

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