Category: Business

Proof of life

Users are the only real proof that you’ve created wealth. Wealth is what people want, and if people aren’t using your software, maybe it’s not just because you’re bad at marketing. Maybe it’s because you haven’t made what they want.

Paul Graham

Inside of technology companies we have a whole host of ways we measure our progress. Key performance indicators (KPIs) I’ve seen include page hits, unique visitors, assets registered in the system, and even Google page ranks. The problem with these kind of KPIs are that they are vanity metrics that make you feel good about your “startup” but don’t actually lead to any sales.

Do you want to know how valuable your startup is? Ask yourself how many actual users you have. Investors, acquirers, and even partners will use this metric to determine your value; so you are probably better off using it to measure yourself. Paying customers is an even better! Look at the largest acquisition value multiplier for any tech company in the last decade and they will have one thing in common, paying customers.

The number of paying users is such a valuable metric that whole business spring up around customer acquisition. One of my favorite examples is the home security space…

At my last company, my partner and I were discussing a business strategy that centered around a serial home security startup founder he knew. This particular entrepreneur had sold 3 or 4 companies so far, each for around $10 million. His methodology was that he started a home security company using third party hardware and outsourced call center resources. He would then sell these systems like a mad man. He would go door to door, viral marketing, contract HOA agreements, pitch to builders… anything he could think of, while working 20 hour days, to get customers.

The beauty, from his standpoint, was these were all reoccurring monthly revenue subscriptions on 36 month contracts. If he could get a critical number of contracts (I want to say it was around 10,000 active home security systems) before the 3 year window, he could sell the entire company to someone like ADP who was happy to pick-up, and pay for, these customer acquisitions given the RMR model. He was treating the home security industry as an optimization problem where the primary metric of success was the number of users under contract and he was RIGHT!

Of Core & Contracting

A contract technology specialist I have a great deal of respect for made this comment a while back.

I’ve never understood why CIOs prefer training rather than hiring a contractor; less time, less TCO, higher quality.

Training is a long term investment in your people that can “potentially” pay off as a force multiplier in the future.  This is especially true if you are talking about a companies core competencies. Historically companies that outsource their core competencies over a long period of time get knocked out of those markets by competitors that can buy up the outsourced experience.

Investing in your people is strategic, but often unexpected opportunities demand short term tactical considerations trump long term strategy. In these situations contractors can act as the spark to jump-start initiatives and respond to unexpected problems.

Contractors make the most sense when you need high value, high quality experience as quickly as possible. Calling a contractor “the dark side” just removes a tool from a CIO’s arsenal of weapons. It is both short sighted and ignorant.

The other place that contractors really shine is for non-core competency functions. If you are not going to be an expert in some capability, you are almost always better off outsourcing that capability to someone that is. This is the reason we have seen the rise of outsourced services like HR, IT Support, and even CIOs.

Let me put is this way, if you are a company that makes X and you are the best darn X maker on the planet then you want to train future X makers so you can continue to be the best at X.  Inversely, if you are the best darn maker of X… then get someone else to install the freaking phone system!

The Measure of Who We Are

The older I get the more value I place on having timely and frequent feedback. It sounds like an insignificant thing but if you want what your doing to actually be useful it is paramount.

Never underestimate the power of an evolutionary process with a tight feedback mechanism.  –Linus Torvalds

Frequent feedback is so important because of the abundance of bad ideas that actually mask themselves as initially useful. Anyone who has done software development or design has had 100 people say “I have this million dollar idea I need you to implement.”  The reality is that most ideas are bad and seldom deal with the practicalities of reality.  Often their shortcomings are not obvious.

Good ideas (aka theories) are actually pretty uncommon.  We build these perfect structures in our heads and then begin to wonder why our dreams cannot also be truth.  Once we latch onto a theory we will remain “loyal” to it and will seldom surrender it easily until external facts force us re-evaluate them.  In actuality these ideas are not even theories but beliefs, which is what a theory really is until it has been tested.  A feedback loop is really a way to force us to test something with an external reference we cannot ignore.

The single biggest problem in communication is the illusion that it has taken place. –George Bernard Shaw

One of the major changes in the structure of technology companies and their succeed has been the dissociation between a business BEING an idea, and a business trying an idea.  The new mantra in places like Silicon Valley is get actionable feedback, make a change, fail fast, and pivot.  Failing fast provides as much feedback as possible in the shortest period of time; so fewer resources are spent on bad ideas and thus increasing the likelihood of isolating good ideas.

On the macro level, the key to the effectiveness of capitalism has been the success of the market as a feedback mechanism.  Local government’s superior representation is a direct reflection of the ease at which local officials can be replaced.  The feedback loop for a City Mayor is quite a bit tighter than for the President of the United States.

Notice how, in the last example, by focusing on the feedback mechanism we can evaluate two systems that are superficially identical but function dramatically different.  Why does progressive democracy work so well for Denmark and not for the US?  Because Denmark’s feedback loop is closer to Missouri’s than it is to the whole of the United States.

With genetic engineering, we will be able to increase the complexity of our DNA, and improve the human race. But it will be a slow process, because one will have to wait about 18 years to see the effect of changes to the genetic code. –Stephen Hawking

Feedback is so fundamental that systems that have weak or non-existent evaluation mechanisms are losing their authority overall.  We value academic disciplines by how consistent their feedback loops are.  Things like math, science, and engineering all have well defined and extensively tested methods to evaluating themselves and make corrections when shortcomings are identified.   Non-empirical disciplines like art, philosophy, and religion are suffering from the lack of reference available to the natural sciences, and their overall effectiveness is thus reflective.  Remember, at one time science and mysticism were one and the same until science formalized the scientific method, liberating itself (and humanity) from the confines of dogma.

“Science gives man ever greater powers but less significance. It gives him better tools and with less purposes. It is silent on origins, values, and ultimate aims.  It gives life and history no meaning or worth that is not canceled by time and death.”. –Will Durant

This is not to say that ideologies and theories are likely to disappear. On the contrary, as religion had demonstrated, systems that have no effective feedback loop are nearly impossible to remove entirely because there is no way to “prove” the shortcomings of their beliefs.  You cannot fail a test you’ve never taken.

Nor do I mean to suggest that systems lacking structured feedback methodologies are bad.  I strongly believe in the value of philosophy, art, and religion as part of making a full life; and I passionately love my liberal arts education.  The need for improvement isn’t an absolute and, contrary to popular belief, neither is the need for truth.  But, when the desire is to approach understanding, even if only asymptotically, there is simply no better system we know of then a quality feedback loop.

If you can prove you don’t need it

For years, I have watched the number of technology companies that operate without debt.  The trend has always been popular among IT/IS companies because of the fundamental instability of intellectual property over hard assets.  The logic is hard to argue with.  If everything you “own” of value only has value as a direct cause of its perceived importance, then a shift of public perception doesn’t just hurt your brand, but fundamentally devalues your property.

Think of it this way; if tomorrow everyone stopped trusting Google for their search results (say, you know, someone found out their code sent all our personal information to the Chinese) then overnight they could loose 95% of their US market share.  How much is Google’s code-base worth at that point?  Currently Google is trading at 183 billion so a 95% loss in usage would probably translate to a market value somewhere south of 3-5 billion.

Physical assets don’t behave the same way.  1,000,000 lbs of steal doesn’t just loose 98% of its value overnight.  Even in heavily over-inflated markets things like… I don’t know… homes, don’t loose 98% of their value.  People may be upset that their 350,000 home is now worth 260,000 but just image if one NIGHT your $350,000 home was worth $7,000.  THAT is the danger for companies whose primary assets are intellectual property.

I will give you another concrete example.  Once upon a time there was a company who made A LOT of money in the energy trading business.  Basically the company had sold off almost ALL its physical assets because they made so much money acting as a broker for energy trading.  Think of them as the stock market (or eBay) for energy.  The only problem was that their principal value lay in the fact that people trusted them, trusted their market, trusted their systems, and trusted their software.  Then one day  it was demonstrated that this company lied, cheated, and stole in almost every way you could imagine.  Enron’s stock dropped from $90 to just under $1 in a matter of weeks.  Basically, Enron’s major asset was trust, which it lost, and the company disintegrated overnight.

So how does a company protect itself from such quick devaluation?  The same way you and I protect ourselves from economic turbulence; a big savings account and as little debt as possible.   Microsoft, for example, is famous for “saving” close to a billion dollars a month… yes, a MONTH!  At the same time, Microsoft doesn’t borrow money.  I have been told, by people I put NO trust in to know this information, that they don’t even lease the copiers.  Competitors who want to beat Microsoft can certainly do so, but it will not be an easy fight.  That kind of financial position means that competitors must beat them dollar for dollar, customer for customer, year in and year out… for YEARS!

So who else do you know that doesn’t use debt?  Here are are couple names both in IT and outside of it.  Accenture, Activision Blizzard, Apple, Bed Bath & Beyond, Broadcom , Citrix Systems, eBay, Gap, Google, Infosys Technologies, Juniper Networks, Marvel Technology Group, Qualcomm, Research In Motion, Stryker, Texas Instruments, and Yahoo.  Want to see something more amazing?  Check out those companies 1, 3, and 5 year average returns compared to the market average!

I think it was Warren Buffett who said, “Leverage [i.e. debt] is a funny thing, people who don’t understand it shouldn’t use it; and those who do, don’t.”

Software Development
and Project Success

When I was growing up our family’s resources were less extensive than they are now, and as such, we sometimes had to do without some perks. One of these perks was a complete set of tools for home/car repair. Simple fixes like changing a battery would result in hours of work because of the inherit limitations of our tools; which ostensibly consisted of a hammer and a butter knife. Whenever I was brushing off the latest “injury” incurred while fixing something, my father would say to me, “Everything is simple if you have the right tool.” The better the tool is at doing a specific task, the easier it will be to complete that task. Ever watched “This Old House?” They had a tool to do everything! I didn’t even know they made adjustable-corner-rounded-cut-circular-door-saws with the optional digital level… cordless, if you are lucky. Heck, if I had a shop with 30 million dollars worth of specialized equipment, I bet even I could make something as fundamentally complex as a bar stool.

“Everything is simple if you have the right tool.”

This maxim (while not always true) is amazingly accurate in describing the modern development process. In fact, this is the reason I work on KDE (as opposed to the “other” Linux desktop environment.) Things are simply easier to do, are more productive, and more functional because the tool is designed better and focused specifically on desktop software development.

Today I ran into a series of articles by some application developers who I have come to respect. Their insight into the software development process will hopefully help give me some direction on future project management. Here they are will some selected quotes that stand out:

The strongest indication of a weak team is the realization that if you were to quit and start your own business, you wouldn’t try to poach any of your colleagues.

“Strong teams have almost impossibly high hiring standards. Strong teams will always leave a desk empty rather than settling for less than the best.”

“Examples of development hygiene include source code versioning, maintenance of an accurate bug or issue database, significant use of automated testing, continuous integration, and specifications that are kept current (whether incredibly detailed or high-level overviews).”

“A chicken is an individual who has significant authority over your project, but does not make a personal commitment to the success of the project.”

“And every time I’ve delivered software on schedule milestone after milestone, my influence and standing with stakeholders has grown. And every time I’ve missed a date, I’ve suffered, regardless of whether the late software was demonstrably better than what was originally planned for the missed date.”

“Documents such as specifications yield the same benefits of source control.”

“Discard all processes that are mechanically completed with little actual benefit. Tweak those that require more effort than necessary, maximizing the results while minimizing the effort.”