z on life

California Golden Cookies is an amazing gyro place and bakery on Kearny St. in downtown SF and is a frequent lunch spot of mine. The food is amazing, prices are reasonable, service is given with a smile, but far and away the best part is that you sometimes get a free cookie that is amazingly tasty. The interesting facet is that you never know when you’re going to get a free cookie. I have gone about 20 times now and gotten, I’d roughly estimate, 10 free cookies. The problem is I can’t seem to figure out what variables the guy uses to determine if you get one or not. I have thought about everything and watched carefully, but to no avail, I cannot figure it out. This prompted me to think about the pyschology of giving out free stuff.

Consider three cases in which I am going to buy a gyro and may or may not get a free cookie.

1. Every other time I get lunch there, the guy gives me a free cookie.
2. Every time I go there, I get to flip a coin and if I call it right I get a cookie.
3. It is seemingly random whether he gives me a cookie or not, but so far it has worked out to roughly 1 out of 2 times I go I get a free cookie.

Notice that the expected value for all three of these is that, per lunch session at the restaurant, I expect to earn half a free cookie. So does this mean that the affect on the consumer is actually equal for all three stratgies? I say no, and here’s why.

In the first case, you have a game of perfect information and you know exactly what you’re getting. The problem with this approach is that, while people generally get excited about free stuff, you are reducing the experience down to its raw economics. The customers know exactly how much they are saving per lunch visit. Plus or minus a little added excitement, they know that if the cookie is $1.75, they are really just being given 87.5 cents back each time. This feels like a coupon. Coupons work, but it comes down to economics.

Pros

• After an odd number of visits, people will be thinking about coming back to get the next one free.
• For the store owner, this is predictable and easy to work into his financial models of sales and profitability per customer.
• If people get a cookie every other time free, they’ll probably get used to eating them and actually buy one every time they don’t get a free one.

Cons

• Some people will see it purely as a coupon and the free cookie will not have any intangible or emotional value.

In the second case, you have a game of chance where you expected value tells you you’ll earn 87.5 cents back each time, but really it is either 0 or $1.75. Some customers would probably prefer the fun and allure of this more so than just having a ‘coupon’ as in case 1, but some would also probably not like it. Some people prefer to save every penny, some prefer to buy lottery tickets. This might be a fun idea to try, and may cause the restaurant to turn into a really fun environment as the tension builds for each coin-flip and there will be excitement after wins.

Pros

• This will really be fun to some percentage of people (risk-takers).
• The coin-flips will create excitement and hooplah.

Cons

• For small sample sizes, the number of free cookies needed to be given out is highly variable so there could be inconsistencies in profit day-to-day caused by this.
• Risk-averse people would probably just prefer the coupon style.

In the third case, you as the consumer really have no idea what is going on. All you know is that sometimes you are excited about your bonus, and other times, not. The key here is that you can’t prove the restaurant owner has a systematic method for giving out the free cookies, and thus you must (or at least it is human nature to) conclude that he is actually giving you one out of kindness. When you make the decision to go to the restaurant, you will not only consider the empirical chance that you’ll get a free cookie, but also the emotional aspect of ‘wow that guy is nice, we should go back there’.

Pros

• You get the human factor of emotion and personal connection involved.
• If the owner is being secretly systematic, he can tweak the algorithm to his daily needs (ie: if there’s only a few cookies left and still many more potentially paying cookie customers to come in later, he can simply not give any more out free that day).
• Because there is no set expectation of something free, you can never be disappointed on non-free days (ie: it is easy to be mad at someone for not keeping their word, but really hard to be mad at someone for not being overly nice).

Cons

• In the case of the customer who is the utmost consistency seeker, they may react negatively to this mysterious process (highly unlikely though).

It is so interesting to see how these three economically equivalent schemes are so psychologically different and complex. Of the cases, I think case 1 is the most popular (think those little things restaurants stamp when you come in, and every 10th free or something). Case 2 is the most fun and would be interesting (I have never seen it done). But I think very strongly of case 3 above and beyond the first two.

There is something about selling the ‘hope’ of a free cookie and genuine kindness that is awesome and resonates very well with me. Of course, in case 3, the guy could really be deeply manipulative and have this complex algorithm for which he is maximizing my expenditures in his restaurant. And if that is true, kudos to him, he should be an econ PhD (or maybe he is). But, in my book, he is innocent until proven guilty and until I or anyone else can prove that he has a system, I have to believe he is genuinely just a nice guy and that means a lot. It keeps me coming back.

The moral of the story is that if you are slick about it, you can connect with your customers on a personal level in a way that doesn’t cost you anything extra. Good feelings and good relationships are huge in business, and even matter down to the level of this small restaurant. If you take a little time to think about the psychology of such techniques, you can get something for nothing, and that’s always a good thing.

Think of it this way. Consider that each of those cookies probably costs the guy, let’s say, 30 cents to make. He’s given me about 10 free. He’s lost $3 to such a business practice but just got me to blog about it. If even one reader buys one more gyro at his restaurant, he’s made that back in raw profit. Interestingly, he’s created economics that make sense for him (not even including the probably 30 people I have told about his place in conversation), but I as the customer never even thought about the economics. All I thought about was how nice the guy was.

PS: I did not get a free cookie yesterday, but I’m still happy.

In the world of startups, everyone seems to have a different definition of ‘winning the game’ or ‘being successful’. With that said, I wanted to write about what I think winning is and is not.

To start, let’s talk about some popular ways to viewpoints on what it means to win that you hear in and around the startup crowd all the time:

1. Making something that millions of people use every day
2. Working with your friends, being comfortable, and having fun
3. Becoming Internet famous
4. Getting to a liquidity event
5. Being massively rich

To different extents, I disagree with every item above. Some of those are merely stepping-stones to real success, and some just have no place in the same sentence with the word ‘winning’.

Making something awesome that a lot of people use everyday is sometimes necessary but never sufficient in building a real business. Unless you can truly extract money from those users in a significant and sustainable way, I don’t see the point. Maybe the purpose of your work life is to just provide cool goods and services to the world. In that scenario, you’re really just running a charity event, in which case you need to acknowledge to yourself and others really what your true intentions are. But if the purpose of your work life is to build big companies, then focus on economic value by thinking about distribution, retention, monetization, strategy, relationships, and market before anything involving the word ‘cool’.

Getting to work with your friends with flexible hours and a low key work environment is great if you want to be a lifestyle business. If you are a disciple of the work-to-live philosophy, then that’s all fine and dandy. By all means, emulate the four-hour workweek. But if you want to build empires like Gates, Jobs, Ellison, Brin and Page, Dell, Bezos, etc, you will never get there if you maintain this type of philosophy. If you want to be funded by Sequoia, KP, Accel and that elite crowd, you’ll never get there in this mindset. When you’re in the office, the more blurry the line between friends and coworkers, between fun and business, between goals and leisure, the worse off you will be.

Becoming Internet famous is a really funny goal that many people have but few will admit. At the end of the day, famousness stands for very little expect maybe a fulfilling feeling inside to someone who needs that. Can you imagine coming to your board and saying “Well we missed earnings and we’re going to have to liquidate at a loss on all of your investments, but at least now people know who I am when I walk down the street.” That sounds absurd and is absurd. If fame comes with the process of being a successful businessperson, then that is what it is. But if you seek out fame for the purpose of fame itself, you actually stand to have less of a chance of succeeding because you will make irrational decisions and spend too much time and effort worrying about the wrong things.

Getting to a liquidity event can be a huge win, but the concept of ‘exiting’ in and of itself is not. Many times startups push forth and push forth and push forth because they just don’t want to die. Amen to not dying, but what is the goal of what you’re doing? Is the point to not fail? Is the point to prove that you were right after all and that “this can work”? Do you need to see the company ‘exit’, even if it is a tiny sum of money with years of handcuffs, just so you can think you “didn’t waste that time” in your life? Does exiting make it somehow worthwhile, even if you could have made more money over those few years working at Google or building new and better startups? Hey, if you’re going to hit it huge and explode with a 10-figure market cap, by all means exit and buy a Ferrari. But if you’re on the other end of the spectrum, are you really being rational, or are you hanging on to the concept of ‘not failing’ instead of focusing effort on a new massive success that could be up for the taking?

Being massively rich, in a self-made way, has correlation with “having won” but does not for sure indicate causality. After all people do get lucky, are benefited by serendipitous events, or find themselves in the right place at the right time. But in the end, most of these people still earned it. In my mind, though, these people have won a battle, not the war. I feel like the key to winning the war is in a process and not in any one result. It’s those people who have built up a methodology, a framework, and a desire to do it again and again and to do it huge. These are the Marc Andreessens of the world. The other side of this coin involves all the people I mentioned earlier Gates, Jobs, etc who have really focused on one company and taken it all the way for many, many years. Instead of doing it again and again, these people are all about extending it further and further. It’s the not the money, it’s the push to always be looking up even after you have the ability to be comfortable for the rest of your life.

So then what is ‘winning’ to me? Here’s a couple definitions or elements that seem much closer to what I would be comfortable with:

• Going from 0 to multi-billion dollar IPOs and beyond
• Putting yourself in a position to work with the best people
• Doing in aggregate what the fewest other people have been able to do

IPOs and huge exits are a good, tangible way to look at things. Money as a scorecard is fine, because virtually everyone who’s at the very top of that scorecard has earned it, either via sustained hard work or a huge string of success after success. Analogously in the non-startup world, you could argue that running a key division of a company or managing a huge fund and growing the earnings or worth by a large multiplier is just as good. I completely agree. There are lots of tangible ways to win.

Being able to work with the best people is an indicator of success. It means that every day, you get to experience the joy of pushing out the most creative, strategic, business-savvy ideas at the fastest possible rate. You get to solve problems that other teams can’t possibly imagine solving. If you think of life in terms of how many interesting experiences you get to have, working with great people can make that number explode. Every minute of every day can be incredible. While others can pay to go anywhere in the world, drive fast cars, and even go to the moon, you can’t pay to work with the best. Sure you can sometimes just set up the economics so that they make sense, but if really good people don’t respect you and see you as a winner, they won’t want to bet some portion of their career on you. If you can get to this point where the best want to be around you, you are on your way to a win.

The last is my personal favorite: measuring the size of your win by how many people have been able to carry out what it is that you did. We as people naturally seek to be different and new things excite us. We love to do what others can’t, not to evoke jealously, but because it is has core appeal. Professional athletes are one a million, same with movie stars, senators, and the like. Being a top of the top businessperson is more on the order of one in a hundred million. Striving for that is exciting, not because you get famous, but because getting there means you solved the most difficult and dynamic problems the world has to offer. Think about your aggregate level of accomplishment and what percentage of the world is at or above it? Chances are, that number is large. How can you get it down an order of magnitude, or how about five orders of magnitude?

Notice I have left out anything besides work. Nothing was stated in here about life, family, friends, fun, none of it, except how it was bad to mix lifestyle and work. The enjoyment of life outside of work as completely and wholly necessary, but it is an even more macro question of balance between the career-facing facts stated here and the elements of fun, happiness, and personal enjoyment elsewhere. What do I mean? You will be on some trajectory to win at some magnitude in the professional sense, and depending on what that is, you will have some portion of time to spend on the rest. The end goal of life on the whole might still be happiness, but the key is deciding how big you will win professionally, how much happiness that generates for you, and how much you will need to seek from other sources such as personal enjoyment of friends, family, leisure, and so forth.

So what should all of this mean to you? Really, it should mean nothing. This is how I look at things, but everyone is different. Winning as defined here isn’t for everyone, and I think it is awesome that not everyone goes down that path. I will say, though, that when I meet people, I am always curious how much they really want to win and win big. The ones who want it bad are the kind of people I enjoy working with.

Very recently I moved from Pittsburgh, PA to sunny San Francisco, CA. I’ve only been here a few weeks for real now, but the differences in the city are pretty obvious. I wanted to share my thoughts on how you would make Pittsburgh into San Francisco:

1. Increase property values by 500% 
2. Add slides and hot tubs to the nightclubs 
3. Stop everyone from caring about their NFL team
4. Turn 1 in every 4 people into Facebook app developers

It’s pretty unlikely this will happen any time soon, and obviously this is somewhat less than serious. But in reality, from the perspective of an entrepreneur, what does Pittsburgh need that San Francisco already has? The following are four items that are for real.

•  A wealth of capital (financial + social)

This is completely straightforward. There’s more money in a top tech fund here than all of Pittsburgh combined, and the concentration of talent and knowledge is simply astounding. Of course, the venture community in Pittsburgh has likely hit a carrying capacity for the amount of deal flow, so it’s not like simply adding more money fixes the problem (imagine a logistic growth curve math problem where you add more wolves but keep the number of sheep fixed). This is a standard chicken and the egg problem that has to be attacked from both angles.

•  Open, cutting-edge idea flow

Entrepreneurs in the bay don’t see success as a zero sum game and are willing to share strategies for success. Especially in the space of viral and user acquisition plays, we’ve seen a number of big wins in the recent years building and manipulating a core of techniques shared by a number of great entrepreneurs. Successes can coexist, and by being open and accepting this, the bay area has created a self-fulfilling loop of staying ahead of the rest of the world with some of the best information flow I have ever seen. Too much secrecy is dangerous.

• Building for the long-run

We’re going through a process of hiring right now, and it is interesting to think of things not just in terms of skills, but much more so in terms of trust and long-term relationships. When you’re in a small pond, you’re willing to bet on skills because you need to get the job done. When you’re in a big pond, you need to be on trust and long-term value because the payback of these seemingly softer things greatly outweighs any feature or any component of a product that a hire will get you in the next 6-12 months. At the end of the day you’re betting on the people more so than the tangible thing they can immediately provide you. A good question to ask yourself is ‘would you unconditionally work with any and/or all members of your core team again?’ Entrepreneurs should bet on themselves and their teammates to succeed in whatever, even if the current venture fails miserably.

•  Stars that have serious gravity

Pittsburgh needs to make very visible a set top-notch entrepreneurs who others badly want to work for. Simple jobs are great, but at the end of the day a job boils down to a corporate position P with skill needs A, B, C that provides salary X and Y stock options. Long-term career growth is much more than money today and a resume line item tomorrow. Would you rather work at Microsoft, or be Bill Gates’s right-hand-man? What if the latter meant half the pay? I would argue that in many startups, you can work with truly awesome people and not even sacrifice those other elements. The question is, are these people visible? And does the common person know what that relationship will do for their career? Better yet, does the diamond in the rough fledgling entrepreneur know who these people are that can jump start his or her career? Just some thoughts…more to come…