
The returns to entrepreneurship  - prakash
http://startupboy.com/2009/11/09/the-returns-to-entrepreneurship/
======
patio11
Excellent article.

I think code is just one tiny piece of the puzzle, but here's an example: I'm
one guy who programs in his kitchen. I would up at 6:12 AM last Saturday and,
unable to get back to sleep, decided to write a new feature into my website. I
found it easier than I expected and eventually ended up writing two new
features. Then I set up A/B tests for both of them. I then got done at 10:37
AM and spent the rest of my day playing videogames.

I was able to "write" two features in 4.5 hours because it was a matter of
snapping two bits of OSS code together with a bit of UI glue drizzled on top.
(The A/B testing framework is also OSS, though I wrote it.) My customers don't
care about that, though: they care that they couldn't do X or Y last Friday
and now they can. (Well, if they're in the A/B test group.)

You know what isn't anywhere in the above description? A four hour planning
meeting between six people discussing whether X or Y should go into the next
version of the product. I've been at that meeting before. I think we all have.
It is a tremendous waste of time when I can just ship the feature in an A/B
test and tell you a week later how 5,000 users reacted.

(Answer: feature X increased task success. Feature Y decreased it. Neither
effect was statistically significant. As I had been delaying making these
primarily out of fear that featureitis would hurt task completion, in the face
of repeated customer requests for both features, I'll be shipping them to
everybody.)

And I'm one guy doing this from his kitchen table in his spare time in a not-
too-rich niche. There is nothing about these techniques that make them less
effective for bigger, better funded, more focused teams in richer niches.

------
10ren
_Examining a list of the 75 richest people in the history of the world,
Gladwell notes that “an astonishing 14 are Americans born within nine years of
one another in the mid-19th century.”_
<http://features.csmonitor.com/books/2008/11/17/the-outliers/>

England's colonial shipping trade and railroads were also technologies that
changed the economics of business, making fortunes in the process.

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davidw
> It seems that the entrepreneurs who “hit” these days are doing it more
> quickly, making more money, and doing it at a younger age.

Citation needed! I think 'younger age' is likely to be true. Thanks to the
internet, it's easier to build up a network and get informed earlier. I wish
_I_ had had HN ten years ago! The rest of it... well, I'd like to see some
facts.

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jmtame
A very interesting reminder of just how low the barriers are to doing a start
up today.

~~~
Scott_MacGregor
The barriers are low as long as the brainpower is high. It isn’t just any
person off the street who can flesh out and grow a startup company from
scratch. It takes a certain type of person with a certain amount of horsepower
under the hood to achieve that objective.

~~~
davidw
Ok, but the point is that everything else being equal, that person has a much
better shot at things today, because of the very small amount of capital
necessary for a web-based business.

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markbao
> _Most web products have no marginal cost of replication, so adding a new
> customer is pure profit._

This is my single gripe about this article. This isn't true: although there's
a higher profit margin because the cost of one customer on a general web
application is close to nil, the cost of acquiring a customer is sometimes
pretty high. Especially if you factor in that 1% of free users will convert to
paid users (in a freemium model.)

Unless if you hit it out of the ballpark with some crazy lucky viral
marketing, I'm pretty sure you're going to have to do some solid marketing to
gain traction.

~~~
patio11
On the plus side, if your trial -> purchase conversion rate is in fact 1%,
then a single A/B test which increases your conversion at any step of the
funnel between trial and purchase by 5% results in an almost immediate 5%
increase in top-line revenue. And 95% of that (allowing a little bit for cost
of payments) will flow straight to the bottom line, because you typically pay
for COCA whether the person converts to premium or not. (Well, unless you're
doing CPA marketing. Even then, there are compelling reasons to do conversion
optimization, as it will make your effective payout for affiliates higher,
attracting more of them to your banner.)

Actually, come to think of it, in a freemium subscription model a 5% increase
in conversion doesn't necessarily do 5% to revenues instantly because a
portion of your revenues are produced by existing subscribers. Sorry -- I do
one-time purchases, sometimes I forget about the economics for other folks.

Still: what other businesses can assign one junior employee to work on button
designs for a week and walk away with 5% added to the value of the business?
And close to risk-free, because you can experiment on a fraction of your
customers and terminate it almost instantly if it doesn't pan out?

That is leverage, broadly defined, that would make hedge fund managers green
with envy. ("Hey, can you figure out a way to make us 5% extra on all our
capital? Oh yeah, and do it risk free. Oh yeah, and I'd like whatever you do
to be basically repeatable with a minor variation next week, so that we can
institutionalize this and do it as a process rather than a one-off. Alright,
call me when you've made me a billion, I'll be on the golf course.")

~~~
jamiequint
I agree with your point, but think someone should mention a point I believe I
saw on HN the other day.

Basically, trial -> purchase conversion for freemium seems to max out at
around 1%, so your efforts are usually better focused on improving retention
rather than initial conversion.

If anyone remembers what presentation this was from please post the link, I
can't seem so find it.

~~~
patio11
You may be thinking of the discussion here.
<http://news.ycombinator.com/item?id=926506>

The presentation it references for support of the "1% is the limit" myth is
here: <http://particletree.com/features/web-app-autopsy/> "Myth" is strong
language for me, but I believe it is justified in this case. If you play "Hey
I got a BA degree for a reason, let's play secondary researcher", it is based
off of a misstatement of a repetition of a claim that doesn't even appear in
the primary research. All the primary research says is "Three particular firms
we have convenient access to say they have about 1% visitor -> purchase
conversions. That's probably typical, then." (Even the primary source skips
over the fact that one of the three actually reported 1.14%, which is a 14%
difference that falls straight to the bottom line, and the other two reported
to exactly one significant digit.)

You'll note that visitor -> purchase is very different than trial -> purchase,
but don't beat yourself up, different folks routinely quote both numbers at
1%. It should be self evidently obvious that both groups cannot possibly be
equally right, but as it turns out they're probably both just equally wrong.

In addition to being incorrectly repeated from a misreported summary of
anecdotal data, the claim is empirically false. I can't tell you other
people's numbers, but I can tell you mine: 2.45% trial to purchase conversion.
Feel free to do much better than that -- it is certainly possible. (Important
possible apples-to-oranges alert: my freemium app is not sold on a
subscription basis.)

This post is not meant as a personal attack: I have heard this statistic, and
its older brother ("1% of shareware downloads convert") for years. Vaporizing
it in the harsh light of actual evidence is one of my numerous personal
crusades, because it leads to poor decisions that actually cost people money,
like "Well, conversion is a fixed number so I totally can't add 5% to my
bottom line by working on buttons or something absolutely stupid with a
shopping cart redesign."

~~~
eagleal
Practically:

* As you "launch" there is like 1% of conversion

* As you keep optimizing, conversion rate increases (in your case by 1.45%)

* Something like +1% per major optimization (and targeting) (compound rate ?)

Can you confirm it?

And don't forget that you can always hack the buyer psychologically.

------
krschultz
Is anyone else's Bubble Alarm going off? These are the kind of articles that
are often a sign.

~~~
tomjen2
My bubble alarm has been going on for years, but I predicted that neighter
Facebook nor Twitter would ever have a viable business model and I have
already been proved wrong on Facebook at least - I assumed that it was the
harder of the two.

Having said that, it still doesn't smell right.

------
quellhorst
Overnight success is a myth.

~~~
Harj
depends on your definition of success

~~~
mikeryan
or your definition of "overnight"

------
paraschopra
If making technology products has become accessible, similarly barriers to
entries has been reduced. When there are lots of players, Nasim Taleb
describes the situation as winner takes it all.

~~~
patio11
I think the Internet makes two very different things common. I'm not sure what
world any given business falls into:

1) The Internet is vast, and this tends to create everybody-wins. There is a
virtually inexhaustible range of niches out there. Seriously -- one giant,
flowing river of value creating. You are able to dip a bucket into it. You may
not end up with your own private ocean (hello, Google) but you will also
probably not die of thirst.

I honestly think that this is big, like Industrial Revolution big. Big like
"bigger than all the hype about the dot com bubble" big. That was a bunch of
PR-funded hype which collapsed in on itself. This is about creation of value
-- huge, staggering amounts of aggregate value -- and cutting out a lot of the
waste that previously prevented that from reaching people. Industries are
being reinvented, and some are being created out of whole cloth.

2) The Internet is deep, and this tends to create winner-takes-most. At the
top levels of any intellectual labor there is a step function difference in
outcomes between #1 and #2, #2 and #3, etc. We talk about the Long Tail
because it is new and exciting, but the fat head is still there. That fat head
of SEO means, for example, that executing 1% better than the guy in the #2
spot more than doubles your revenues. By itself. The difference between being
Google-successful and being Facebook-successful is several orders of
magnitude, even though both of those examples made their founders rich beyond
the dreams of avarice. The productivity difference between the best
programmers and the worst programmers is widely rumored to be an order of
magnitude: I think in the future, we'll see the pay catch up, outside the
fairly narrow range of quants on Wall Street. (And the difference between the
average programmer and the best day laborer is probably going to keep
climbing, too. Returns on one of them keep increasing, you do the math.)

It is a great time to be alive for those of us who can leverage these trends.
If I were committed to equality of outcomes, though, I would be terrified.

~~~
paraschopra
Regarding #1, I think you are right that there are a lot of niches which can
be tapped and which will make one a moderate amount of money. But problem
arises when tons of creative people choose a single niche (e.g. todo lists).
Choosing a niche and executing well is important but what stops from other
fishes having their lunch at your part of pond?

Regarding #2, do you think luck is involved there in getting to jump the step
function?

~~~
patio11
_Choosing a niche and executing well is important but what stops from other
fishes having their lunch at your part of pond?_

The pond is so vast and the river flowing into it is so wide that all the
other fishes are welcome to anything they find in the general vicinity of me.
I'm hardly starving. I also find time to publish a blog titled Tasty Worms
Here and release open source swimming techniques. (Plus, although many people
think my section of the pond is the size of a mud puddle if that, I think I'm
probably, hmm, fourth biggest fish in these here parts? Maybe third. I don't
spend too much time thinking about it -- too many tasty worms to eat, not
enough time to worry about other fish.)

I don't believe in luck, and I think it lacks explanatory power. For example,
the top 1% of iPhone apps rake it in next to the bottom 99%. If you were to
ask me why, I'd talk very little about luck and very much about how the App
Store is virtually designed to encourage churn and blockbusters, which
exacerbates the Winner Take Most effect to the point where it gets almost
absurd.

~~~
megamark16
All great points, so I'll throw one more out there. Not all fish have the same
tastes, needs, or swimming abilities. If the "niche" that you are filling is
occupied by a huge number of fish, is it still a niche? ;-)

------
kevinholesh
Great positive outlook on the rewards of entrepreneurship when the media is
constantly droning on about the negative effects of the recession.

I too am looking forward to seeing where we'll be in 10 years time.

