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You Negotiate Commodities, But You Seize Opportunities (steveblank.com)
165 points by icey on Sept 16, 2010 | hide | past | web | favorite | 19 comments

Over and over in business you'll see people avoid decisions they don't deeply understand (e.g. the average VC knows nothing about gaming, the average PHB knows nothing about databases, the average techie knows nothing about your market), and to paper over their ignorance and demonstrate they are in control and providing value they'll suggest a change to something they think they understand (advisor shares, the design of the front page, your pricing relative to a bowl of ramen).

This rarely works well, particularly when the two decisions are in fact related. One coping mechanism is being able to ignore advice (if you haven't taken their money, you can probably ignore their advice). Another is having a list of knobs people can twirl which are off the critical path (salaryman survival skill #1: distract the boss with rearranging a Gantt chart which can't kill anyone).

"I work in advertising, where frequently the challenge is to get the client to agree to pay you as much money as possible, then go away. The problem is that some clients (particularly new ones) will absolutely refuse to let an estimate pass their desk without making some alteration, just to show that they’re involved in the process. Now, if you go in with a carefully crafted ad campaign, where everything beautifully interlocks with everything else, then this moron blindly slashing away with his pen will inevitably cock it all up.

The solution is to give him a helicopter. A helicopter is something glaringly, obviously wrong, deliberately thrown in to satisfy a busybody’s need to “do something.”

It comes from a video producer I once knew who would always include an actual helicopter (for aerial shots of the city) in the estimate every new proposal he made. The helicopter was always obviously far more expensive than anything else on the list, and the client would always immediately cross it off before approving the proposal. End result: the producer got to do the project as he wanted, the manager got to feel useful, and everyone was happy."

Let's say you have manager A, minion B and ad agency C. If A and C know one another, A can simply say to C, here's some money, get on with it. If they don't, A uses B as a proxy in case it all goes hatstand, B can take the fall.

There's no reason B can't be complicit in this and take the day off to play golf instead...

What Patrick is suggesting is the proactive diversion of the PHB's attention to such issues.

Man, applying to YC has got me addicted to this news site a bit :) Before, I used to dismiss it because I thought it flew by too fast. I remember passing by it a few times in the last couple years. If there was only an indicator of something psychologically reassuring for someone like me, I would have bookmarked it.

This is the stuff I understand. Technology, web design, psychology of people online, etc. I notice that when I design a business plan, I think in terms of actual use cases from each participant, and why they would do each step. And if there's a missing piece somewhere then that's a red flag. I ask how it would spread virally, or how it would make enough money to spend on user acquisition. This is how I approach business, using what I know.

But there's other stuff out there, SEO, guerilla marketing, PR, etc. and I completely avoid it in my designs because I don't know too much about it. That's why it's good to have a partner who can be involved with talking to PR people and marketing agencies and architecting real-world campaigns when the time is right. Whenever there was a problem, I tried to solve it myself using the tools that I know. All my business plans have been of this nature -- sites that are viral by design and get people to spend money by design. Not that it can't work spectacularly, but it's a one-sided, internet-centric approach.

It sounds, to me at least, like he did a very poor job of actually putting this "opportunity" in proper context. More often than not this type of behavior is a failure of the CEO rather than the board.

As a technical founder I'm really well aware of it. After all, I'm constantly pushing projects that my non-technical partner (and by extension our board) really doesn't grok. Things like site security, more robust backups, improvements to the software stack... these are all things that don't really show up in any visible way within the product but they're all crucially important. It's my job to put the risks in proper context and help him understand that. It's his job to learn, understand, and help me make better decisions as well. I've often championed projects that addressed risks that weren't worth the effort to properly deal with. I need him to reign me in when that happens.

I think it's far to shallow to say "well they don't understand so their just flailing about trying to turn it into things they do comprehend." Assuming that you've assembled the right board and the right investors it's much more likely that you've done a poor job of engaging them in the topic. To them the advisor LOOKS like a commodity because from their position he is.

So the basic premise I get, but as a nascent founder, you haven't seen a lot, so sometimes, you may not know if this is a dime a dozen commodity or an opportunity.

I'm wary of fooling myself into thinking most thing's an opportunity rather than a commodity. Besides getting more experience and seeing more, how does one guard against it?

Interesting how your investors see you bringing this guy on board as an asset but only at a price that they are comfortable with and that might have brought a multiple in value. Makes me wonder how they'll feel about dilution if you ever need to go for more capital.

On another note, did you put it to a vote? Do you still hold a majority?

In practice, everything a board does is unanimous. If you respond to you VC board members saying "he is too expensive" with "let's vote on it", the company has WAY deeper problems.

The bigger problem in this case was that there was consensus about the budget before it was made clear what the goal to be achieved by spending it was.

Being in business means being flexible and having a bunch of beancounters on the board that are scared to be diluted is not going to help at all.

In such a case stating your case as clearly as you can, possibly in a follow up meeting (because he clearly was not well prepared for this one) would have been much better, also, and that's another critical mistake here, before you approach an outsider you first agree internally that you will do so, and what the budget for that particular outsider is. That could have saved some friction here.

A ship has only one captain, if the VCs are on the board they are represented as guardians, but not in a decision making capacity, only an advisory role.

Board decision are not nearly always unanimous, and it could very well be that a decision like this is determined during a general shareholders meeting if the board can not find a resolution. 1 share, 1 vote.

I really enjoyed the personal touch the last sentence and full paragraph added to the story; being able to admit personal failure is an admirable trait, and everyone likes to see the mistakes their heroes make, and not just the successes.

Everything can be overpaid. It seems like he is denying that.

I think what he really means to say is to don't negotiate too much where you can have a great profit. In fewer words, not to be penny-wise and pound-foolish.

So does he mean you shouldn't negotiate opportunities? I don't think this is valid in general.

Yes, you need to negotiate opportunities. But an opportunity is where you see value that is not visible to others. If that value is large, then it will pay off in spades even when other people think you're being crazy.

negotiating can send a signal that you don't value the other entity as highly as they value themselves. it's one thing to negotiate over the price of an apple, say, because the apple doesn't have feelings. but if you try to talk down the compensation package for a potential employee/advisor, particularly one who would likely become a star contributor, you can hurt their feelings and/or cause them to seek employment elsewhere. you can always buy an apple from somebody else, and the store/vendor can always sell that apple you passed over to somebody else. but as a laborer, you have only so many hours in the week you can sell to somebody else, so in general it's in your best interest to get the highest compensation you can.

So negotiating as a general rule is good. But in specific cases, where you're dealing with an opportunity or "non-commodity" thing, no, negotiating can sometimes be bad. That was his whole point.

great article but I think he failed to make a significant point which was also key to that experience: the failure wasn't so much about treating an opportunity as a commodity but that he failed to follow-through on an offer he has already made and negotiated with the guy and had buy-in from him on. so when he came back to him and said i have to make you a lower offer that moment was going to hurt the other guy. It's not that negotiating itself was wrong, it's that there already seemed to be buy-in from both key parties and then later one side didn't follow though on it. Ouch.

He did follow-through on his first offer. What he wanted, but the VCs did not agree with, was to accept the last email two days prior to the board meeting.

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