API First

If you’re building a digital product or have built one, you’ve most likely heard of the debate between web first and mobile first. In short, the debate is about choosing which platform to focus on first when building a MVP (minimum viable product). Fred Wilson wrote a good piece about it here when mobile was quickly gaining a lot of attention from product teams.

Mobile has since lost its edge as the platform of focus for a lot of product teams because it has gotten crowded and there are a lot of new platforms bursting on the scene (AI, chatbots, VR/AR, etc.). Google even recently called itself an AI first company. But I think there’s another way of thinking about building a digital product, and that is API first.

What I mean by API first is focusing on building your core API as a product before focusing on another platform. The great thing about focusing on the API first is that it makes it easier to tackle building your product for other platforms and interfaces. Once your team has built an API, you can focus on building your product for whatever other platform potential customers may be using, or whatever the next big thing is. In a sense, it “future proofs” your product because no matter what the next big thing is, your product will be ready for it. You won’t have to rewrite everything in order to support the new platform.

Now, I know there are probably a lot of engineers reading this and rolling their eyes saying you should be building products like this anyway! And you’re right, a smart product team will do this anyway when they build their product for one of the other platforms. However, often these APIs are kept private and not thought of as products themselves, but rather as a component of another product.

All of that is starting to change. Amazon recently announced a way to make it super simple to monetize an API built with their API Gateway product. In addition, 21.co is enabling bitcoin-payable APIs. This means your API can now be a product itself. You make money by charging others who consume your API.

The API as a product isn’t an entirely new idea, some examples include Cloudinary, AWS itself, and Api.ai. But what these new developments do is make it really easy for any product team to monetize their APIs.

I think this could have been an interesting route for Twitter to go in its early days. You could even make the argument this is what they did unintentionally. When Twitter first burst on the scene, there were lots of clients built on top of the Twitter API. But instead of thinking of their product as their API, they thought of their product as their own mobile and desktop clients where they could serve ads and make money that way. In an effort to channel more eyeballs to these products, they cut off a lot of the third-party developers that were consuming their API, and were left with arguably mixed results as a business.

Various Twitter clients (photo cred: Trusted Reviews)

So if you’re on a product team, in the midst of building a new product, or are thinking about building a new product, I encourage you to give the API first approach a consideration. Afterall, having another way to make money can’t be a bad thing for a startup.

Looking beyond the advertising business model

It feels like we’re hitting an inflection point with Internet business models. Currently, the most dominant business model for a consumer Internet business is advertising.[1] But there seems to be a growing sentiment that this needs to change. Medium recently announced it’s rethinking how it’s going to approach generating revenue. And they aren’t the only ones who think the Internet’s ad model is broken.

What’s great about the advertising model is everything is free! At least, in theory. The promise of the Internet is that it can be scaled infinitely. So anyone or anything can access any information that is uploaded to the Internet by someone or something else. This all happens at little or no cost.

This has been great and served us very well in the early days of the Internet. Just thinking about all of the information we have access to now is astounding. You can open up any web browser and do an infinite amount of queries and, almost always, find what you’re looking for. You can read the thoughts and opinions of anyone in the world, in real-time. You can watch someone else’s first-hand experience, anywhere in the world, live. Again, you can do all of this for basically nothing.

The problem is that’s not true. Yes, you can get all of the above for little or no monetary cost to you.[2] But it’s not true that you can get all of the above for no cost. Somewhere, somehow the piper is being paid. Most commonly, for businesses that rely on the advertising business model, your attention is what is being sold. Every time you do a search on Google, your attention is being sold. Every time you log into your Facebook account, your attention is being competed for by all the different services that want to tell or sell you something.

It might not cost you any $$ but it definitely costs your attention.

And the above assumes you’re browsing the web anonymously, which if you are the typical web user, you’re not. After all, most companies are not going to throw their money at Google and Facebook just to buy random people’s attention. They throw their money at Google and Facebook because Google and Facebook know a lot about you and that’s really valuable to businesses.

You know the famous line: “By signing up, you are agreeing to our Terms and Privacy Policy”. How many of us actually know what we are agreeing to? I mean actually know? I don’t see many hands.

This isn’t to say I think companies like Google and Facebook are evil. Instead, it’s not a question of good vs evil or right vs wrong. It’s about incentives. Google and Facebook don’t want to be evil but they also don’t want to go out of business or have to fire a whole bunch of people.

They are, however, huge public companies that face a lot of public scrutiny. What about all those random websites you sign up for to share images of cats or funny gifs? They get your data too. And even if they don’t directly ask for your data, they might get it from some other company who has your data and decided to sell it because they had to survive.

Wait, what?? It’s ok, it’s in all the privacy policies that you agreed to when you signed up in a drunken stupor late on a Tuesday night in 2013 because your friend told you to check out a cute cat picture.

This quote sums up what I am trying to get across[3]:

If you’re not paying for the product, you are the product.

In addition to advertising being a sketchy way of making money, it’s also a shitty user experience. Any time you go to a free article on the web, you are almost guaranteed to see a couple banner ads, a popup asking for your email, and an auto-play video advertisement. Nobody wants any of that crap. In fact, I’d bet the website you’re visiting probably doesn’t even enjoy showing it to you. But the only way they can please their true customer (the advertiser) is by showing you more of it.

The main news page for USA Today. A good proportion of the visible page (~60%) is dedicated to ads.

There have been some improvements to the advertising user experience with things like native ads. Which are ads that look just like normal content but are paid to be shown. An example of this is sponsored Tweets or Facebook posts that show up in your feed regardless of whether you follow the company or liked their page. They may be a better user experience than the huge banner ads and popups that meet you when visiting a typical site, but they still aren’t desired.

In response to privacy concerns and crappy user experiences, consumers have been fighting back with things such as ad-blockers. Ad-blockers are not just a niche thing either. Millions of users have them installed on their browsers on both desktop and mobile.

2 out of the top 3 most popular browser extensions for Firefox are ad-blockers. Each with millions of users.

This is obviously not great news for websites that rely on advertising dollars as their main revenue source. It has even created a heated debate about the ethics of ad-blockers. Is it ok to consume content for free if you are avoiding paying the content creators in some way? Is it ok to pass on the costs to other users? In fact, there’s even a bit of a cat and mouse game going on now between the developers of ad-blockers and the developers of websites that rely on advertising.

Regardless of your stance on the ethics of using ad-blockers, there’s no denying the advertising business model on the Internet is reaching a crossroad. On the one hand, having access to basically free content is awesome and has pretty much defined the web since the beginning. But on the other, advertising has gotten really fing annoying and taken to the extreme by companies desperate for revenue.

The problem is, there really haven’t been any great alternatives for consumer Internet business models. It’s easy to get sucked into this game too as a business. Create something. Put it on the web. Give it away for free. And attract as many users as possible. Figure out how to make money later (hint: ads).

That sounds really attractive. And it is really attractive. Especially to startup founders and investors. Some have made a lot of money with this model. And some will continue to do so.

How sustainable is this? And is this what we really want to do?

As a tech founder myself, it’d be awesome to create something that millions of people would want to use. But I also want to give my users the best experience possible and I just don’t think the advertising model can provide it. I also don’t think we want to build more apps and websites that rely on advertising. Most of the people I know in tech hate ads. We hate ads as consumers, yet we spend our day jobs creating products that rely on them.

It’s also, to a certain degree, encouraged by us consumers. We balk at paying $0.99 for an app that can measure our heart rate, send it to our doctor, and predict when we’re going to die.[4] Yet we have no hesitation to pay $4.50 for a grande cup of crappy coffee.

So what are the alternatives? How can you build an Internet business that costs users very little to access yet doesn’t bombard a user with advertisements?

Unfortunately, I don’t have a perfect solution to this problem. Come on, you weren’t expecting me to just give you a one-size fits all solution, were you? Instead, I think an area that particularly interests me as having not one but many potential solutions to this problem is cryptocurrencies.

For those who aren’t familiar with cryptocurrencies or the Blockchain, I am not going to go into great detail on what they are or how they work but I really don’t think you need to know those details to understand how they could be used as an alternative business model to advertising.[5]

There are two main ways I think cryptocurrencies can replace the advertising business model on the Internet. The first is the simplest to envision, micro-payments.

You may or may not have heard of the term micro-payments before but basically all I mean by it is making very small payments. For example, fractions of a penny at a time.

With the current monetary system, there isn’t a great way to give someone (or something) a fraction of a penny. I can’t just take a penny out of my pocket, cut it into fourths and give a fourth of a penny to someone. They may question my sanity if I did (they still may).

But you can’t really do this digitally either. In theory you can pay someone $0.0025 since it’s just a calculation but the problem with this is the amount of hands that $0.0025 has to pass between. When you factor in the various banks, credit card companies, and merchant accounts that are involved in the typical transaction, the fees to process an exchange of a small amount of money between parties would far surpass the actual amount exchanged. Making it pointless to transfer this small amount of money between parties.

If there are no banks involved by using a cryptocurrency to exchange funds between parties, the fees can be extremely small and actually make exchanging something like $0.0025 worth it.[6]

This would make it possible to have business models where the consumer pays very little (fractions of a penny) for each piece of content they consume (like an article, song, etc.), yet a business could make a lot of money when that fraction of a cent is multiplied by the large audiences of the Internet (i.e. the world’s population).

This is essentially what the advertising business model already does. But instead of the consumer paying the business directly for the content, the advertiser is essentially paying fractions of a penny to the business to get their ad in front of your eyeballs. Add that up over millions of pageviews and you can see how a business can make a lot of money selling ads. Yes, micro-payments requires a large audience to make good money, but so does the ad model.

There already is a micro-payments model being used today, in-app payments. Most don’t think of in-app payments (think buying levels or upgrades in a game) as a form of micro-payments but it essentially is the same idea. You pay a small amount of money ($0.99 typically) to consume a digital product. The reason in-app payments can exist, despite all the things mentioned above for a transaction so small, is because there is one company (Apple or Google) that processes the transaction. This can be done economically by lumping all users’ transactions together and only paying the fee on that one large transaction.

For digital goods like articles, videos, songs, level upgrades, etc. the micro-payments model makes a lot of sense. The only issue with it is consumer behavior and expectations. We’ve all been trained to believe everything on the Internet is free. So how do you convince someone who has never read any of your posts before to cough up $0.0025 to read your rant on Internet business models? Despite it being a really low amount, I can see why you might hesitate to part with your hard earned 1/4 cent.

The other alternative model that uses cryptocurrencies is investment. Not investment in the speculative investment sense that surrounds a cryptocurrency like Bitcoin (though that is part of it), but investment in the protocol by participation and consumption.

Cryptocurrencies, like other assets, have value. This value all depends on how the market perceives that value. If I created a digital currency today but didn’t tell anyone about it and you couldn’t do anything with it, then it would have no value.

But for digital currencies like Bitcoin, where you can use it to buy goods and transfer funds, it has value. That value is calculated like any other asset on the market, by supply and demand.

Applying this idea to Internet business models can get pretty interesting and complex. But to keep it simple, let’s use Twitter as an example. Imagine if instead of using the ad model like it does now, Twitter instead created its own digital currency, let’s call it Twit. By participating in the Twitter network, you can earn Twits. The more likes or retweets you get on one of your posts, the more Twits you can earn.

Then you can use those Twits to get access to extra features like embedding Tweets, creating moments, or accessing the API. Since it’s a digital currency, in theory you could also use it to buy goods (as long as the seller accepted Twits). Or trade it with someone else to buy more of your preferred currency.

The creators of Twitter (and Twit) could have decided in the beginning to allocate themselves 1,000,000 Twits each. Over time, as Twits rise in value, the value of the founders of Twitter rises, just like any other business.

There are already a few businesses that are starting to test this model out. The most popular amongst these and the closest to the model I walked through above is Steem. Steem is kind of like Reddit 2.0 but is backed by its own digital currency. By participating in the Steem network, you can earn real money. It’s a really interesting idea and one I hope is experimented with more.

There is much more you can do with a digital currency and I am over simplifying a lot but the point is you can create an alternative business model to the advertising model that still keeps the core spirit of the Internet alive but doesn’t have to spam Internet users to survive. I think as the Internet continues to mature and innovate, we’ll see more and more new business models like the ones I’ve outlined above.

In the spirit of this post, I want to try something. If you found this interesting (hey, you made it this far at least) or you just want me to tell everyone I know how awesome you are, send me a small amount of Bitcoin. It can be as little or as much as you want. Thanks!

[1] I am just going to focus on consumer Internet businesses in this post. B2B Internet companies do have a number of different models that seem to work fairly well (i.e. SAAS, Freemium, etc.) and they have the advantage of users who have budgets specifically for spending money on these things.

[2] I am no expert, but I am assuming the monetary costs would be some portion of the combination of the cost for the device you use to access the Internet and the cost you pay to a service provider to hook you up to the Internet.

[3] I don’t remember who said this originally :/

[4] I’m kidding, an app like this doesn’t exist. But if it did, you’d probably debate whether or not it was worth $0.99.

[5] If you want to learn more about cryptocurrencies and the Blockchain, I recommend Googling it. It is constantly changing so it is hard to give any one resource but searching for it will definitely turn up some good results.

[6] A lot of people seem to get tripped up by the feasibility of cryptocurrencies because they say: “no one will ever understand what the value of this coin is” or “the coin is to volatile to be used practically”. But I think they overlook the fact that a cryptocurrency could be used strictly for the transferring of funds between parties. You don’t have to show this to the end user and can instead show their home currency. And you don’t have to hold the cryptocurrency for longer than the time it takes to process the transaction.

Now, I know I am glossing over some things here, but the point is cryptocurrencies for micropayments can be used strictly as a means to transfer funds and nothing more.

What happens to the drivers when automatic driving cars arrive?

I’ve been spending a lot of time thinking about the gig economy lately because of The Gig Saloon, which is trying to help give gig workers more bargaining power in the gig economy. I am really fascinated by the idea of not just services on-demand but also work and income on-demand.

But one thing that keeps bugging me when I think about what the future of the gig economy looks like is what happens when driverless cars arrive?

It seems pretty evident to me that driverless vehicles will one day be the rule, rather than the exception. And that one day is getting pretty close. You can debate about the timing of driverless cars but I don’t think you can debate about the inevitability of them.

The problem with this is that almost all of the current gig economy jobs are driver based. Whether that driver comes to pick you up and drive you to your destination or drives to a restaurant to pick up your order and bring it to you, driving is at the core of gig economy work right now.

That will completely change when driverless cars arrive. Those jobs will no longer be there. I don’t think that means something should be done to prevent or slow the progress of driverless cars. In fact, I think the opposite because of all the benefits society will gain from driverless cars.

But I am curious what will happen to all the people (and there are millions of them currently, not to mention truck drivers as well) that use their vehicle as their main source of income.

Perhaps these jobs will just take another shape. Instead of driving around to deliver services, people will instead deliver services digitally. We can already see this happening with things like Amazon Mechanical Turk or Upwork. It’s not hard to imagine more services like these popping up, especially with the growing need for training AI algorithms.

Another alternative would be to invest in training current workers for the skills of tomorrow. I am 100% for this but I am also realistic and recognize this won’t work for everyone and most likely will take a much longer time frame than a 45 year-old person without those skills has.

Maybe new technologies will unlock new forms of jobs that won’t require humans to be behind a wheel and don’t take a lot of training either. I am not sure exactly what these jobs would be, but nobody thought you’d be able to hire a car from your pocket 10 years ago either.

Unfortunately, I don’t know what the future holds but I do think we should be thinking about what affects it might have and start planning for them today. Maybe the company you’re thinking about starting could utilize a large and eager workforce?

A new project – Sell and buy with peace of mind

I am excited to share that I am working on a new project. For the last year or so I have been trying to figure out what is next for me. In the meantime, that’s meant helping startups build their products and get them to market. I will continue to do that for awhile, but I always knew I would eventually start one of my own again. I am not calling this project a company yet, as I am still testing the waters with the idea, but I do have high hopes.

The idea for the project stems from my own frustrations and problems that I have had with buying and selling used goods. For a long time, I just accepted the frustrations as inevitable. But the more I began to think about it, the more I realized the barriers that exist could be surpassed with a new way of thinking using current technology. So that’s what I am working on.

I wish I could share more about it at this point but for now that’s all I am going to say. I am looking for beta testers and early adopters to try the product out and help shape what it could become. So if that sounds like you, go here to signup. And please share it with others!

P.S. I am also looking for help with design and development. So if you are a designer or engineer and you’re interested in helping build trust between people and solving the problems of buying and selling used goods, reach out to me here: [email protected]!

Second-Order Effects: Apple vs the US Government

As we all find out in our lives, every action has a consequence, and each consequence has its own consequence, and so on. This chain of events is usually referred to as second-order effects. And while the concept is intuitive to us, we often overlook the second-order effects of the decisions we make because it’s easier to think about one decision than the chain of events that are caused once a decision has been made. 

One example of not taking into account the second-order effects of a decision happening right now is the case between Apple and the FBI. On the surface, it’s easy to look at the case as a mere one-off effort by the government to access a terrorist’s iPhone. But what about the second-order effects of that decision?

If Apple concedes and helps the government with it’s request, does that set a precedent and mean every time the government comes to Apple wanting information they have to oblige? Or what about if another country’s government (let’s just say China’s maybe?) asks for information from a user’s iPhone, does Apple now have to answer that request too since it’s already shown to have done it for one government?

What about the effects it will have for overall individual security? If Apple creates this tool for the government and it leaks into a bad actor’s hands (an inevitable scenario), now that bad actor has the ability to do whatever he/she wants with what’s on your iPhone. You would no longer feel secure about what you put on your iPhone because anyone could have access to it.

And finally, an increasing likely scenario that could take place is someone like Donald Trump becomes in charge of the US government. By making Apple concede to the government’s request now, means someone like Trump will be in possession of that tool and who knows how he would wield that power. A very scary scenario indeed.

Always be aware of the second-order effects for the choices you make.

Planes, trains, and ketchup

Full disclosure: I am an investor in Berkshire Hathaway.

Yesterday, Berkshire Hathaway released it’s 2015 Annual Report to the public. The entire report is 120 pages long but the real gem is in the beginning, which is Warren Buffett’s letter to shareholders. As it has been for the last 50 years, every annual report includes this letter from Buffett, which is always a witty and insightful read. This year’s letter was no different.

All public companies are required by law to release an annual report each year. And many of them also include a letter to their shareholders. What separates Buffett’s letter is his ability to write and think clearly about topics that often get complicated by the popular media. For instance, one of the topics Buffett talks a lot about, for obvious reasons, is the stock market.

If you were to turn on CNBC right now and listen to it for 10 minutes, I would take a bet that unless you’re an investment banker, most of it is hogwash. But Buffett is able to take a complicated system and break it down into an analogy that elementary school students can understand: in the short-term, the stock market is a voting machine and in the long-term, it’s a weighing machine. By using this simple analogy he is able to explain to the common person why you should pay little attention to the market day to day but instead be interested in what it has to say over the course of a few years.

Another quality of the Berkshire letter that goes unmatched is Buffett’s honesty. He doesn’t make excuses like most managers and investors do when they miss their numbers or try and cover up loses with complicated jargon or fancy accounting. Instead, he’s upfront about his mistakes and even explains the quirks of accounting despite it not being in his own interest. He even sometimes manages to do so by putting a smile on your face with his wit.

Another impressive part of the letter is it doesn’t avoid the messier subjects like employee job-loss. In this year’s letter Buffett addresses the growing uncertainty many Americans today have with future work prospectus in the section Productivity and Prosperity. He does so by explaining the business side of the equation but also recognizes the struggle of the worker side. In an industry that sometimes treats people like numbers on a sheet, it’s often refreshing to hear one of the country’s largest employers recognize the struggle of the individual worker.

There are many other lessons and tidbits to get out of any Berkshire Hathaway annual letter, but I’ll leave the rest to you. Even if you have no interest in business, the letter to shareholders is an insightful and fun read.

I hope one day I have a company that is as well and honestly run as Berkshire Hathaway is by Buffett and Munger.

If you ended up reading this year’s Berkshire letter and want more, visit the Berkshire Hathaway website or pick up this book of shareholder letters.

Also unfortunately, this year I am unable to attend the annual shareholder’s meeting in Omaha. So if you are interested in going to the meeting reach out to me for tickets. As someone who’s gone to it before, it’s definitely worth checking out!

Thoughts and Learnings from Capitalism’s Biggest Event

Once a year Berkshire Hathaway, the world’s fifth largest company, holds its annual shareholders meeting in Omaha, Nebraska. Normally, annual meetings are attended by no more than a couple hundred people even at large companies. The crowd that comes to Omaha, however, is usually in the tens of thousands. It’s often referred to as the ‘Woodstock of Capitalism’ because it’s basically an event that draws people from all over the world that overwhelming share an interest in money and how to make more of it.

As a shareholder and a Buffett/Munger fan, I decided to go to this year’s meeting along with 40,000 shareholders, fans, and capitalism devotees. I mostly went out of curiosity but also to see if there was even more I could learn from Berkshire’s Chairman and Vice Chairman. It’s hard to find two people that have a more rational way of thinking than Warren Buffett and Charlie Munger.

The main attraction of the event is the Q&A portion where shareholders, along with top financial journalist, get to ask Buffett and Munger any question they want. It’s such a popular portion that this year’s meeting had two three hour sessions with a lunch break in between.

There were lots of interesting questions and topics touched on but I wanted to share what I thought were the best takeaways from two of the greatest minds (business or otherwise) currently alive:

Culture is Everything

Berkshire Hathaway is known to buy companies and then largely leave them completely alone. This often makes companies more willing to sell to them as opposed to someone else, you get to keep doing things exactly how you were before but now have access to Berkshire Hathaway resources. For the sixth largest company in the US, they have a very small corporate office, only 25 people.

All this makes working under Buffett very attractive. There were multiple times when culture came up as a topic at the meeting. Some wanted to know a magic formula that was the key to their success and some just wanted to hear what kind of attention Berkshire places on culture. Buffett noted how important culture was, once actually saying “culture is everything”, but he also said that they didn’t have many tips to give the crowd. This was because he emphasised how culture comes from the top. As the CEO, everything starts with you. Your employees look to you for what’s acceptable and how they should carry themselves. It also matters more about what you do and not what you say.

He went on to admit that there will always be some bad apples, especially in a company the size of Berkshire. But if you create a company culture where doing something questionable is looked down upon, your employees will report suspicious activity and cut it off at the head instead of turning a blind eye and making matters worse.

Culture is the code of conduct at the core of a company

It was interesting to hear how valuable culture is to Buffett and Munger. Culture is sometimes written off as a trivial matter or something that just refers to having a ping pong table and beer in the office. But it’s much more important than that. Culture is the code of conduct at the core of a company, which is something that is very hard to change.

It’s also notable how much a CEO needs to lead by example. Everyone in the company is watching what the CEO does so he or she has a responsibility to act the way they want the rest of the company to act. Culture is a direct reflection of the CEO. So if you’re the CEO of a company and you don’t like the company’s culture, change your own behavior and lead by example.

Companies Need to be Adaptable

The subject of adaptability came up a few times in answers to shareholder questions. The first time Buffett talked about a company’s need to adapt was when discussing online car sales and its effects on car dealerships. The shareholder asked a question about the recent acquisition of the Van Tuyl Group and how they might be addressing the rise of purchasing a car online. While Buffett largely felt that a large purchase, such as a car, would generally require a negotiation and therefore not be a great target for online sales, he did recognize the need for a company to adapt to the desires of the customer. He stressed that while he didn’t think the market will move in that direction, he did recognize that if it did his company will make sure they adapt.

Towards the end of the Q&A, Buffett mentioned what he really liked about American Express, its adaptability. He told how time and time again, American Express has been able to adapt to the changing market and stay a terrific business. Buffett talked about American Express’s history and how they actually started out as an express mail business and soon after added a money order business because they saw the need to send money around the country as well as packages. He compared that to what they have been doing more recently, adapting to the quickly changing world of technology by continuing to be at the cutting edge with mobile payments and online financial services.

Berkshire Hathaway itself is also a lesson on adaptability. When Buffett gained control of the company in 1962, it was a struggling textile manufacturing company. Over the years, Buffett realized the textile industry was a poor one to be in so he started buying other types of businesses like insurance and local stores. Today’s Berkshire Hathaway looks very different than the one he started with in 1962.

Instead of jamming our products down people’s throats, we should better understand and adapt to their needs.

I think this is especially important to note for lots of new companies today, where they often want the world to adapt to their idea instead of the other way around. That’s why you hear about companies trying to educate their users on how to use their product in the ‘correct’ way. Instead of jamming our products down people’s throats, we should better understand and adapt to their needs.

The Power of Incentives

Everyone knows from Economics 101 that human beings respond to incentives, yet it’s shocking how little we think about them when it comes to our everyday lives. When discussing how big scandals take place at companies, Charlie Munger showed how powerful incentives can be.

He explained that the root of the problems can usually be explained by incentives that encourage people to misreport things. This is especially true in a employee-boss relationship. Often the employee, not wanting to disappoint his or her boss, reports numbers better than they are in actuality. The boss also wants to report the better numbers because they often have incentives to impress shareholders so they go along with the false report. This creates a downward spiral which leads to much bigger issues in the long term. Munger emphasized the importance in controlling incentives so you get the right outcome.

Understand human behavior when you are running a business

This is a more difficult subject than it seems on the surface because of the web that incentives can create. For example, an incentive for one person that is put in place to have a positive outcome might actually produce a negative incentive for someone else. It can be tricky to put the proper incentives in place at a company but it is also important. That’s why Munger encouraged the audience to understand human behavior when you are running a business.

A Strong Brand is Powerful

Throughout the Q&A session the power of brands came up over and over. It was apparent how important brands are to Buffett and Munger when evaluating businesses. One advantage of a strong brand is the ability to increase prices. Strong brands have customer loyalty and therefore aren’t subject to becoming a commodity business.

It’s often hard to understand how one candy store can distinguish itself from all the others but the way to do it is with a strong brand. That’s why See’s Candy has been so successful for Berkshire Hathaway. A strong brand can raise prices during periods of inflation and not lose as much business as it competitors because customers are loyal to the brand and are willing to pay more for it rather than buy a cheaper unfamiliar product.

“If you want to be unsuccessful in life, be unreliable” — Charlie Munger

A strong brand is not only important for a business, it’s also important for an individual. One young shareholder asked a question about what qualities Warren Buffett and Charlie Munger would recommend to someone trying to be like them. In their response, both men stressed the importance of having a great reputation. In classic Munger form, he said “if you want to be unsuccessful in life, be unreliable”. The importance of brand is undervalued very often in both business and life.

Systems Matter

China was also a popular topic of discussion at the meeting. There were many shareholders who were either from China or who had a lot of interest in what was happening in China. I thought the most interesting point made about China was by Mr. Munger. He compared China and the United States from about 1750 to 1980. During those 230 years, both countries had vastly different results. One became the world’s number one power and largest economy and the other was pretty much nonexistent at the global scale. This despite both countries having equally talented people and China with a much larger population.

Then almost out of nowhere, China exploded on to the world stage and is now amongst the world’s greatest powers and economies and only continuing to rise. This had never happened before in human history, so how could this be?

He explained that in those 230 years America had pretty much figured out a system that was able to maximize it’s citizen’s potential where China had not. But as soon as China put that system in place, it shot off like a rocket. You can say what you want about capitalism but China’s history over the last 250 years is a really strong case that it is a lot better at unlocking human potential than any other systems previously tried.

If you found any of this interesting or want to learn more from the minds of Buffett and Munger I highly recommend you check out the following:

Why it’s probably a good thing to have a stupid or small idea

There’s been a lot of responses lately in the tech community to the popular sentiment that people aren’t working on challenging enough ideas. Marc Andressen had a tweetstorm on the subject which spurred a conversation on the topic. Instead of regurgitating his argument in this post, I want to dive into why it’s probably a good thing if people tell you your idea is stupid or small.

Lately, I have been reading Geoffrey Moore’s Crossing the Chasm, which is a book about how to market and sell disruptive technology to mainstream customers. It’s a great book to read for anyone in the industry but the main takeaway is the way to capture mass adoption is to start small and focused. While reading it, I couldn’t help but think of Clayton Christensen’s best seller Innovator’s Dilemma. The Innovator’s Dilemma was about the exact same theme: disruptive companies almost always start in a small, niche market.

What does this have to do with stupid and small ideas? Many ideas seem stupid to you because they’re not meant for you. When eBay first started out it was a website to auction off Pez dispensers. If you weren’t selling Pez dispensers at the time, you would’ve thought this was a stupid idea. Who would ever want to buy a Pez dispenser? Not only would you have thought the idea stupid but you might naturally think the founders had small ambitions, “Okay cool, you made an auction website but you’re only selling Pez dispensers and that will hardly change the world”.

This is a common theme amongst some of the most successful and disruptive technology companies in the last few decades. A website that helps Harvard students share class schedules? Could you think of a less important idea? Online bookstore site? There are libraries and bookstores, who would want to buy books online? That’s stupid and small thinking.

Do you see the pattern here? So the next time anyone tells you your idea is stupid, you should feel really encouraged. You’re probably onto something.

The two books mentioned above explain the reason for the high correlation of success and stupid ideas. By going after niche and small markets, potential competitors often feel the same way as the media. They think the ideas are too stupid or small and therefore don’t pursue them. What they aren’t aware of is all the while your learning invaluable lessons that will help take you beyond the small, niche markets to much larger ones. Often the momentum alone will catapult a company to other larger markets. It’s difficult to compete with a company when they have momentum going their way.

I have also seen and felt this in my own startups. It’s often tempting to go after everyone. You think, “who cares about who we sell to, we just need to make sales”. This couldn’t be further from the truth and many times has the opposite effect. By pursuing everyone, you end up losing focus and selling to no one. Paul Graham offers another way of thinking about this, concentrate on making a select few customers love you. If you do this, it’s surprising how easy it will be to get another group of customers to love you.

Moral of the story: never be discouraged if someone tells you your idea is stupid, and instead of looking for the next big idea, look for a small idea that you can solve.