Andy Zhang

Startup Battleship

2012-12-06T21:40:00.002-08:00

Startup management is like playing Battleship. It's a disciplined series of targeted 'spray-and pray' assaults on the market. It's finding the balance between analysis paralysis and blind wandering.

If you hit, you focus fire on that area and figure out where it leads. If you don't hit, try other things, rather than vacillating between thumb-twiddling and overthinking. Your entire purpose should be to figure out if you hit (actually very non-trivial), and gain quick insight into the 'why.'

In Battleship, I like playing the odds (people tend to put their ships in certain areas...particularly the ones that think they're clever) and validating whether I was right. What's your system for playing battleship?

Entrepreneurial Markets - Chicken/Egg

2012-12-06T21:30:00.001-08:00

Tech entrepreneurial markets suffer from an interesting chicken/egg problem.

Most regional accelerators believe that, by simply providing an ecosystem, entrepreneurs will come flocking and will stick around. The fact of the matter is, entrepreneurs only stick around when there are credible, 'senior' entrepreneurs that are in the area and available.

Adding support systems (marketing gurus, SEO guys, dev shops) doesn't really solve this problem. If anything, it exacerbates it by peppering the young entrepreneur with constant distractions.

What gets senior entrepreneurs to stick around? Investors. Quality ones that have experience with early stage tech startups. But who typically becomes those?

Maybe it's time to start drawing entrepreneurs back to their hometowns (undoubtedly, not all of them are from SF) and getting them to invest and support local entrepreneurs. Probably a better idea than spawning hundreds of accelerators a year and playing startup spaghetti toss.

Mature vs. Epitomized Markets

2012-09-25T22:06:00.001-07:00

Many would argue against this dichotomy that I propose. I concede that the line can be blurry, but I insist that one can only make an error in 1 direction. You can never mistake an epitomized market for a mature one, but you can probably mistake a mature market for an epitomized one on occasion. Here are explanations below.

Epitomized Markets

On one hand, you have an epitomized market. These are markets where the product has developed to a point where it can't really get any better. I'd argue that the search engine market is one example (and many who are more knowledgeable in this area will probably disagree). Both Google and Bing look amazing and work fantastically well. Search is also heavily concentrated by those 2, and they've largely saturated the addressable base. Sure, DDG (duckduckgo.com) may be better than Google in certain ways, but the top search players will likely trade users back and forth and in general maintain an unassailable position in terms of attracting talent and delivering sustainable innovation.

Mature Markets

On the other hand, you have a mature market. These are markets where product innovation and saturation seem to have hit a plateau. The addressable base is clearly larger than currently served, and innovation seems to trail behind analogous industries. I'd argue that the online dating industry is one example. Match.com and eHarmony look like shit and their product behaves like shit. However, there's been little innovation in the space since 1995, and due to rollups, the industry is moderately concentrated, with the top four players owning around 50% of the market.

Mature markets are interesting because they're more subject to disruption than epitomized markets.
New players on the outskirts, such as HowAboutWe.com, as well as niche-focused sites, have taken bites out of what should have been growth on the part of the giants.

My conclusion is that dating is mature, and needs to be 'epitomized' or disrupted. This is definitely a self-serving post; I am the Cofounder/CEO of WooWho, and we're working on epitomizing dating for the busy professional who doesn't have time to mess about with the unnecessary frills of traditional online dating.

Passion v. Principle

2012-03-30T13:11:00.000-07:00

Seeing all these talks on entrepreneurial passion got me thinking a bit about why I do what I do. Lots of people pursue what they do because they love doing it. But there's another reason to pursue something; because you believe in that thing as a matter of principle. I think passion is about the 'how' and the 'what,' whereas principle is about the 'why.' See this TED talk.

I think about my off-and-on pursuit of the music industry. I honestly don't love the music industry. I think it's run by a bunch of hacks who don't know an A-flat from their assholes, use ridiculous and esoteric accountancy methods, and take IP protection as a given (which I'm strongly against).

The world is a better place with music. It is a better place when more people have access to music. Music connects people in ways that are far less destructive than religion or any moralist associations. Music helps us see beauty in a world that we typically think crazy and ugly. I may not care for the music industry, but I want to make it work, because I believe in music's need to be commercialized and disseminated.

You can fall in and out of love. After a month, a project that you have serious passion for may seem stale. I've been out of love with the music industry for awhile, having been disillusioned by the 'how,' the 'what,' and especially the 'who.' What keeps me coming back is the 'why,' and this is why I say that pursuing something out of principle is infinitely stronger than pursuing a passion.

Access v. Ownership

2012-03-30T12:53:00.000-07:00

I struggle to understand the value of media ownership. I may be a weirdo, but I personally hate owning things. I'd rather have the money, which gives me the option to consume more of other things.

I suspect this has to do with the West's obsession with ownership and private property. It's this nonsensical idea that surrounding yourself with more belongings somehow makes you happier, more effective, or more like to survive. I guess if you wanted the latter, buying lots of guns does make sense.

What's so bad about paying for access? Yes, when the subscription stops, so does the music. But if you decided not to pay for the subscription, haven't you indicated that the music isn't worth it? Sure, there's no conceivable way you'd listen to every one of the 10M tracks on a music service. But do you really only listen to under 120 different songs per year ($120 being the cost of buying those tracks a la carte, versus a $10/mo subscription).

I have a friend who has no taste in music, and admits to it. He doesn't care about discovery; he only wants to listen to what everyone else is listening to at the time. He set up a bot to download (ahem, pirate) the billboard top 40 every week and create a playlist. Assuming 80% overlap week over week, that's still 51*8 + 40, or 448 songs that he wants access to. That equates to a $38/mo subscription, if he actually paid for the music. And they're all throwaways!

Spotify seems to have roughly gotten this right, whereas Google Play Music is still working out the licensing kinks. I'm anxious to see where the industry goes with this.

God

2012-03-30T12:40:00.002-07:00

I'm not a religious person, although many have tried to push me into it.

I argue that my response, "I answer only to the market," is in fact deeply spiritual. If God is a clockmaker, then Darwinist principles and market-driven society are the right answer. Clearly, God intended us to respond to a set of incentives in pursuit of our personal goals. God did not intend us to fritter our time (in fact the most scarce resource!) in serving an absent deity.

If the response is, "Well, God is in the details, so he must be present," I'm certain of my answer to that as well. Nature is full of recursion. Recursion is beautiful and self-propagating. In the face of recursion, things are still generally stochastic, rather than deterministic. Recursion is God, but not by intelligent design. Therefore, God is not omnipresent, nor does he care what we do. I'm definitely not worshiping him without any real incentive, as grateful as I am for my existence.

My conclusion is not that we should live without morality. Rather, its that morality falls into the "personal goals" category, and should not determine how we structure society. But then again, I needn't worry about how we structure society, need I? After all, the Darwinist laws of nature suggest that we'll fall into the right structure as a matter of course.

Oldies but goodies | Keeping only Self-Generated Content (SGC)

2012-02-23T16:31:00.001-08:00

As part of my efforts to keep copies of only self-generated content and necessarily application files locally, I went through my local documents and found some cool oldies that are worth sharing and keeping. Rather than keeping an actual copy, I've decided to house them in "transactive memory," meaning that I'm just going to post them as links. I got a lot of these docs in actual Word doc format, so I can't be sure that the 1st Google search yielded the original source. Enjoy!

http://www.lifemastering.com/en/syltetoy_og_bayer.html

http://www.wocka.com/4111.html

http://www.sevenstring.org/forum/general-music-discussion/22849-metal-styles-explained-through-dragon-princess-story.html

Grad School Education

2012-02-15T22:59:00.001-08:00

Going through docs in due diligence room now, and realizing that the Structuring Venture Capital/Private Equity class at Univ of Chicago Law was unbelievably helpful and succinct. Credit should go to the Asset Based Finance course as well, for addressing the more obtuse risk allocation issues. All of this feels completely manageable and makes total sense with real company data in an industry that I (somewhat) understand. Thank you law school!

Even though I'm not a big fan of accounting, I'm really glad I took Financial Statement Analysis at Chicago Booth. Thanks to Steven Chen for convincing me. What would otherwise look like gibberish on a spreadsheet actually makes sense. To top it off, I got lucky and chose a great capstone course, Strategic Investment Decisions. No amount of obfuscation in modeling can confuse me, or at least I tell myself that. Thank you Booth!

Thank you grad school! Now for the part where I can claim it paid for itself....

SOPA | More IP Reg

2012-02-03T18:25:00.000-08:00

I wanted to follow up on my PIPA/SOPA post by saying one more thing, inspired by this post from the Truth on the Market blog: http://truthonthemarket.com/2012/01/22/sopa-incentives-and-efficiency/. To summarize that post, policymakers need only concerned with incentives created by prospective rights.

The lifetime of any piece of innovation ("the investment window," as I call it) is decreasing because technology is becoming obsolete more quickly. The investment window starts with a "monopoly period" for the first mover. The length of this monopoly period clearly affects the economic returns to the first mover. Good policy should never artificially increase this monopoly period more than necessary to incentivize investment. Here are 2 scenarios to illustrate:

The first type of scenario involves prospective entrants in a nascent space. Granting a longer monopoly increases the expected returns, causing over-investment in front-end R&D and under-investment in back-end competition and incremental innovation.

The second type of scenario involves prospective entrants seeking to provide incremental innovation in a mature space. Granting a longer monopoly decreases the expected returns to those entrants, causing under-investment in competitive innovation. In other words, increasing the monopoly period crowds entrants out of the investment window.

An optimal level of investment results from granting market-level returns to innovation by setting the right monopoly period for a given investment window. There's some degree of circularity here; the appropriate hurdle rate is determined in part by the level of IP protection, but it takes the right level of IP protection to generate the right hurdle rate.

The Unfortunate Android Arms Race

2011-12-23T18:16:00.000-08:00

Android seems to be competing on the following:

Screen Size
Processing Power
Camera Pixel Density
Carrier Bloat
Manufacturer Bloat

Have consumers really indicated that those things matter? They all seem like "search good" traits. That is, upon first inspection, having tons of 'features' in the form of carrier bloat or CPU clock speed is impressive. Then, you realize that the CPU speed is irrelevant in light of RAM being a bottleneck, which only happened because you were running 60 AT&T/Samsung processes. From an "experience good" perspective, the phone sucks. On screen size, I defer to Dustin Curtis. And articles like this.

One might bring up the Galaxy Note as a counterexample. Well, it doesn't fit in your pocket, so it's not a damn phone. I argue that the Galaxy note wins because its a smaller tablet with a data connection. Those two things are real advantages in the mobile world. Or am I just crazy?

If you read this article: Freakonomics blog post about harmful arms races, you might note that the Android arms race is the same as the bull elk situation. For someone looking at an Android phone, it might make sense to compete with each other on "search good" traits. But bring on the consumer love story with the iPhone, and the elk bull gets slaughtered.

I guess the organic (pun intended) answer has been to just create more elk bulls?

The Price of Lawyers

2011-11-16T21:12:00.001-08:00

As a JD, I feel like I've earned the right to rip on lawyers and the legal services industry a bit, and I think this article is timely because this is a hot topic in the business world. Because I went to Chicago, I consider legal services economically similar to an insurance-style investment. It's an insurance-type investment in that you pay less for a lawyer now to avoid having to pay more later (another lawyer, court-awarded damages, settlement).

My proposition is simple: pay for a lawyer when the cost is justified. The calculation isn't conceptually difficult, but the real world complexities make it somewhat subjective. In my narrowly defined world, lawyers exist to prevent you from having to pay or lose lots of money or valuable assets upon the occurrence of certain events; legal services insure you against the probabilistic losses from lawsuits. When I say probabilistic, I mean that the loss is (some Amount of Damage) * (some Probability of Damage). Law students know this as the Hand Formula.

Here's a simple example. Assume that in any given year in your business, there is a 0.1% chance of an accident resulting in a $1 million lawsuit, and a 99.9% chance of no accidents. The probabilistic loss is $1m * 0.1% = $1,000. In that closed universe, I should pay up to $1,000 to insure against a $1,000 probabilistic loss, ignoring discounting for simplicity. If a lawyer bills $200/hr, which is pretty standard, and he/she takes 6 hours to draft the agreement that ABSOLUTELY shields your business from this contingent liability, the lawyer's cost is $1200. Given that the probabilistic loss, $1000, is less than the cost to prevent that loss, $1200, you should decide against using the lawyer's services as insurance.

Use your imagination to introduce complexity. Should you decide not to contract around the issue, you can still hire a lawyer to fight the case should it arise. You can decide not to fight the case and pay $1 million, or pay the lawyer $200/hr to reduce that number. Moreover, most agreements do not provide an absolute shield from liability or loss. Cases are decided by judges, who are human and subjective. You could be paying $1200 for only a 50% reduction in a $1000 probabilistic loss, plus $200/hr to fight it.

The big wrench in this model is the concept of limited liability. Limited liability means that the owners of a company are not liable for the debts of the company. Let's say your $1m company is 50% equity and 50% debt. As the sole shareholder, you would only stand to lose $500k in the same $1m lawsuit, since the rest would drive the company into bankruptcy but leave you unaffected as an owner. A (0.1% chance) of losing ($500,000) is only $500. Would you pay $1200 for a 100% reduction in a $500 probabilistic loss? Worse, if the services only resulted in a 50% reduction, it wouldn't affect your personal bottom line at all, since the company would still owe $500,000, wiping out your equity. Would you pay anything for that?

My goal in writing this article was not to belittle the role or importance of lawyers in business. The numbers may have been made up, but they're plausible. Fear and risk aversion are strong motivators for seeking insurance, so business owners ought to fight those impulses, judiciously employing legal services after at least some quantitative analysis. For example, if you want to avoid betting your own farm, you could hire a lawyer to ensure that you have the proper limited liability structure. This limits your losses to your personal investment in the company, in case it gets sued into oblivion like illustrated above.

There are more advanced and interesting frameworks for analyzing corporate structures, which I'll save for another article. The limited liability structure mentioned above is an example of a real option, which is the ability to take the good states of the world (no lawsuit) while throwing away the bad ones (lawsuit bankrupts company). The point of my article is simple: don't hire a lawyer just because you're scared or clueless. Do the research, use wikipedia if you must, like real lawyers do anyway, and do the math!

PIPA/SOPA

2011-11-13T14:24:00.001-08:00

It occurred to me that my rather unpatriotic-sounding rant on G+ in response to Fred Wilson's post would probably be the first of many nonpublic posts that I would regret. In order to hold myself to the spirit of "saying what you mean without regrets," I'm opting to leave it up and instead clarify my argument. As a caveat, I haven't done any research into academic papers on this topic; this is "DRE."

I stand against PIPA/SOPA because I think it decreases social welfare. Social welfare is in large part a function of innovation, which is in large part a function of the level of protection innovation receives in the form of monopoly power. We renamed this monopoly power into "intellectual property rights", even though true free market economics dictates that there is no such thing.

The government-granted monopoly power creates a strong enough incentive to innovate in the first place, outweighing the loss of having a monopolist. We give someone a monopoly in an idea they create, and we are better off as a society for having that idea. When we give someone too much of a monopoly, we start to preclude other innovative ideas coming to market. In essence, the government is trading between the innovation generated by giving incumbents a monopoly and the innovation generated by entrants in competition with incumbents.

In order to simplify, I'm going to assume that maximizing innovation also maximizes welfare, because private ordering solutions like the capital markets help us figure out the right level of innovation, given government allocations. You get the following model:

PIPA/SOPA moves us too far to the right of that curve by granting incumbents stronger intellectual property rights at the expense of the innovation. My qualitative impression is that entrants are opting for "Blue Ocean" markets rather than innovating on top of existing content because they are pricing in the high likelihood of a lawsuit. PIPA/SOPA will exacerbate this, leading to aging legacy industries with no incentive (e.g. threat of piracy) to improve in response to changing market demand.

Blogging

2011-11-13T11:38:00.000-08:00

It was suggested by many that I start blogging. For the longest time, I didn't take this suggestion to heart, out of fear that I would regret publicizing my impulsive thoughts and ideas soon after posting them. I also wasn't sure if my ideas were worth publicizing to begin with.

I finally accepted the saying: if you don't want to share your ideas with the public, they probably weren't good enough to begin with. That being said, prepare to be amazed, bored, inspired, and offended. Looking back at my Google+ posts, I'm guessing it will be mostly the fourth. Speaking of Google+, I will try to share these posts with G+ friends, and maybe I'll get a Twitter account (finally!) as well for that purpose.