• “This is the best conference I’ve ever attended. Nice work!!!”
• “BoS provides excellent content that can be applied immediately, the forum is the best for networking with peers who have the same ideas and problems”
• “Epic”
• “The opportunity ever software person should take to see what they do in a totally new way”
• “This is a conference where the content is as great as the people”
• “Great theme, keep it up, make it just a little bit better every year”
• “Awesomeness OD!”
• “One of the best avenues out there to understanding to create great software companies, kudos!!”
• “Injecting inspiration back into your business.”
• “If you’re running a software business you need to be at this conference”
• “You have given me what I need to finally get my startup moving. “
• “Head exploded”
• “BoS is a gathering of engaged like minded people who freely share ideas to encourage innovation & promote success in the software industry”
• “Thought provoking”
• “Very rare opportunity to be amongst my people, wonderful break from day to day operations to think big thoughts”
• “How to make happy customers”
• “Like TED but for software entrepreneurs”
• “I’m not worried about my sales funnel, I’m worried about this new idea funnel I have to manage thx to this conference”
• “Inspirational to do list”
• “Thought provoking, high paced talks by people who have actually done real sh*t, attended by interesting people your happy to meet at breakfast – stuff”
• “The highest prize I can give this conference is that I wasn’t ready for it to end… I am still hungry for more!”
• “Excellent opportunity to sit back away from day to day operations and share others experience & reflect on that.”
• “The place to be for people who run small, growing, sustainable, software businesses”
• “A recharging and reinvigorating for my business.”
• “I signed up based on the speakers and content. I leave w/the inspiration to build better software and engage w/ customers. I will be back next year.”
• “Mindblowing and inspirational talks, now #JFDI”
• “Fantastic speakers combined w/networking makes for great learning environment, lots of stimulating content & thought provoking conversations.”
• “One of the best decisions I ever made was to come to BoS”
• “Phenomenal, the best conference I’ve attended, with the best attendees.”
• “It makes you think the rest is up to you”
• “Disconnect from work to connect with people”
• “An avalanche of actionable knowledge”
• “If you’re hungry for stories, BoS is where to go”
• “At tech conferences, the best I might walk away with is a new technology or tool to help my business. At Business of Software, I walk away with ideas & actions that will fundamentally change the way that I approach my work”
• “Great talks. Great people. Fantastic opportunities to exchange experiences”
• “The conference is an amazing global community of passionate entrepreneurs willing to share their experiences and capitalize on the knowledge of the pioneers and gurus who have preceeded them.”
• “How about two words? Entrepreneur Recharge”
• “The smartest people in the business presenting their wisdom, humbly and genuinely. Just awesome!”
• “Useful context switch”
• “Best conference I”ve ever attended”
• “Excellent speakers plus really smart attendees = incredible conference”
• “Spa for nerds”
• “Mandatory attendance if you’re serious about building a software business indispensible advice and inspiration.”
• “Highest quality sessions w/actionable advice of any conferece”
• “Good, interesting ideas to use in my business”
• “We have been searching for a conference or association that supports the startup commercialization and growth of software business. I have finally found exactly what we and other ISV’s need.”
• “The forum to talk with others passionate about improving software and making the world a better place”
• “All the ideas I need to keep improving for the next 12 months”
• “A great experience… not just the speakers but the pure connections are phenomenal”
• “Insanely great software (and business) conference “nuff said!”“
• “Honestly? Senior management at Redgate has been asking me “what do you want to do?”for the past 2 years and this conference has been part of the ________ that answered that question.”
• “The networking opportunities at times equal or outweigh the incredible presentations and speakers in terms of value to a start up or existing entrepreneur”
• “Another awesome yearat BOS. It’s like an annual shot I the arm to get me super energized about my industry”
• “The 24 hours long I,500 mile drive and 3 flights, was totally worth it! I would do it again without thinking!”
• “The only difference between the speakers & the audience to see is how eloquently they speak to a crowd.”
• “Great content. Great attitude.”
• “A must for any exec in the software business”
• “Fantastic! Inspiring! The only problem is that I know I still had a lot to do, now I have to do even more, but with some great guidelines.”
• “Excellent organization, content and speakers, good enough to make me fill out one of these cards and that makes good”
• “If you’re thinking about going to #BOS2012 #JFDI”
• “Get the push to get data driven and learn consumer psychology. But the awesomeness was to get pumped up that what I’m doing is on the right track and small software businesses can make the world suck less”
• “Great minds, good intentions, great inspiration from real people in software businesses.”
• “TED for the real part of the software industry”
• “Like an eating contest, except with ideas. Awesome! Amazing community, but the key is to DO!”
• “Nerds learning how to do business with other human beings”
• “Opportunity to think differently. Think of the possibilities.”
• “Big ideas, need to change thinking process and apply to our business”
• “An avalanche of thought provoking, insightful mind food. Very humbling.”
• “Continues to be the single best “business” “experience” I have each year. Outstanding!”

Coding is the easiest part!

If you think your ability to code up a new web app in the course of a week-end is your ticket to startup success, think again. Soon you will realize that coding is the easiest (and most fun) part of your job.

Building and growing a business is HARD, and filled with, “what the…?”, moments.

In this talk I will talk about a number of strange things that happened to me in the 4 years of bootstrapping Balsamiq into a global, multi-million-dollar tiny little company. Lots of quick, direct and immediately applicable stories that will save you tons of time and frustration when they happen to you.

If you have been at the sharp, painful end of a growing business, what is the one thing that you wished you knew before you started?

Tobias is CEO and co-founder of Shopify, the marquee shopping cart system of the e-commerce industry. As a programmer Tobias has served on the core team of the Ruby on Railsframework and has created many popular open source libraries such as the Typo weblog engine, Liquid and Active Merchant. He maintains a popular tech weblog at http://blog.leetsoft.com/.

Watch the video or you can see a full transcript of the talk below.

Tobias Lutke

Music, (Applause)…

Thank you, so let’s see, I just got this. I have no idea where to click, hey, that looks, that looks like it looks. Alright, so, this is a little bit about me. Um I am originally from Germany. I moved to um Canada about eight, nine years ago. And, I’m really I’m really a programmer, through and through. I, in fact, dropped, dropped out of high school to focus more on programming and figured that that is the one thing and the only thing I will be doing for the rest of my life and that was totally okay because I really, really do love that. Now where was I going with that? So, the funny thing is, so I came to Canada and then, I started a business which broke but I closed and later on I started another business which I’m still doing and the business is the one I am talking about here today. By way, the funny thing is, so, I mean, what a tough act to follow, what a fantastic day of talks. I think this is a just absolutely an amazing conference. And I love some of the, you know, humility which was here. Where we have people who will go her and say, “I’m a bit nervous, I’m not a professional speaker, and, so bear with me” and they will go on to be like amazing professional speakers (speaker giggles) so, we’ll see how I’m doing on it.

Okay, so, Shopify. Shopify is the easiest way to create scalable and beautiful online stores. And, obviously, this is one of our sentences, and, especially after we talked about how to be honest, I went back to my slides and said “okay, is this still something I can say?” And, (speaker giggles) but as each sentences go you know that’s there’s word processing, I mean, everyone tries to get at these things, you know everyone tries to, you know, can’t we put a platform in, like they are really applaud form as well. And, then people use us for their CRM systems and CMS and stuff like, how can we work this thing. Now, the point is, you have to have one of those sentences which really is going to you know, guide you through these times where you just have to say no to features. And you know, ideally, it kind of describes about why you initially even went ahead to build the business.

So, at, this is sort of how it starts. You know, this is very much, as Jeff puts it. This is “hot SAS”, like you go to this website, you click the big green button, and then in a couple of minutes you end up in different online store. This is for retailers, this is for people who have physical ship of goods. And they set this up and they are up and running. So, one of my favorite examples is a company called Dodocase. It started with us in, just last year, just beginning of last year, really, really recently. In fact, at the time they Had this contest running, They were trying to find who can build the biggest business in this shortest time span and that’s how they got signed up. Then they built this beautiful store and I can’t really give this justice so here is a really neat video here. (VIDEO)

How cool is that? So, it’s easy to miss this but they said, they have projected revenue of $4 million. That was their first year in business and spoiler: they actually beat that. It’s an absolutely incredible business and the formula here it’s rather simple. I mean, clearly they have great product. I mean, what they’ve done is just something, which, you just have to feel good about. I talked to Greg recently and he told me the story that when they started and came up with this idea, they wanted to talk to actual book binders. And this is San Francisco. San Francisco actually has a guild of book binders. Most places don’t have guilds. Like, I mean, how cool is that to begin with? (laughter) But the problem was the guild only had two people binding books anymore so those are the only two people in all of San Francisco that are actually actively doing this. So, they met with both of them and they described what they wanted to do and they got this initial sort of almost fliers made but they got them bound. It looked sort of like just a piece of paper but it looked like the back of a moldskin typed on, and it was sort of showing what these cases will be like and they will go around during the time of the iPad launch to hand that to all the people waiting in line and that was how they got their initial customers. The amazing thing about this is, now they have 40 full time book binders in San Fransisco again. So, all these guys they called, you know, their daughters and nieces like that, extended family to come back to San Fransisco going back into the trade, people can make for retirement so on and so on. They’ve actually created something amazing over there. And this is the, and of course, timing was a big component when it was launched, I mean this is what entrepreneurship is all about. So these things combine to something we call ‘critical success’. And,  this is what we are trying to enable. So, there are lots more of these stores and this is the last slide of our virtual company.

For more context, we started in 2005. We became a profitable company in 2008. Then, sort of a year ago, we completely shifted gears and raised now $22 million in funding and we have 16,000 stores in 70 countries and we grew from 30 to 80 people now in this year. And, I also realize I’m in the way of beers, so I am so sorry about this (laugh) they will keep this light. This is the topic of this talk. And, this is completely opening the bait. I absolutely don’t say I have any answers really. I just have data points. But I feel like this is what we all should be thinking about. I think what a lot of people don’t realize about what’s going on right now like the news and, you know, what going on with conferences and so on, except it seem like there’s this phenomenal interesting global brainstorm going on about what a company actually is. They started out with sole proprietorships and family run businesses eventually came up with public corporation. Then around in the 70s, there was something called the agency problem, where shareholders weren’t enough quite sure whether the CEOs of public corporations were fully representing shareholders while they are actually maximizing with share holders value and so there was the shift of aligning CEOs of stock options directed to the fortunes of the businesses and from then there that has been straight line of businesses becoming sort of this solo entities that some of them are now, but this is a ground rule. There’s tones and tonnes of examples of business like that. They’ve been really kind of seeing the insurgence of this. Dodocase is a fantastic example because they are reviving an entire industry. Now, you have to also, especially because of current events, look at Apple, which is a company which has been doing amazingly well again, in a way of thinking long term. And both of these companies and many other companies combined, say, “we actually exist not for cash but rather for delighting customers.” And I think you’ve heard us talk on a bunch of times on a various talks. It’s very important to emphasize this. Delighting customers is really what it’s all about and then a lot of good things follow from this.

And what do I mean by going and look into history, and please don’t take history lessons from a high school drop-out like me. You have to read up on this stuff for yourself (laugh). So this is, I was trying to find the picture of Henry Ford’s assembly lines but this is the closest thing I found. These things are really, really amazing. Like, about a 100 years ago, they were the newest thing that anyone knew existed in the world of business. They were invented. They made quite incredible effectiveness, incredible wealth and there were a lot of problems with them too. So, however, they were so good that everything of the entire, especially the American automotive industry really did build itself or model itself on what Henry Ford did. And, now 80 years later or so, Gm is now market leader and  all of a sudden have all these Japanese companies running cicles around them. No one really quite knew why. I bet then, information wasn’t flowing quite freely. So, this is really interesting case of, I guess it’s called Nummi. And that’s a car manufacturing plant somewhere in California, which is really rough place. You really did not want to go, want to work there. They had a massive problem of people getting drunk at work, that massive absenteeism. They actually have a problem with workers having sex at work (laugh). You know, things are pretty bad and that’s one of your number one problems. So, they shut it down, and um, so, they shut it down and then what happened next is that Toyota came and said, “hey GM, why don’t you put a joint venture here? And we would build this factory in sort of a Japanese style” and then the project was a huge success. And same people coming in to work building now Japanese cars and the differences were striking because Toyota invented a lot of innovations in the supply chain. But the biggest difference it made was they gave the workers an incredible amount of autonomy. So, every person had a red card to stop the supply chain. Everyone could go ahead and say, “there is a problem with this car, I’m going to stop this now” and they actually had ways of rewarding people who did that the most and actually solve problems. So, no one had really thought about these kinds of things. No one wanted to give a lot of autonomy to these dispensable people, however as soon as someone did, they completely outcompeted everything. So, the lesson of this is: success doesn’t make you right. And I think this allows us to say our responsibility is that we need to build companies that don’t embarrass us like that in 100 years.

So, there’s a lot of stuff wrong with companies right now. And this brainstorming is great, it’s a great exercise. Everyone can and should really think about this and try to improve things a slight bit in their own companies and then tell other people what they did and I think there were some really, really neat examples of this already in today’s talks. One really useful phrase in the office environment: the atmosphere of the average workplace is to productivity what flames painted at the side of the car at a speed. I love this, Paul Graham said that. And this, you know, this is, again, a (?). You can create in an environment which is much more creative, more like a left side rather than a right side. You can make your corporate retreats more like that rather than verboten and catering, I mean, we all want to have beers right now, don’t we? (laughs). So it’s funny to compete against guys where you can take their company pictures as negative examples, thanks Volusion.

I don’t know why I share them but there you go. But um, compensation is a really really interesting one. That’s a hard problem. Office environment – easy, this one – super hard. So, I mean, do people here pay bonuses? Kind of everyone does, so you kind of have to. So, it’s like this rat race where people really do think of bonuses as part of their base comp and then kind of no one, like this is clearly a North American thing and in Europe it wasn’t really around. I never quite figured it out. So, the problem I have with bonuses and I’ve heard that this is something to take a stand on. Let’s think about this, you know. What can we do here? It’s like, it looks like they’re never really distributed right. And, yet the other things also, the effectiveness of bonuses, it’s really quite disputed. You know, there is a famous experiment that takes two groups of people, three days in a row, each group solves puzzles every day, every day they get a certain amount of money and then both of groups on day two get twice the amount of money. Do I have that right? So, sorry, one of the groups only gets extra money on day two. On day three, that’s been taken away. So, and then, they measure up overall output. And, it turns out that this group that has gotten the straight pay, every day ended up out- performing the group even though on the second day, the group which cut the bonus was, ended up being more effective, and that’s because on day three the funding ran out for the extra money, they just didn’t perform nearly as far. So, it’s a good shot to measure but in the long term has proven to not be so effective. So, one interesting thing, when I was still in Germany, I was an apprentice programmer there, that means I was on an intermanship, which is something you can do in Germany, which is something North America absolutely needs because they are  sticking people for way too long into universities around here. I had this mentor. I was looking for Seimens, big German company. And this leader of mine, he ran the skunk works, like a really, really effective group. They are a group of doers within this large organization, so I asked him, you know, how did you go about selecting people for this group, you know, how do you know how is right, who is good? And then, he said that this was all in his mind, he didn’t really do this. He said the thing he would love to do is, or what he does in his head is a bucket of paint test and the way that goes is, you would put a bucket of paint in front of a front entrance of a house, of an office, and then at the end of the day, you will go back in and look around on the foot prints and find the desks of all the people that just surrounded the footsteps. The people that, everyone walked to that problems, everyone talking, like, these are the most important people and clearly somehow the corporation internally knows itself that these people are important people. But it’s a terribly hard problem to figure out from the top down view. Usually when you sit down with other managers, you know, and other people, people of this kind of things, so you usually know who the important people are but it’s really really tough to figure out certain aspects of this.

So, any way, this is a good thing to look at. Um, you don’t have to read this, this is an example, it’s very technical, it’s a top one in our system that I’m going to describe that came up. Julie thanking Jose for having made some kind of a data base for us on Friday night. So this is something that happened in the company and Judy truly really was thankful to Jose about it, so she then went ahead and thanked him for it. Now, what do I think? How good is that for the company? Is this a one unicorn good, two unicorn, three unicorns? I know this is completely arbitrary. I would say it’s probably a one. He obviously did something on Friday night when he didn’t need to and clearly Julie was delighted and so, I’m happy about it too.

What is this? So, this is our internal system. It’s what runs essentially all of Shopify, and really, really helped us get through this 30 to 70 employee death valley, which is very very hard to get through. It’s the time when your company realizes, okay we can’t all go to have lunch anymore and talk everything over. Communication suffers. You don’t know what the people in sales might have accomplished, especially if you are in development and so on. So, the way unicorn works, it’s essentially this place where people go and simply thank other people for things that they may have done. And, there are certain reports. Other people in the company can go through and get email once a day and so on. Just saying, here’s what happened in a company, what do you think about these things? How many unicorns do you think are deserving of this? Similarly, it does project managements and managers have one on one meetings as well but the point of it is, one percent of all our revenue goes into the system. This is for bonus points. It goes into that a big pot and even its evenly distributed among the people in the company and based on their votes, it then goes to the people who deserve it the most. It’s an incredible system because here’s what happened. We had, we are trying to run a corporation just like most of you hiring the best of the best. They are very good at attracting these people but you don’t always get it right. In some cases you hire someone who you thought would be absolutely fantastic but then, somehow, they don’t end up as effective as you’ve imagined.

We had one case where after the three months mark, the probation period, we looked at it, scheduled a one-on-one meeting, checked on his unicorns and then what became obvious was that an incredible amount of people thanking him for doing all these small things and it turns out that the reason why he wasn’t actually that effective was because he spent most of his time helping other people. This was his own way to integrate into the company and it was tremendously useful. In fact, he was the second large recipient of bonuses that particular month and if he would have carried this forward, that would be like a 30% increase of his base salary, so that is significant. So in a way like, a company already knows more than the managers, and there are ways to tease these out. I think this was something on the right side of history in terms of human relations and so on.

Next thing is – do not start a company to make money. I think that’s something we’ve discussed, we’ve discussed here. The right here is to start a company to delight customers. And, money is something that should follow. I know this,I know this very well, um, before I get into this, again everyone knows this here. There are two economies out there right now like this, normal place and this crazy technology place, which, which has 0.5% unemployment and I’ve been asking around today, some companies um here in the Boston area paying $20,000 for single referral of a single engineer like, that is crazy, that’s a car. So, they are clearly all trying to find amazing people, therefore, everything, like a lot of things don’t count. Everyone in this room her is by definition like a percentage of a percentage of a percentage. You know, you are all smarter and better looking and you know, everyone here can go and work for a larger company and, and you know in very little time can get medium six figure salary and you know, you can make, I mean, you put that into some kind of balnce, investment fund portfolio, I mean you’re going to be a millionaire before your kids go to school. Don’t take investment advice from a high school drop-out. (Laughs) There are so many better ways to start companies. Money is sort of a side effect of this critical success. A critical success you can’t get if your target is money. It just does not look like this. It’s not something you can seek, it’s something that follows. So, I even forget this myself so the first business I started, which is funny, given Jeff’s story, is, I started snowboard store. This was not breaking water. It was supposed to become breaking water but we started it online and this was in 2004, my first business in Canada. And it was a fun business like calling up all the suppliers and negotiating rates and tiny suppliers. You called up a guy and they say, “okay, ten snowboards” and they go in their garage and they ship them out to you. So, it’s really, really neat in a lot of ways. And, it was successful, we saw the profit and all these kinds of things but then in the Spring of 2005 I was kind of like, you know, I’m really, really proud of this but not actually of the businessy bit because I spent all my time tweaking the knots and bolts of the software that ran this business. I really put all my work into, into the sort of the underlying machinery of this and I didn’t really think that the actual store was that worthwhile, I actually thought the software was a bit amazing, so somehow my heart already knew what kind of company I wanted, so I said, “okay, maybe we close this down and then we would start a business that helps other people try to achieve critical success by allowing them in a more direct way to help them pursue what they want to do.”

And the last one, invest into internal tools. I think that’s generally like, there’s a, like absolutely hard, it’s hard to over state like of investment that is going on right now in general in companies like the amount of horrible software that you see in larger companies, it’s absolutely outstanding. In Shopify, from the early days, we’ve put our best programmers in building tools and it’s, you know, unicorn is a good example of that, of what kind of things we have. But we have really this kind of quality in just about everything that’s worth doing for the company.

AAPL is interesting. This is not perfect because this yellow line has machinery equipment and internal use software but you clearly see where AAPL is locating its money like this is a tremendous amount and this is about, um, I think it’s five times the next company in terms of these sizes of investment into anything software like this. So, internally we have things such as, like, the top left is our phone system, so have you ever, like I don’t know how AT&T is or Verizon but if I call Rogers in Canada, I call them on my cell phone which is on a Rogers cell phone, then I get connected, then the first thing they ask me is to put in my phone number. I’m like, I pay you for caller ID (laughs), I’m on your network, you know my phone number, this makes no sense whatsoever, and then the great thing is you are like “okay fine”, you talk to someone, they ask you for your name, and then the next thing is they ask you for your phone number (giggles) because there’s no connection between those two systems, you put your phone number in, and then they connect you and then they connect you to another department you type it in twice again. It’s crazy in a way, like, why is that? Like really, they can’t solve this? With Twilio you can do that in like two minutes, so its, so when you call Shopify the other system goes into the database, it figures out who you are, it’s “hi John”. Everyone who signs up to us always get someone called a guru assigned. What a Guru is: are the people who help you for the first couple of months because in as much as Shopify makes it easy, e-commerce itself is still pretty complicated. We route you directly to that person and that’s not a big investment, that’s a week of having a great person hack on some software. We have internal BI tools, which will hopefully release soon. We have a public happiness card, that’s been, if we talk to you, if the support talks to you, you can rate them at the end of the call. We try to get a feed back. We try to maintain a 90% happiness and we are very proud of having reached that and having be there for a while. And, of course unique couple of other things.

And then, the neat thing is what you can do later is that, in fact, you can turn internal tools to external tools for more leverage.  Anyone here use Active Merchant? Is there, is there anyone (rumbling) ok I see a couple of hands. So, Active Merchant is something that I wrote um, and I started it originally um on Shopify. It is essentially dealing with payment versus pain. They are all kind of the same yet specific kind of languages, so it is um, software system that allows us to just touch the file and we say okay you talk to Active Merchant and Active Merchant talks to all these other guys. And then, I integrated two gateway payments which I wanted and then called in my co-founder and saw, oh, he did another three and so we were supporting five payment gateways and then he flew on his Honey Moon to Venezuela and when he came back three weeks later. We’ve got four new payment gateways submitted in the mean time. Even if he would have stayed home and spent this entire time implementing this, he couldn’t have finished it. So, it’s a really cool success story and it’s something you can do once you get into the habit of building great tools internally. So that’s it. Thank you very much.

This is a guest blog from Lerone Wilson, BoS ‘camera guy’ and now founder, ’The Blackline Magazine‘.

Notes from the Video Guy - Lerone D. Wilson

Hey, it’s me- the video guy.  I’m the one who gets between you and your perfect view of the stage each year.  The guy who makes you wish you had taken the extra minute to comb your hair in the morning as you realize that the audience is occasionally recorded as well as the speakers.  The one who ruthlessly unplugged your laptop from one of those electrical outlets in the back of the room in favor of some piece of equipment that doesn’t look important (it is).  Yep, that’s me.

I’ve worked at every Business of Software conference since 2008.  Because of the nature of my work, this means that I’ve listened to each speaker’s entire presentation once while shooting it, and another once or twice (sometimes more) while editing them.  Oddly enough, this has never bored me.

You must understand that in my line of work you get used to being bored quite regularly.  Whether it’s doing an hour long interview with a guy because his brother is famous and maybe he’ll connect you, or waiting for that gaggle of geese to move past the frame in just the right way (Pro-tip: Never actually do this. It turns out that geese are really mean), you get used to being mindlessly bored as a matter of course.

That said, what has surprised me each year about the Business of Software, is that the organizers consistently book some of the most interesting and entertaining speakers I have ever encountered.  They are brilliant, yes.  They give amazingly accurate and much needed advice, of course.  But most importantly, they inspire.  So much so that after last year’s conference I was compelled to call a few old friends and colleagues and put together a startup of my own.

Earlier this month, after nearly a year’s preparation, we launched ‘The Blackline Magazine‘,” an HTML 5 based news magazine optimized for iPad, which covers the stories and issues that really matter.  From Bo Obama defending his initial term as First Dog, to Netflix CEO Reed Hastings admitting their instant selection is crap, to a three page write up on how Tetris pieces collectively despise the long straight piece for routinely showing up late, if ever, Blackline covers the issues that the “lamestream” media routinely overlook.

So far Mashable, TUAW, and a few other tech blogs have had some very nice things to say about us.  In fact, Secretary of State Hillary Clinton even ran an ad in our inaugural issue to make it plain why she’s absolutely not running for president (Hint: “Because F**k you, that’s why”), so for now we’re calling our launch a success.

Magazine aside, however I can say with some authority that this startup is something that I wouldn’t have ever attempted if not for my past with the Business of Software.  Particularly important, is the sense of inspiration and encouragement you get from being around so many successful and active tech founders at one time (the audience at these events are routinely just as qualified as the speakers, they just don’t have PowerPoint slides).

I recall with great clarity Alexis Ohanian’s speech last year about the amazing ability tech founders have to make the world suck less.  The entire room was gripped by the collective realization of the incredible sense of agency that founders have over the world and how it functions.  Put simply, it was more inspiring than that scene in “Independence Day” where Bill Pullman convinces what remains of the U.S. Air Force to go on a suicide mission to defeat the aliens.

Likewise, it was a bit eerie even how the interpersonal issues Joel Spolsky discussed in his 2010 speech about founding Stack Overflow, matched almost exactly those that we had founding Blackline.  So much so, that I have long considered penning a literary response to “Joel on Software,” titled “Lerone on Joel on Software.”

Interestingly enough, back in 2005 I interviewed both Joel (then running a 6 person software company out of a tiny New York office) and Alexis (then working on a yet to be released project called Reddit) for a documentary I was working on.  What made them both remarkable then in my opinion was that they both were incredibly motivated and passionate, and incredibly well informed.

This is the type of conference that will do just that for you and your startup; inspire and inform (The videos are really, really awesome too).  After all, this is the conference that makes startup founders from even the video crew.  Just please be careful not to use the power outlets in the back by the A/V equipment.  I’m totally cool, but the rest of the A/V team is quite vengeful…

“Mark

I run a small bootstrapped software company.

We have a samll US team of 2 employees (me & wife, and some part time contractors)  and have a remote team that is full time from India.

I am trying to evaluate if BoS would be the right conference for me to attend given our stage of the business.

My cell is below if you need to reach me.

Thanks
S
213.xxx”

My take, in short – while we try to focus the content of the event on the how, who, why, when and where of growing a successful software business, almost all of the content is incredibly valuable to software entrepreneurs who are starting out on their journey. We have a single customer at BoS – you, the attendee. No sponsors or exhibitors to keep happy. Just the delegates. Of course you can go to ‘cheaper’ events, but we think that people come to BoS because they are able to learn, share their ideas, their fears and ambitions with a  very special group of people. You will find people who are incredibly willing to help a single founder/startup – everyone started out at some point and it is wonderful that so many people are willing to “give something back.”

You can also see all of the feedback from delegates at Business of software 2011 here.

I figured it is a question that a lot of bootstrapped companies will ask so I have tried to answer it with the help of Stephen’s guest blog. Stephen is a single founder and Business of Software regular so perhaps his thoughts will be useful…

“In October I travelled again to Boston, MA for the Business of Software conference. This is the number one conference to go to for folks aiming to create a software business to last the long term. This isn’t a place to come if you want to create a Facebook then flip it and walk away with millions. Nothing sustainable about flipping companies.

Twitter seemed to come into its own at and before the conference. People using phones, iPads, laptops to coordinate who they were eating with and when. #BoS2011 became unmanageable. Mark Littlewood’s advice to use Tweetdeck was well received.

Audience

Its a self selecting audience. They’re all very bright, self motivated. A lot of the people attending run their own businesses, from one man companies to some larger organisations like Red Gate who brought a good chunk of their staff with them. 30 people? 50 people? I don’t know. A lot – more than many people have on their entire staff. I spent Saturday evening with 5 Red Gate people and most of Sunday with some more Red Gate folk. It seems that Red Gate is being quite entrepreneurial with its staff – exposing them to conferences like this and training them for the future. It seems like a much more thoughtful vision for their future than most companies take.

Microsoft had some people in attendance too. The only Microsoftee I met was Patrick Foley, who was brave enough to give a Lightning talk. One attendee had travelled all the way from Romania, using three planes to get to Boston. He was probably one of the youngest attendees too. I spent a chunk of Tuesday evening chatting with him in The Whiskey Priest. Not sure I’d have been that keen to travel that far for a conference at age 25. Kudos.

The quality of the speakers was incredible. I thought Clayton Christensen would be the top draw (I’ve read most of his books, found them really interesting) but as it turned out I preferred the speakers on the second day – Rory Sutherland and Josh Linkner in particular. Most speakers manage to weave humour into their talks. I don’t know if this was planned, opportunist or just something you get good at.

Note taking

I took very few notes at Business of Software. I was just too wrapped up in what was being presented. When I look at my notes its in my typical unreadable “I should have been a doctor” handwriting, with a good chunk of the notes not about the talk being given but about ideas for improving the software process at Software Verification. Its as if being there was stimulating me to take action over what we will do in future. Part of me is pleased with this and part of me is frustrated I didn’t take more written notes.

[Actually, Stephen's notes are pretty good. You can read them all here on his blog - Business of Software 2011 - Mind Food].

The Business of Software goodie bag was unusual – full of stuff I will actually read. Books from some of the speakers. Their talks were interesting, so that bodes well for the books they wrote.

Business of Software Team

The team Mark Littlewood assembled were superb. They were always on hand to help. When I asked them for help with some nuts (I needed protein as the vegetarian food was all carbohydate and had no pulses etc) they to my amazement found some fruit and nuts for me. I expected them to tell me where I could find a shop. Later that evening two of them saw me collapsed on a seat at The Whiskey Priest and came over. They wanted to walk me back to the hotel until I explained I’d be alright in about 20 minutes – when my blood sugar had become normal again after eating (I shouldn’t have had the beer so soon after eating with the noise of the Business of Software band – too much).

As well as the BoS team, the conference centre staff were helpful and courteous. Americans really understand service. So often I’ve had bad experiences in the UK.

Coming home

After the conference everyone had a chance to grab some food, possibly be interviewed by the roving cameraman. He got me. I don’t think I made a very good subject. I think you’re either good at this or not. When asked a question that required a thoughtful answer I should have paused and thought. But no. So a bit of a disaster on that front. I’m sure other people had better things to say to the camera than I did.

I milled around for a bit then a group of us headed off to a local restaurant for some pre-flight food. Mark Littlewood said he’d come and join us, but he took so long he met us on the way back to the hotel. Better luck next time Mark.

[Ha! You got me. We ran a few optional post-event workshops that started at 1.00 pm. They were supposed to finish by 2.30 pm. The last one finished at 4.30 pm and I figured I should be around to see people off the premises... ]

The photo shows (left to right) Krishna Kotecha, Patrick McKenzie, Corey Reid, Patrick Foley, Levi Kovacs, Tyler Rooney.

TO DO List

My notes are littered with TO DO items scrawled done as a speaker sparked something in me. On the plane home, reflecting on the conference, I found that every few minutes I’d have to write something down. In total I have about 4 pages of TO DOs, 1 per line. That’s about 120 items to do or research. All directly from attending the conference. Not all of the TO DO items were new to me at the conference, but the conference reinforced my pre-existing thoughts and coallesced them into an action point.

Conclusion

If I could summarise Business of Software into a few words, it would be “Incredible mind food, stuff to think about for a long time”.

Would I go again? Yes.

Am I glad its on the East Coast of America? Yes. 5 hours out is one thing. 8 hours out another altogether.

If anyone wants to share their experiences in the comments – or via a guest blog, please get in touch.

John Nese owns and manages Soda Pop Stop. He is devoted to the art of soda pop and supporting the small businesses behind  each bubbly drink, Galco’s Soda Pop Stop features more than 500 flavours of soda at its Los Angeles storefront and nationwide through its website at www.sodapopstop.com. With a mission to supprt small soda makeer , Galco’s motto is “Freedom of Choice” which mirrors Nese’s determination that customers have the right to choose from more than just a handful of mass-produced, big-business selections. You can find out more at SodaPopStop or watch this great video – Obsessives.

In this interview, which concluded the second day of Business of Software 2011 and was followed by a soda pop tasting, Peldi draws from the wisdom which Nese has recieved in his experience and shares it with the entrepeneur community.

Peldi & John Nese – Transcript.

When I was about 8 or 9 years old we went on a family vacation up to a place called happy camp. They had a spring and this water had natural carbonated water. I can remember thinking as a little kid, thinking about that spring and saying, ‘if we could pipe this down to my school, when we turn on the water spickets we can get soda and I could have different flavors of soda. I wouldn’t have to drink the water that I drink.’ I went to work with my father when I was 5 years old. Galco’s itself goes back to like the roots,  is 1897. About 10 -11 years ago a Pepsi cola salesman came in and he said, “I got the best buyer you’re ever going to get on a pallet of Pepsi cola cans. I’m only going to charge you $5.59 a case.” I said, “thank you but no thank you. I am going to send my customers down the street to Ralf’s because they are going to be on sale down there at a $1.99 a 12 pack.” And he says, “Well you can’t do that. Pepsi Cola is a demand item and your customers are going to demand that you carry Pepsi cola.” And I said, “my customers are going to be happy that I was honest with them and sent them down the street. They can buy them cheaper than I can buy them.” And after 2 weeks of really being upset I said, “thank you very much Pepsi cola for reminding me that I own my shelf space and I can do anything that I want.” So I immediately went out and found 25 little brands of soda. I thought, “Gee whizz”, they were still in glass bottles and I put them on the shelf and people would come in and look at them and say, “what are you doing with all those old things that don’t sell?” and when I got to 250 is where you find, you know … So now we have about 500 different sodas.

If you are going to get a root beer, the one that is hardest to find is a Red Ribbon because it’s made with the (?). If you are looking a lemon lime, try the Bubble Up, it’s still made with lemon and lime oils. The Manhattan Special, the company that makes the coffee soda, they’ve been making coffee sodas since 1895, the same family, in Brooklyn, they roast the coffee beans they brew it they bottle it. A little 10year old kid he comes running in he says, “where’s that cucumber soda you made me buy?” and I am laughing. I thought it was funny; a little kid asking for a cucumber soda. You know they don’t drink vegetables. People are saying, ”well you’re here and you’re working all the time”,  and I’m say, “I don’t work, I just play all day long. I come in and play.” It’s flavored water with a lot of bubbles. If I were going to define it with one word I would say, ‘happy’, or ‘smile’. By the way you should taste it, what do you guys want?

People come in here and look around and they say, “Well this is overwhelming. I didn’t know there was this many flavors of soda.” What really has happened is, it’s given exposure to the little bottles that they’ve never had before. We just picked up another independent bottler. They’ve been bottling since 1926, the mother, the daughter and two brother ; bottle. Those floral sodas; the fellow called me “you gotta carry my sodas. I’m from Romania. We still know how to press the rose petals.” And he says, “I’m going to send you samples.” And I said “Oh, OK.” And I am thinking, ‘perfume? Wow! Crisp clean rose soda. The American republic has never been exposed to anything like that ever before.’ We bought the total run. They are not available anywhere else in the United States and so I said, “really, what else do you make?” “Well I have a cucumber, but the problem is nobody will give me a chance.” So we commissioned a run of the cucumber. First lady comes in, “oh, this isn’t what I was expecting at all. This is actually very good.” When the American public has a choice, they are going to buy it, they are going to try it.

The way a product goes in a glass bottle is the way it comes out. Everything is over carbonated in plastic because it starts breathing, and it has a four month shelf life so they get flat as they go along. But when you put something in a glass bottle, I will tell you the caps are so technologically advanced that the way it goes in is the way it comes out, 3, 4, 5 years down the road. Have you ever picked up an old glass bottle?

Spk1: oh wow heavy. That will hold carbonation. The bottles today are very thin glass, and if they have a weak spot in them they will explode if you put too much carbonation in them. You can drop these and they will actually bounce, they won’t break. I mean I drop them and they just pooom! They won’t break. Talk about re-usable?

Most diet sodas are really pretty bad; I mean they just don’t taste good. There’s been a few that have come out. Stewart’s black cherry diet is probably the finest diet black cherry I have ever tasted. There is Jones –has  diet green apple that’s very good. And then there is Sprecher – has a low calorie root beer which has like 11 calories in it. It’s not a true diet, but it’s slow enough if you are watching calories. But other than those 3 or 4 or 5 most diet sodas … Drink less, how’s that? Drink 6 ounces rather than 12. And you get 60 calories versus 120 calories and then you are satisfied and you’re happy.

Everything prepared in this country has corn syrup in it. And it’s totally unnecessary. The largest single crop in the world is cane sugar. It’s larger than corn and wheat put together. It takes three times less sugar to sweeten with than it does corn syrup. I mean take a look around at the diabetes; you will never get an allergy from sugar. You’re going to get an allergy because there’s a spore in corn syrup that cannot be refined out. And people have allergies to corn products. So why would you use corn as a sweetener? We have some, yes, the Stewarts, the IBCs, and the Crush. They are contract bottled and they are done in glass but they are done with corn syrup for the supermarkets primarily. We carry them because they don’t come in any other way. Once a year Coca cola makes a Kosher coke just before Passover. The Kosher one will be cane sugared, it’ll have a yellow cap, it’ll have a ‘U’ on the upper left hand corner with a circle around it and the label will still say, ‘corn syrup’, it won’t be changed. Try the two side by side and then tell me. The one with the cane sugar just goes pop! And it explodes and the flavor just goes wham!! It’s delicious and the one with the corn syrup is like prrpth!!

What I would to see is a root beer cola. There was actually a company about 100 years ago called root beer cola, and it was a cross between a root beer and cola. And I’m just fascinated with that. Or I would like to see a pineapple cream. I just think it would just be delicious. I’ve been trying to get somebody to make it so we we’ll see.

OH!! Energy drinks, they taste bad. They are small cans, small sizes, big prices. I mean Red Bull sells in the billions. I mean Coca Cola wish they could get that kind of a profit out of a 8 or a 12 ounce can, and for what?

Big business loves big government. They just take the market place up, eliminate all the little guys, they run them out of business and then they jack the prices up and then they control the market. But you look at the candy section its Nestle, Hershey’s and Mars, or you look at the soda pop market its Coke and Pepsi. My thought had always been that what I wanted to do, was do business with other businesses my size, to help them become unique businesses and that’s exactly what’s happening. And what’s really interesting about it is, out of all the things we sell wholesale, one business a mile away from the other and what they are selling is totally different. One restaurant we sell to, they love the floral sodas and another place they can’t give them away but they are doing the Red Ribbons and I’m going, “isn’t this interesting that everybody has found their own level and their own niche, and they’ve done it on their own.” The important thing is to set yourself apart and provide your customer with something that nobody else has.

The most common thing I hear from the American public is, what’s the best? In Coca Cola and Pepsi, what they’d like you to believe is what they make is the best. Everybody’s taste is different. I can tell you what I like or I can make suggestions, I mean the New York Times called the best cola ever made Fentimans, curiosity cola. It’s brewed like a beer, it has natural carbonation and it has ginger in it. There’s so many people came in here still looking for RC Draft, which was a very soft cola a very smooth. So I point them out and say well maybe you want to try a Rock & Rye which is cream finish cola from Detroit, a very old brand. So try all these and then tell me what the best is for you.

Who do you think passed CRV laws? You’re going to get me on my soap box again and then you’re going to have to point the camera up.

It wasn’t written for the consumer and it certainly wasn’t written to keep this country green, it was written so coke and Pepsi wouldn’t have to wash a bottle and they wouldn’t have to make recyclable bottles and they could transfer the cost to the consumer. I called the recycling center when I got started and I said, “listen I want to put a recycling center in. They bring them back to me and I’ll give them the money and I’ll sell them some more sodas.” “Oh am sorry you can’t do that, because you have a recycling center two blocks away.” I said “yeah but they don’t give the full price, and I want to give the full price to the customer to get them back to sell them some more.” And he says, “if you did anything like that you’d be in restraint of trade and you could probably get sued by the state.” If we were really carrying about the environment we would have reuse, not recycling.

Oh I’ll drink one or two a day. But I’ll actually have diets or water or something. I like carbonated water, I started drinking carbonated water about 20 years ago, I just like the bubbles. If you get a bottle of Gerilschteiner and it has the great big bubbles. And then there was another one from Germany called the Polynarios with the little bubbles. I just tasted one today, a Vishey water but it came from Spain, from Catalonia and I tasted it and that had the finest bubbles I’d ever tasted. I mean it was really fine mineral water.

What would you like? If you’ve been looking for double cola and can’t find it, we have it. Before 1900 it was called the Lota cola now it’s called Double Cola and when you taste it you’ll know why they call it double cola. Below it is the Red ribbon, by far the cherriest of all the cherry soda. And when you taste it’s like oh my goodness! Hotlips, this is actually a pizza kitchen up in Oregon. They are made from 100% organic fruit. And if turn them upside down you’ll actually see the fruit coming down the neck of the bottle. We also have from Central America, Banana Nina. This one actually tastes like a Charlie rancher banana. It’s the only banana soda I’ve ever tasted to date. This is very interesting. This is made from the bark of the Mabi tree and it is actually brewed like a beer and it wasn’t up until two years ago that this was available commercially. Up until that time if you went to the Caribbean it was made home brewed and that was the only way you could get it. This is Moxie, the original elixir. This has been around since 1884. By the way it’s the only soda to ever make it to the dictionary. And it came in a six and a half ounce bottle and if you could drink two of them you had a lot of Moxie. And we have the Manhattan Specials. They are all natural, they are natural bottling, if you look at the bottom you’ll see the fuzz and that’s because they use real vanilla beans, if you look at the orange you’ll see the pulp of the fruit in their orange. So whatever you are interested in we have it, and if we don’t, we are looking.

Spk2: Ladies and gentlemen, John Nese. [Applause]

John Nese: That’s the first time I’ve seen these.

Peldi: Is it really the first time you’ve ever seen it. Coz I watch every other week. [Laughter] I want to be just like you when I grow up. So before we start I have a little present that…don’t tell anyone but I smuggled it in the country. You’re not supposed to bring liquid. I brought you some Italian sodas. Wow!! Am nervous. Oh my goodness

Spk2: I thought we could have one or two while we have this intimate chat. [Laughter] Ok. And also my favorite kind of Italian soda… its balsamic vinegar. [Laughter]

John Nese: Thank you. I like balsamic vinegar.

Spk2: Thank you for the cucumber soda that you sent me and it’s actually really delicious. I’m going to open it up right now. So I also want to thank mark for giving me a chance to meet one of my heroes in front of everybody. This video really speaks to me and I thought it would also speak to this crowd. Coz I see a lot of parallels between what you’ve been doing and the way this part of the IT industry sees themselves. We want to build sustainable businesses. We are not the Facebook or the Twitter or the Google, that’s like a whole different, we read the same news, we both write code but it’s completely separate. I think that this crowd can learn a lot from you and so I wanted to just ask you a few questions.

John Nese: Of course

Peldi: All right. So first how did you get started? How has your business grown? Why sodas? Well, I can tell why.

John Nese: Basically what happened is we were going broke, we were an Italian grocery store and the neighborhood changed and the Italians who were in the neighborhood did one of two things. Either they moved out or they stopped cooking. The second thing that happened, the supermarkets bought the distribution channels for the little markets and the first thing that they did was close them down. By closing them down, they eliminated the cap on supermarket pricing, up until that time little independent businesses were the cap on supermarket pricing. So by eliminating the cap they can charge whatever they want. And by the way the prices in this country reflect that.

Peldi: so what year was that?

John Nese: That was somewhere right around the nineties. Eighty five, ninety.

Peldi: So your business, everybody went to the cheaper supermarket?

John Nese:  Well yes, they could buy it cheaper. Of course they were paying more but still they could buy it cheaper.

Peldi: and you had this business, how old was it at the time? You have been around for a while.

John Nese: Well its very interesting. It was right around 95 that we started thinking about, I started thinking if we could go another year another two years it may get to 1997 we would have been in business a 100 years and no one could be ashamed of that. You know, you just got to make that little bit more.

Peldi: 2 more years.

John Nese: And so we worked to that goal and we made it and we were still there. And then we looked around and go, “you know if we can make it to the year 2000 or 2001 we would have been in existence not just 100 years but in two millenniums.” How many businesses can claim that? So we worked and we kept working. And it’s really interesting how things happened. They just started happening.

Peldi: so was it a conscious decision. The business is drying up quickly we have to do something urgently and boom I have an idea let’s just become the soda business and boom it just happened?

John Nese: No what happened is Pepsi cola came in and they were really arrogant about it. A salesman came and said, “am going to sell you this Pepsi and am only going to charge you 5.59 a case.” And I looked at him and said, “Well, tell me on that 100 case pallet how much profit am I going to make?” “Oh you going to make 30 dollars.” And I said “thank you but no thank you. I’m sending my customers to the supermarket down the street because they are selling it at $1.99 a twelve pack and it doesn’t make any sense” “well you can’t do that because Pepsi cola is a demand item and your customers are going to demand that you carry Pepsi cola.” And I said, “my customers are going to be happy that I was honest with them and I send them down there. They can buy them cheaper and I can buy them cheaper.” They don’t owe me anything.

Peldi: and that’s when you decided to start buying some other sodas for that same shelf? So they helped you?

John Nese: Well they did. It took about two weeks. I was so angry. Nobody could talk to me, I was upset, I went through the whole thing. And after two weeks the light bulb went on. The light bulb said “you know you should thank Pepsi cola for reminding you that you own your shelf space and they don’t and you can sell anything you want.” And it was at that moment that this big relief, it was like, ‘ok I can do this.’ I immediately went out and found 25 little brands of soda, they were still in glass bottles, they were still made with canned sugar, a lot of them were made with real ingredients and I put them up on the shelf and all the people coming in look and they would go, “what are you doing with all those old brands that don’t sell?” And I didn’t say a word, I just kept adding and kept adding and when I got to 250 is where you find it. And then my daughter came along, and my daughter is very bright, and she said to me “dad what you are doing here is really great. But if the people don’t know about it, it’s not going to do any good. I am going to send a letter to … what is it…Western Magazine or something like that,” I forgot the name of the magazine. And I said “oh OK.” And as she was walking by she said, “by the way dad I’m sending one to Huel Howser.” Now Huel Howser is a fellow that concentrates on little business and little things that most people in California don’t know about, and he highlights them. And so, that was on a Thursday, on a Monday we got a call from Huels office he says, ‘if what you say is true, we want to do a show on you.’ They were out the next day, “we want to do a show.” They filmed in 2 weeks and 2 weeks from then it was being broadcast. And it was just happening immediately. And then at the same time there was a fellow by the name… a lady came in and we were on the art and Oddity tour in Highland Park. All of the artists were displaying their wares and we were the oddity. So people would come in and get a little sample of soda and that was really interesting. And then this lady came and she says,“you belong in the times” and I said, “oh yeah I know that.” And a couple of weeks later she comes in with her friend Charles Perry and we just talk like we are doing now, he never took a note, never said a word and walked out. I said, “I guess he doesn’t like it.” And a couple of weeks, three weeks later I get a call from The Times and they said they wanted to do a photo shoot. They came in and then they did a photo shoot. Charles Perry copyrighted… or syndicated that column and it ran for 9 months all over the world. I didn’t know what he was doing but I know our business went up, Hugh Houser aired and oh my goodness we were jammed. That was interesting because this man walks up and he has a copy of a newspaper in black and white, the photo was in black and white in his pocket, and I looked at it and said, “oh I haven’t seen a black and white,” most of them are in color. And he says “I was sitting in the Tokyo airport and I knew I was coming to Los Angeles and I thought I’d stop.” And it goes like whoop!

Peldi: Wow nice pivot. [Laughs] And your daughter is in marketing?

John Nese: No, she’s a chiropractor [laughs] but she’s smart. You don’t have to be in marketing. She’s in tune. She came to work when she was about 12-13 years old.

Peldi: Nice. Speaking of doing your job, how did you learn? You said in the video you started when you were 5, how did you learn to become the business owner and how long did it take you get really good at it?

John Nese: Oh all my life. It’s not something that happens overnight, you have to work at it. And I started when I was very young. Of course I had good models, my father…

Peldi: he owned the store before you?

John Nese: Yes and he became a partner with the fellow that founded it back in 1897.

Peldi: I see.

John Nese: And it was really something. My father would say you know you got to go broke three times before you can make it. I don’t know whether he literally meant going broke but I think what he meant is that you had to go down three times you had to fail, and I think that’s been the whole thing in this seminar, don’t be afraid to fail because you’re going to gain and you are going to do better.

Peldi: thank you, I’ll remember that. So since you mentioned your father, I had this slide up last year when I made my speech about my heroes and you know of them and in the room and it’s kind of embarrassing, but do you have people that you look up to still to this day or they sort of inspire you. Who do you want to be when you grow up?

John Nese: Well, I read a lot. And the person I got the most knowledge out of was Cincinnatus.

Peldi: who’s that?

John Nese: Ancient history, romans, he was ploughing the fields and they needed him to help defend rome. So they pulled him out of retirement he led the army and when he finished he put his sword down and went back to his plot.

Peldi: so what about him?

John Nese: I think he set a precedent. You do what you need to do and you go on and you have to do what you need to do. I mean that was really important to me and I read that a long time ago.

Peldi: everybody is taking notes. [Laughs] damn I should have majored in history instead of engineering.

John Nese: Well, I wanted to teach ancient history. That’s what I wanted to do. And then i got into college and then I found out you had to be fluent in two out of three ancient languages to do your dissertation. And it was Latin, ancient Greek and ancient Hebrew. Most people don’t know what ancient Greek sounds like so I got [??] and decided that was it. I have to do something else.

Peldi: so you said it is about doing the work and the job to be done. So how much do you work? Can you describe a typical day?

John Nese: I never work; I’ve said that very early on. I just go in and play. When I was six years old I went to work with my father and it was very interesting. He said, “ok you dust all the lower shelves.” I go in there and am dusting all the lower shelves and I got to the Twinkie rack. And what really intrigued me were the jelly rolls at the bottom of the shelf. I wanted to know how that jelly was rolled inside there. I could go into the cooler and there was a wheel of Swiss cheese and I wanted to know where those holes went. And so that was all very intriguing to me. And so when I grew up and I graduated from college and my father he calls in and he says, “ok I guess you’re going to work for a big company now.” And I said, “no I want to work here.” And he looked at me and he just shook his head and he says, “I want to tell you something” he says “all you going to do is make a living here, and you’re a damn fool. Go for the money.” And I said Pop they’re going to stick me in a cubicle somewhere and am going to be there for the rest of my life until I’m ready to retire. And I’m not going to be happy. I’d rather be here, I can hear the motor run, I can see if the light bulb has to be changed whatever that has to be done I can do it and I have something different to do every day”, so you are challenged every single day. And I think that is really important for people.

Peldi: excellent. [Applause] I knew they were going to like you. So let’s see, you’ve been very successful lately… Well am just doing what I always do.

John Nese:: well there are people around, are people approaching you wanting to invest or acquire you, pressure you to grow? Yes and that becomes a very big problem. My thought was I really wanted to develop a buying co-op. and everybody would put their money in and we’d all divide the money up and the first thing that happened is the bin counters got involved. And the bin counters said, “you can’t do that because you’re not going to wind up with the business.” And I said, “what!!?” And then I remembered what happened to us in the grocery business when the chain stores bought the distribution channels and they closed them down. And that was a real problem because here was the big guy controlling the market place again and eliminating competition. And I said, “yeah that’s true, that could happen.” So.. But at the same time I am not interested in a pyramid. I mean I’ve seen too many franchises that are nothing more than pyramids where the only ones who make it on are the ones on the top, and that’s exactly what’s happening in our area right now. People are going in and setting up soda pop stores and charging $50000 for franchising and another $50000 upfront. You got a $100000 invested and then they come along and say, “you have to buy everything from me.” And I’m saying, “Who in their right mind wants to do that?” Do you really want to guarantee someone their income for life?

Peldi: wait, so people so what you did and know you have knock offs Yeah?

John Nese:: oh well interesting. Has that been good or bad for business? It doesn’t matter. When I go in and I take a look at the stores that are there and am looking around and am going everything is private label in here, not everything but most of everything is private label and there is nothing really authentic and it’s not really helping who it’s supposed to be helping. For me that’s a problem, for them they are making a lot of money so there’s no problem.

Peldi: they are making a quick buck but probably not… excellent. So how is your company structure right now? How many people do you have?

John Nese: Well we have about eight or nine people.

Peldi: oh! Me too.

John Nese: Yeah [Laughs] it’s a nice size you know everyone and my help is definitely getting better. Oh my goodness it’s really good.

Peldi: wait, lets dig in a little bit. What do you mean? So your help was not so good at the beginning?

John Nese: Well you know I have had employees, I shouldn’t say I’ve had employees because we all just work together but they are dedicated people. I’ve had one lady when we were going broke she didn’t take any money for three years.

Peldi: three years? Wow!

John Nese: I mean three years which she never said anything to me because she could sign the checks. I mean she knew what she was… I mean she is so fantastic. And then the other lady has been there for 20 years, so we’ve had a very long term…

Peldi: so there are ups and downs, there are fights, it is like a family.

John Nese: Yeah and then younger people, what I see here today especially in the United States is young people have a hard time working. I mean…

Peldi: millennials?

John Nese: Is that what they… I don’t know [laughs] but all I know is they have a difficult time. Many of them want to start at the top and but with me, I’m sorry but that’s not going to happen. If I’m at the floor and am cleaning the shelves they better be there with me to know how it’s done. Then they have appreciation for the people who stock the shelves, mop the floors and do all of it. And that’s vital, absolutely vital to get a company to work together.

Peldi: imagine you were hiring and you want me to work for you for some reason. What would you tell me, how would you…

John Nese: I probably couldn’t afford you. [Laughs]

Peldi: But let’s say somebody is about to start. Well let me just give you an example. There is a young lady that we just hired and I had gone to the business where she was priorly working and I told her, “don’t lose her, she is really good” and I just felt it. She was on the ball, she had my orders ready, everything was ready and she never winced or anything. When she said she was going to do something, she did it. And I said, “don’t lose her”. Well they lost her and I hired her.

John Nese:: but how did you steal her away, what did you offer her?

John Nese: I didn’t steal her away I just said to her I like the way you work. I would like very much for you to come and work for me. [Laughs]

Peldi: it’s that easy.

John Nese: I will be honest and that’s the truth but I watched her and I told her that and it’s really important and so far, and she has a lot more to learn because we are still training her, but everything she does she is meticulous about it and she knows what she is doing.

Peldi: so do you plan on ever retiring?

John Nese: No. I tend to joke about it. I say go on as far as you can.

Peldi: what happens then? Well I have grandchildren. My grandchildren, they come and they play on the pallets that you saw on the video and they climb and they think they are king of the mountain or whatever and one of them comes over to me and says, “Papa john, you’re the boss right?” “Yeah I’m the boss” and he says “does that make me a boss too?” [Laughs]

Peldi: so he is the one, nice.

John Nese: And every time I see him he runs… they are twins by way, he runs and puts on his soda pop stop trainee shirt when I go visiting.

Peldi: nice. So it seemed like from the video you were still very much hands on, you’re the CEO right.

John Nese: Well that doesn’t mean anything, that’s just three letters.

Peldi: I know, I know [Applause] but I am totally jealous coz it seems like you’re still able to do what you love every day. I do. So how do you do that even if you have nine people to manage and check in and this is problem I’m facing right now, this is what I really wanted to ask you. [Laughs]

John Nese: Well, I think you have to work in to that solution and every solution is different.

Peldi: ok that doesn’t help me so much No, [Laughs]

John Nese: No, maybe one day, yes of course. Ok, well alright. Ok I’ll digest that. OK, so what type of metrics do you look at?

John Nese: What type of what? [Laughs]

Peldi: that’s enough thank you. Thank you so much for that.

John Nese: Well you know when you ask me about retiring, I talk to the Doctor, I’ve known him for probably 40 years. He used to take care of my parents, and he just says work as long as you can.

Peldi: Steve Jobs worked until the last day.

John Nese: Right that’s true and my parents did too. Both of them.

Peldi: that’s great. So do you have any company policies, salary, vacation, bonus?

John Nese: The employees that have been there a long time, yes we do. The newer ones, you know the laws have been changed, especially in California and the politicians want to tell everybody about how many jobs they’ve created, what they should be telling everybody is how many part time jobs they’ve created. Not how many jobs. And I think the politicians have it wrong. We should be creating wealth. I am not interested in jobs, I am interested in creating wealth so we can get other people to work again. [Applause] And we need to create wealth. Not just here but everywhere. I mean if we just spread the things out and then everybody makes less and oh yeah, we put in 80000 new jobs this year, yeah but they are all part time so what good is it?

Peldi: so you’ve helped create some wealth by giving a chance to these small bottlers all over the world it seems.

John Nese: Well, I don’t know about all over the world but here. We made a point, it was really interesting very earlier on that the small bottles, oh we just can’t compete, Coke and Pepsi owns the shelf space and we can’t compete price wise. And I just said, “Paul, remember you have to make a profit. If you don’t make a profit I can’t buy your products and my customers can’t enjoy your products. And it is really important that you make a profit. Don’t worry about the other little bottler next to you because they are going to help sell your products and you’re going to help sell their products. The only one you have to worry about is coke and Pepsi because they are interested in putting you out of business.” And that’s what they are.

Peldi: I just an idea for a brilliant business plan. So the small bottler gives away all their sodas but they put little ads in the bottle. [Laughs] what do you think about that?

John Nese: Ah! Well that could work.

Peldi: no eyeballs, throats. Let’s talk about the doing the business with businesses your size. I really love that. We are web, sort of internet company, and it’s like an ecosystem. We pay for all these services online and I notice that I’m always happier if I know that the company that I’m buying the service from is roughly our size, coz we sort of see eye to eye in things. If there’s a problem I know I can somehow get in touch with the CEO.

John Nese: Yeah, you can call him and talk to him and he can talk back to you. A couple of years ago, it was really interesting, I’d been doing business with these people and the family for ever and ever, and we are Soda Pop Stop ok? Because there were stops before there were shops. But this candy company filed on the word Soda Pop Shop and I went to my attorney and I told him, “you told me you couldn’t do that.” “Oh well I guess they did.” So he got involved in it and pretty soon he’s running up this bill, the bill was getting bigger every week and I said, “look at it. They are much larger than we are, they are going to kill me; they are going to drain me. I can’t do this.” And he says, “well you can call the head guy yourself if you like.” And these people that I’ve known, they were in the wine and beer business, I buy a lot of beer from them, well they knew that fellow. As a matter of fact, their father had sold one of his brands to them when he exited the candy business. So he called them and told them the two of us should talk. So I got on the phone, and I called and we talked; we worked it out in about 3 minutes. [Laughs] And I’m going, what do I need an attorney for? My thing was I don’t have a problem with you using the term Soda Pop Shop versus Soda Pop Stop, but if somebody hits on your website and he’s looking for Soda Pop I would appreciate if you would refer them to me. And at the same time as long as you protect Soda Pop Shop and there is no confusion I don’t have a problem. And it works.

Peldi: I read somewhere that you are giving back to the local community; can you tell me a little bit about that?

John Nese: We’ve been there a long time. We’ve been at this location since 1955 and there is a museum in Los Angeles which was the first museum in the city of Los Angeles, the first museum in the county. And it’s the museum which the American Indians, it’s called, it’s called south west museum. Well there is another museum who are absolute money grabbers, are stealing the collection, and I understand the same thing happened in Philadelphia about a year ago or something like that. And what they promised is that they were going to keep the South West museum, which is on the national historic register open as a separate museum.

Peldi: but empty.

John Nese: Yeah they closed it. They picked the collection up, put it in storage and they are telling everybody, we are preserving the collection. They told everybody they were going to keep it open as a separate museum and they didn’t. They didn’t have a problem telling everybody that they had a 10 million dollar endowment. Their endowment when they merged was a million and a half dollars. They didn’t have a problem taking the five and a half million dollars endowment that the South West museum had, no problem at all. And the politicians in Los Angeles, they are chasing the dollars, and they are not taking care of business. That museum deserves to be there. That museum is sitting on a site that used to be a crossover for the American Indians to the next world. Not only is it their crossover, but they have human remains in there that go back a hundred years and they are just white washing over this whole subject. And that museum should never ever be moved.

Peldi: so what are you guys doing to help? Well we had a fundraiser to raise funds. And I have to say it was very successful especially in light of the fact that the Los Angeles times will not print an article on what’s going on in the museum. We had about 800 people show up for a soda taste and this was the benefit of the friends of the South West museum who are taking a point on trying to keep the museum there, and trying to keep the museum open. And I was very happy to do that and by the way Peldi, I never wanted to do a soda sampling. I mean, people should do their own soda sampling; it’s the fastest way to open up lines of communication between people. But this was for a very worthy cause and I very happy about that. I feel good about it and we are going to another one for them.

Peldi: Excellent. Well, we are going to be having a soda sampling as you walk out. Yeah, only coke and Pepsi. [Laughs] So when you heard about pricing, how much freedom do you have to price things coz you have a supply chain right?

John Nese: Yeah, we have pricing; we have to make a profit.

Peldi: Do you have some tricks, like you put the expensive stuff at the top?

John Nese: Nope, I put everything up there but I can tell you what I put on the bottom shelf; all the corn syrup. [Laughs] I mean we have to carry some of those things but they are on the lower shelf. I tell people, “you can get those anywhere; you don’t want us to waste your money here. You want to try these little bottles.” And for example today we going to have a sampling afterwards and these comes from the second oldest bottler. It’s the Red Ribbon line; they are the second oldest and family owned and operated bottling company in the United States. I say second because everybody will fight over the first. Their products are completely unique, and when you taste them you’ll know. They are the last operational pinpoint carbonator. Pinpoint carbonation is made with dry ice; it’s not made on a mechanical carbonator the way everybody makes sodas today.

Peldi: Nice. Actually, do have any thoughts on the in house soda bubbler, soda stream? [Laughs] We just got one and we are pretty happy.

John Nese: I mean, when you drink mineral water, does all of it taste the same?

Peldi: Yes to me. [Laughs]

John Nese: Every water has its own flavor and there are bottling companies that are sitting on springs. And every water will have a different flavor. Not only do the waters have a different flavor but every manufacturer has a different hand on how they do things. And with those bubblers yes, if you’re just buying, you can buy a syrup and just put it in but you just don’t have that individuality. I mean you going to buy terroni(sp) syrups and there’s another one from France, or there’s another one from New Orleans – I don’t know where they are from, but anyway if you’re buying syrups and you are happy with them it’s ok. But you are not going to get that individuality of taste. I mean I’ve tasted a ginger ale that came out of a little bottler in Great Next Virginia it was called Carvers. And it was a golden ginger ale. That was probably the best ginger ale I have ever tasted. Well a few years later the company I don’t when it was, it was sold to a football player from the NFL and the first thing he did was close the place down, rush over to a contract bottler and have his ginger ale made there. And you know what? It’s not the same; you can taste the difference in it. So bubblelers are like contract bottlers, you’re going to get what you get.

Peldi: So must have a lot of people come through your store. Do you have any idea how many customers, repeat customers?

John Nese: No.

Peldi: what about some memorable customers? Did you ever become friends with some of your customers?

John Nese: Well yes, one couple in particular. They came from Michigan, and she was telling me, we were talking about things and she ran a little Italian grocery store and it’s been converted to a gourmet store now. And she was saying, “when my parents got ready to retire my husband and I talked about it and decided to take it over.” He was an engineer. And I said “why was your husband who was an engineer want to leave and take over a little family grocery store?” And she said, “for the quality of life. That it was important for her family and everybody knew where they were all the time, and any time her kids wanted to see her they knew where to go. Just go to the store they are there.” That really struck a chord with me.

Peldi: I could stay here all night. I wanted to open it up for questions to anyone.

Speaker 3: Groupon, do you know what Groupon is?

John Nese: No I don’t like Groupon. Because you have to pay them a percentage of what you earn. What we are going to do is we are going to go to the nonprofits in the area and when we do soda tastings, when we get by this thing with the South West museum we are going to go to soda tastings and we are going to do them for the benefits of things in the area. It was very interesting there was a library and they asked me for a donation and I told them what was going on with the South West museum and everything and she said, “would it be ok if I bought some products.” And it really struck me because she wasn’t asking for a donation, she wanted to do it. And they will be the first ones; we give them the total proceeds. Not a percentage or anything else. This is going to that library.

Peldi: So you pick where you give the discounts and why.

John Nese: And I think it’s important for businesses to be involved in their community because the politicians are going to get the money but who’s going to wind up with it. I mean politicians will sell out in a minute. They are going to sell out your community too. And they have by the way. [Laughs]

Peldi: Our community is the internet is so for now it’s a little more protected I guess, or harder to control. But we’ll see. So anyone else?

Speaker 4: hello, I would just like to ask do you use Foursquare for promotion.

Peldi: do you know what foursquare is? Have you heard of foursquare?

John Nese: No.

Peldi: it’s where people check in… No.

John Nese: yeah. The answer is no [Laughs] You’re talking to the wrong person. I am not computer literate. I was born way before.

Peldi: actually this might be a good time, what’s your website address?

John Nese: It’s sodapopstop.com or if you go to galcos.com they’ll both point to the same site. And in all fairness that site was done 15 years ago.

Peldi: so go open it up on your phones if you ask, there’s a nice animated gif but it works right. How much business do you from the website. Yes, And as Mark and I were talking and I said am really happy about my site nobody has been able to hack into it. And Mark says “oh that’s because it was built before the hackers were born” [Laughs]

Peldi: So I don’t know if Toby from Shopify is here. He helps businesses… we have people here who help businesses like yours with their online presence. Who would like to volunteer to help them with their website, come by later coz we could use the help. His assistant told me to say this. [Laughs] alright anything else, any other?

Spk4: so what percentage of your business is mail order versus…?

John Nese: Most of our business is walk in but we do have a very substantial mail order business. The problem with mail order especially with sodas and I have to tell you a little story. That was my daughter’s idea. And when we first got started I got a call from Tennessee and this man says, “I’d like to buy some of your great bet” and I said, “oh am sorry but we don’t ship.” My feeling was it was too expensive to ship. It cost more than the product. And the man he said, “well I’m taking a road trip about the grand canyon I think I’ll kind of swing buy and pick up some great bet” [Laughs] and my daughter is listening in and she says “now dad do you want to tell people how to spend their money?” and at that point I said “ok you take care of it” [Laughs]

Peldi: I think your daughter should be in marketing.

John Nese: She is very good at it by the way.

Spk5: First I wanted to say thank you for sharing your story. It is very inspirational that you basically told the big guy to go to hell; I will do business the way I feel that is best to my customer.

John Nese: Well yeah you have to. Because if you don’t they are going to own you. Now, there’s something else too. [Laughs] When they come in and they sell to you they are not giving you the same price that they are giving to the big guy. ‘Oh they buy more’ well where do you think your profits go? Your profits go to help buy shelf space in the big stores, so you are paying for that shelf space and they are helping to put other little businesses out of business. And so do you really want to do that. And the answer came back to me and no I don’t want anything to do with them.

Spk5: so my question, which actually is a follow-up, when you were actually thinking about this, what sort of fears did you actually have to overcome to just go in the direction you actually went.

John Nese: That I actually what?

Spk5: You decided to expand your soda offering and directly compete against them in a slightly different market, what sort of things were going through your head when you were making those decisions?

John Nese: Well it’s really easy to make decisions when you are going broke. [Laughs, Applause] and quite frankly we were going broke, we were in a controlled collapse and that’s when I thought about making it to 97, making it to 2000, 2001. Oh, first I wanted to make it to 2000 then I realized that the millennium didn’t start till 2001 [Laughs] and we made it, and then after that it was just boom, it hit. And you never know. If you quit, you defeat yourself. Nobody can defeat you but yourself.

Peldi: there’s lots of tweeting material in here. Anyone else?

Spk6: In the video you talked about different things, different products that you want to see and you’re like I can’t find this particular type of root beers and like that. Have you ever thought about getting in to actually making your own soda?

John Nese: Making our own soda?

Spk6: yeah, you seemed very knowledgeable It’s really interesting that you brought that up because we are In the highland park of Los Angeles. Highland Park area was the first area outside the [??] boundaries of Los Angeles that was annexed to the city of Los Angeles. And we had a number of very small bottlers. One of them, which was White Rose which was sitting on the white rose springs. Now they bottled up to the late 60s and early 70s. And so we wanted to do something that would be a continuous add on to the South West museum and so we brought it back. And this is the truth, the members of the community, computer people, graphic designers, actually found the old label and redrew it by hand and we came out with White Rose sodas. So on our side is the White Rose. You won’t see the label because we got work to do, but we did white rose.

Peldi: are the original business owners…?

John Nese: No, they are gone. We had to find a bottler who used the same type of equipment. And there were people around whom as little children who would walk out of their way after school to walk by the bottling plant and the people there would give them a short filled bottle of soda. And they told me, “you are really close.” It’s not exact, but that’s the best we could do. So that’s the one. And then a portion of the proceeds will go towards the reopening of the South Western museum.

Peldi: did you bring some today? Can we try?

John Nese: No, I didn’t bring any.

Peldi: I’ll have to order it.

Spk7: I’m into this kind of trend that people are into these days, like really nice cocktails. Something that started a revival around 12 years ago and do you feel like this is going to go through a similar thing, where you are helping bring sodas back in style I guess?

John Nese: That’s true. We are. As a matter of fact it was really interesting, Fortune magazine did a page on us a couple of years back, and I got a call from Pepsi cola. The head attorney from Chicago, and he is telling me that if we sell Pepsi cola coming from Mexico then he was going to sue me. And I said, “you got to be kidding me. I didn’t know I was such a pain in the ass to Pepsi cola.” And he says, “well you are not, but you understand, we are just trying to protect our investors.” I said,” ok, send me a letter.” So now I have the letter in a frame and its hanging on the wall. [Applause] And I don’t sell Pepsi cola.

Spk8: John we really appreciate what you’ve done for this industry that could have gone away forever. Could you explain maybe some good and bad anecdotes when dealing with so many small businesses?

John Nese: The bad what?

Peldi: anecdotes.

Spk8: Just stories about dealing with so many small companies, maybe some good stories or some bad.

Peldi: do you have some vendors that are easier to deal with than some others?

John Nese: Well you know when you are dealing with little people your size you know exactly what they are going through and they know exactly what you are going through. And their attitude is going to be the same thing. You know, you have to make a profit. You can’t run a business without a profit. And they understand that, and I would say the larger the vendor becomes, the more problems that you have because they want to control you. They want to do anything they can to control you and take your flexibility and your freedom away. And what you are doing is really important you know, you all know what an impact the internet has had, you all know what you are doing, but there is a problem out there and it’s called control. And the big guys want control and it’s your creativity that is giving them fits, you may not know it but it’s giving them real big fits because they can’t control you. And that is your edge over everybody. [Applause]

Peldi: one more question, last question. Or we can skip dinner and stay all here tonight. [laughter].

Spk9: ok so you talked about 97 as a goal and then 2001 as your goal, what’s your goal at this point? Are you in it to enjoy what you are doing right now? What kind of goals do you have at this point now that you have survived?

John Nese: Well we are going to go into…well I can’t unveil it, I really can’t. But we are going to do things that the other these pyramid schemes can’t follow. And when we do that it’ll take another step and set us completely apart from what they are able to do. Coz all they are able to do is just sell. And if ever get into those places, Peldi, if you ever get into Los Angeles I’ll take you out and show them to you. You walk in, the person who made the investment, he has nothing, people have nothing to do with the day to day operations, the people behind the counter don’t know anything about what’s going on. And it’s really interesting, one of the managers from one of those places who is just an employee, he is sending customers to me, so they got a much wider selection.

Peldi: they are not committed to the business.

John Nese: Yeah but he has a little more than most of the people that are working in the stores. I mean if you’re going to make your own you have to be there, and if you are not going to make it your own don’t invest in somebody else’s idea, invest in yourself. You’ll be way ahead. And you will be a lot happier. Believe me you will go to work every day, and you’re not going to work, you’re going to play.

Peldi: Alright, last one.

Spk10: just a follow up to the previous gentleman’s. Do you always drink your soda straight, do any of them make any interesting mixes or cocktails etc.?

Peldi: do you just drink the soda or you still use it to make cocktails?

John Nese: Oh no. I like just the soda, by itself. I’m very happy with it.

Peldi: Alright and with that bombshell, thank you very much. [Applause] Thank you.

It does contain lots of great ideas about management, but more importantly, some brilliant ideas about managing and thinking about your own life and what is really important.

“Over the years, he also noticed that many of his former classmates at Harvard and University of Oxford, where Christensen was a Rhodes Scholar, had ended up deeply unhappy. “Something had gone wrong for some of them along the way: their personal relationships had begun to deteriorate, even as their professional prospects blossomed,” he writes in the prologue of his new book, How Will You Measure Your Life? Many of these folks stopped attending reunions, and Christensen sensed that they “felt embarrassed to explain to their friends the contrast in the trajectories of their personal and professional lives.” Bloomberg Businessweek

How will you measure your life? is less about business, more about, well, life…

“When people who have a high need for achievement—and that includes all Harvard Business School graduates—have an extra half hour of time or an extra ounce of energy, they’ll unconsciously allocate it to activities that yield the most tangible accomplishments. And our careers provide the most concrete evidence that we’re moving forward. You ship a product, finish a design, complete a presentation, close a sale, teach a class, publish a paper, get paid, get promoted. In contrast, investing time and energy in your relationship with your spouse and children typically doesn’t offer that same immediate sense of achievement. Kids misbehave every day. It’s really not until 20 years down the road that you can put your hands on your hips and say, “I raised a good son or a good daughter.” You can neglect your relationship with your spouse, and on a day-to-day basis, it doesn’t seem as if things are deteriorating. People who are driven to excel have this unconscious propensity to underinvest in their families and overinvest in their careers—even though intimate and loving relationships with their families are the most powerful and enduring source of happiness.” Clayton Christensen.

We just shipped 50 copies of the book to the first of the 200 or so people who have already registered for Business of Software.

We are offering the next 25 registrants for BoS 2012 a copy of the book too. We know you will value what it contains.

He had them eating out of the palm of his hands. This talk is both hilarious and insightful. We would love to know what you learned.

Transcript for Rory Sutherland

I just want to begin by giving credit to one of the people who has been a great influence in my interest in this whole area who I think was one of the speakers last year; the author of the blog “Joel on Software.” In particular, those you who haven’t read it, his blog on pricing. If you search for “Gel camels and rubber duckies” trust me that is not quite a Googlewhack but it’s pretty close. You’ll find this extraordinary blog on the pricing of software which is one of the things that actually got me interested in the whole area of behavioral economics and the understanding that actually technology without psychology can actually be a source of dangerously misapplied effort.

This is the example I always give which I gave at a TED talk a few years ago. Er, a Eurostar train, which for some years now has actually carried people between London, Paris and Brussels and after about 10 years of this they decided to do what the French should done years before and upgrade the track between London and Folkstone which is where the train enters a tunnel to go into France. The cost of the track was about 6 billion pounds, about 9 billion dollars, and what this did is it reduced the journey time from about three and a quarter hours to about two hours 40 minutes. Now, don’t get me wrong, I am not absolutely disparaging the beneficial effects of engineering, I was just asking whether in terms of the hedonic opportunity cost, the best to improve this journey with a budget of 6 billion dollars would be actually to reduce the duration from three hours fifteen to about two hours forty. And most interestingly I think, is the fact that still after spending 6 billion dollars on making the journey bit faster there is still no WiFi on the train. [Laughter]

Now, I would argue for a creative point of view there are two sorts of people on the train: there are people who need to work and there are people who like looking out of the window. Those people who like looking out of window aren’t overly bothered by the duration of the trip, they probably quite enjoy it. It’s also worth remembering about train travel, if you look at the last train journey you made ambling about it was a nightmare except the train journey itself get into the station, carrying your luggage, getting up a flight of stairs, parking your car, buying a ticket, all this was absolutely dismal but once you actually set on the train it was really quite enjoyable. So, you might also raise a question which is why are you spending 6 billion dollars reducing in duration the only part of the journey which isn’t crap? [Laughter]

OK? A third suggestion in terms of hedonic opportunity cost is you could, indeed with a budget of 6 billion as an imaginative creative marketer, you could’ve simply employed all of the world’s top male and female super models, got them to walk up and down the length of the train throughout the journey handing out free Chateau Petrus. Er, you’d still have 5 billion left in change and people would ask for the trains to be slowed down. [Laughter]

There is a very interesting point which emerges from all this and it’s what I call the “Creative Double Standard,” which I think Josh will be interested in as well, I think Josh would support me here. When you have a creative idea it is, and perhaps quite rightly, heavily policed by people more rational than you. If you come up with a creative idea it has to be presented to people for costing, cost benefit analysis, ROI all manner of massive rational processes are deployed to police creativity. However, this does not happen the other way around. If someone comes up with an idea they think of as logical e.g. 6 billion pounds reduced journey time, they don’t go…Well this is probably quite logically valid but before I actually put it forward to anybody else I will show you some really wacky people to see if they’ve got some weird ideas they might come up with instead. [Laughter] [Clapping]

So, what you have institutionally at all organizations is a double standard. That creativity is really heavily pleased by rationality, whereas rationality actually goes dangerously un-policed, as I think this example shows; if you think creativity is expensive you should try logic. [Laughter] Logic can be spectacularly expensive because it takes you down a line of pretty much unquestioned assumption, without ever asking the question you know, is this whole thing based on a completely erroneous premise? Now, you gotta watch engineers here. One of the things you gotta remember about people who like engineering, and that applies to all kinds of engineering but particularly mechanical engineering, and indeed financial engineering, accountancy, other highly mechanistic disciplines which are strongly affected by what some psychologists call ‘physics envy’. It’s the belief that actually my discipline in order to have validity must have exactly the same level of mathematical consistency and predictability of physics.

But actually most things in life to be absolutely honest, certainly most things involving human beings and people, are much closer to meteorology than they are to physics [Laughter]. You know they’re much closer to you know, something deeply uncertain. The problem is, is that people who actually like the mechanistic world and are trained in it aren’t very comfortable with the blurry bit that comes when you deal with people. That kind of counterintuitive stuff the you know, stuff that’s completely counterintuitive, things that are entirely disproportionate, things that are illogical. Actually most of the people, interestingly the marketing director of Eurostar has now found that since they reduced the journey time he quite frequently gets complaints from people who said they preferred it when it was longer. That’s not completely crazy because if you are coming back to the UK bare in mind you have actually spent an hour and half getting through Paris dealing with French people, OK? [Laughter] After which you probably, to be absolutely realistic, earned yourself a good sit down. [Laughter]

So, the problem we face is that highly rational people are actually uncomfortable with a lot of the implications of psychology and indeed are uncomfortable with dealing with people fullstop. That’s why when you go to get your car serviced the human experience is generally so bad because the people who like repairing cars don’t like dealing with people. That’s why they leave you standing around feeling like a complete idiot for 30 minutes while you are waiting for anybody to say “Can I help you?” It’s that famous phrase which is often said about actuaries; So how can you spot an extrovert actuary? When he talks to you he doesn’t look at his shoes he looks at your shoes. [Laughter]

But actually this engineering bias, this physics envy, has far more serious consequences and this is an interesting exercise, if you look at these five university faculties, where do the suicide bombers come from? Islamic studies are a very-very distant second. Number one by miles is engineering, by miles. Now, if you want the back-up, not only was Osama Bin Laden from an engineering family in Saudi Arabia but Umar Farouk Abdul Mutalib was a mechanical engineer, Mohammad Aatil was an architectural engineer, Khalid Sheikh Mohammed got a degree in mechanical engineering and two of the  three people behind the Mumbai attacks were professors of the university of engineering and technology in Lahore. In addition to this I used this slide a week ago and someone rang up to find out that in Egypt the nick name for the Islamic brotherhood is the “Engineers Union” because so many of them are actually qualified engineers.

Now, in business terms this is an extraordinary fact when you think about it and if suggested, if you want to improve airport security [Laughter] don’t bother with things like ethnic profiling, religious profiling any other kind of thing just ask them what they did at university? If it was engineering, rubber gloves on basically [Laughter] The likely reason for this was investigated by two sociologists called Gambeter and Hurtog who believed that there is a particular mind set amongst engineers that distains ambiguity and compromise. They are more passionate about bring rewards to their society and see the religious unambiguous law put forward in radical Islam as a way of effectively taking your physics envy and applying it to how you behave in everyday life. In other words you know, a scientific approach to everyday life which allows for no compromise or ambiguity. And actually it’s interesting that the report from British Intelligence shows that Islamic extremists who from (?) college campuses actually specifically single out engineers as the most likely recruits.

Now, don’t get me wrong. I’m not disparaging engineering culture or indeed the huge advances its bought to humanity. I’m flying back this evening on British Airways I don’t want to think that the people who check the wheel nuts on the plane are desperately creative and imaginative people. [Laughter] You know, “Ah hell let’s try anticlockwise this time!” [Laugher] You know, “let’s just break with tradition.” But none the less, I think it’s important to be alert to the fact that the very best things in life, the very best advances actually comes somewhere from the sweet spot. They make economic sense so that they’re self sustaining and they work but they actually employ not only technological ability and insight, but also psychological insight. And the very very best things do this very very well.

This is a great example from of psychological insight applied to traffic lights. Now, on the London underground the single most effective thing they did to improve passenger satisfaction per pound spent didn’t involve a single extra train, a single extra yard of track. It was simply putting dot matrix display boards on the platforms to tell you how long you had to wait for your next train. If you purely give an engineer’s the brief the dangerous they always want to put more trains on or not totally stupidly they might have said “Now we can track trains exactly to the you know, to a 100 yards, we will make sure that the service becomes more regular with the same number of trains” that’s not bad by the way. What’s better is if you realise that actually what’s bad about waiting for a train isn’t waiting it’s uncertainty. You’d probably be happier mentally waiting seven minutes for a train knowing it was going to come in seven minutes than actually waiting four minutes for a train when you weren’t sure whether a train was going to arrive at all. Someone’s taken this insight to traffic lights and realised that waiting on a red traffic light is a hell of lot less irritating if you know how long you’ve got to wait. And so they very sensibly employed this count down device which ticks along the outside. And in Korea they did some tests and soon found that it significantly reduced accidents at interchanges because it kind of reduced road rage, impatience and the propensity of people to jump the lights. I might add that there is a very bad application of this which someone didn’t think of very clearly when in Shanghai they now started applying this to green lights [Laughter]

If you think about it anybody approaching from a 100 yards away realizing they‘ve got the three seconds of green left fairly instinctively just decides to floor it. The Koreans tested this and found that all credits to their dedication to the scientific method, the Koreans tested this and found that applying it to green lights increased accidents. Someone forgot to tell the Chinese that what applies in one situation doesn’t apply in another. But I think you know, we can take, I mean one of the very interesting things anybody who is in the usability experience or the customer experience business actually is possessed to psychological insights like this which you learn over time, which actually could be deployed elsewhere. One of the greatest insights of all is I think the software loading bar without which no one would have downloaded anything ever. [Laughter]

Some mark of progress is what you need if you are going to wait, my argument is why not apply this to other things in life this is you know, if you take antibiotics; huge dangers are rising in antibiotics because people tend not to take the full course of antibiotics as prescribed they give up early as soon as they feel a bit better and this causes a risk of resistant bacteria developing. Why not take the practice of the loading bar to antibiotics? Don’t give to even 24 white pills give them 18 white pills and 6 blue ones and tell them when you finish the white pills take the blue ones. It’s called ‘chunking’, it’s the business of psychological insight in behavioral economics that if you spilt a task into sub tasks each one of which actually you know, has a clear milestone when you complete it, people are much more like be to complete the whole task.

But the problem we have is that actually that within business psychology is woefully at the moment lacking an entrance, marketing lacks influence, sales in many ways lacks influence. And one of the reasons is I think, that actually in economics there was a similar group of people who also believed that actually the perfect market hypothesis meant that you could therefore apply a kind of you know, rigid economic law to business. You didn’t need to understand people you just needed to understand balance sheets. That was actually a quote from a business guy in the UK. “All I need to know about my customers, I can read on a balance sheet because it tells me the only important thing which is: whether they are buying or whether they are not.” That’s an incredibly absurd reductionist approach to human understanding, particularly as you realize that nearly all the really successful businesses you see are usually based on a really-really good human insight.

McDonalds I will talk about later but actually Ray Crock had a fantastic human insight he had several, one of them that ‘most people don’t want the best burger in the world but actually they want a burger that’s just like the one they had last time.’ That actually in psychological terms, avoidance of disappointment or unpleasant surprises is actually more important to us then the attainment of some kind of platonic ideal of perfection in the burger. And that’s why you will notice in McDonald’s the rules for example, you toast the bun for 37 seconds and so it is absolutely rigidly applied. And we also don’t have first principles. There aren’t any, if you get stuck in marketing there aren’t any first principles you can go back to as there are in most disciplines but Ludwig von MIses, erm, anybody heard of it? Any Austrian school…? Well this is extraordinary! Iin the UK nobody has heard of him, obviously delighted that von Mises institute is in force. He has a few utterly brilliant things which fascinate me. One of them is his understanding that it’s completely wrong to differentiate, and this is what makes it very sympathetic to an advertising man such as myself, it’s completely wrong to differentiate between intangible value and actual value. He believes that most economists and most businesses make a completely stupid distinction between a primary product you produce and other things you do around that product that give it value. For example marketing, advertising, positioning and so forth. And a brilliant analogy he uses, he says, ‘if you run a restaurant it is impossible to distinguish between the value you create in a restaurant by cooking the food and the value you create in a restaurant by sweeping the floor.’ The one of them is your primary good. None the less if you run a restaurant where the food is spectacular and Michelin quality but there is a faint smell of sewage in the air the best way, because the Austrian school believes that value is subjective- it’s contextual and subjective and can only be defined in subjective terms (they also interestingly in the Austrian school refuse to use math because they believe that numbers are an inadequate way of actually representing human preference and therefore, they actually spurn most of this sort of mathematics stuffs the physics envy stuff that goes on a neo- classical economics.)

But that’s a fantastic point because actually one of the things it says is that you know, if you know if you’ve got a restaurant that has fantastic food but there is a slight smell of sewage around it, don’t try and improve the food. That actually it’s impossible to distinguish between the subjective part of value which is the context in which the primary good is consumed, and the frame of mind in which the primary good is consumed and the actual nature of the good itself. You can’t say one of them is genuine in value and the other one is artificial. That’s a very-very interesting and very sympathetic way of looking at marketing which I have never come across elsewhere. If you notice of course that many of the things you know, that actually are own perception of value works that way. We can’t disentangle in many cases the quality of food from the environment in which we consume it. We think we can but I genuinely don’t think I genuinely don’t think we can. I think you know, when you are in a bad mood you know, when there is something wrong with the surroundings is simply less valuable food. We don’t necessarily attribute the causes accurately.

I know this phenomenon which you might call a sort of ‘perceptual blurring’. Anybody had occasion to have that car validated? It’s a brilliant thing to do because it only costs about 0.1% of the cost of a new car and gives you 50% of the pleasure, particularly if you have children they tend to mess your car up OK? But one of the things I noticed whenever I had my car valeted I left it with someone and then they clean the car and sort of hoovered or vacuumed it and sort of cleaned the upholstery. And when I drove the car away I don’t know if anybody else has noticed this, it feels if it drives better? [Laughter] Does anyone else notice this that when you clean your car you drive it out of a car wash and weirdly it feels as though it’s driving better? Now there are two possibilities here: either when I leave my car to be valeted unknown to me and completely unpaid they decide to do a complete service of the car, replacing various barings and lubricating the thing, or actually it’s something going on in my head. But actually I think that that extraordinary connection between our psychological perception of things and what those things actually are is something I will be talking about going forward. But it is extraordinary the extent to which actually we, I think in our heads aren’t really capable though we think we are of actually separating the two. I don’t we can really separate the quality of a product and the nature of its brand. I think the two actually become inextricably linked or if not inextricably linked they color each other to an extraordinary extent.

Now the other reason I love von Mise is because the Austrian school, growing up in the first half of the last century were also sort of rubbing shoulders with people like Freud. And as economists they believed that economics is actually a subset of psychology, I think most modern economists believe it’s the other way around; you have perfect economic modals which are fantastically efficient, you develop those using mathematics and then impose them on people. What von Mise would say is no, praxeology, which is the discipline that Austrians use which is the science of human behavior and decision making, he believed as a prior discipline to economics. I think the Austrian definition is that praxeology is the study of…Sorry the economics is merely the study of human praxeology under conditions of scarsity, that’s largely his definition. That’s an extraordinary useful acknowledgement which actually the world would be a much better place if it actually remembered that.

Charlie Munga, Warren Buffet’s business partner puts it another way in support of behavioral economics he simply says, “If economics isn’t behavioral, I don’t know what the hell is?” So, what I’m hoping for in marketing is actually a new vocabulary. What we have if you look it…If you talk to marketers, the language of marketing is much like the language of astrology which is it’s fine if you are talking to fellow believers but it’s not all that great if you are talking to anybody who doesn’t believe. You know, if you’re an astrologer and you believe in astrology you can chat to all your astrological mates and say “Oh! That behavior is typically Sagittarius and they will nod along. Anybody else thinks you are lunatic. My brother has this problem particularly acutely as he’s actually an astronomer and occasional at parties you introduce yourself, ‘I’m an astronomer’ and they say, ‘that’s very interesting I’m a Sagittarius’ [Laughter] At which point he makes his excuses and heads to the lavatory [Laughter].

But one of the things behavioral economics has given us is a whole variety of words which are scientifically validated by first rate academics at very-very good universities. And understanding and introducing this vocabulary into marketing is of enormous value because actually it’s a kind of psychological Esperanto. You can use this language unlike the language of marketing to talk to finance guys – in fact guys are usually very interested in behavioral economics funny  enough because of course it’s based on a recognizable discipline that they themselves know and simply builds on it rather than being entirely alien to everything they know and believe. Some of these availability signaling that’s a Darwinian term in many ways that actually what we do is we signal things through our actions- I will talk about that a little bit later. Handicap: that’s the peacock’s tail thing – the reason the peacock has a huge tail is to signal to female peahens to the right extent actually that it has resources to spare that you ought to think of actually breeding with me. Obviously there’s a degree of consent in peacock sex which differentiate from same senior French bankers for example. [Laughter] But I actually have so many resources I can actually carry around this tail for purely decorative purposes, that’s how I fit I am.

Now arguably the Ferrari is effectively the sort of you know, the human male equivalent. It also interestingly has to be slightly pointless or wasteful to have meaning, it has to be a handicap you know, if woman were merely attracted to man with expensive vehicles they’d all chase truck drivers but the truck doesn’t serve a useful signaling purpose because it’s actually useful [Laughter]. What you have to be doing is you have to be buying something with spare resources in order to have meaning. Framing, comparison and context I’ll talk about later. Immediacy is an extraordinary potent thing. The part of our brain, our brain is bit like an Intel Duo Core Processor, it has an older, what I call type I lizard part which mostly operates unconsciously and it has you know, a lot of frontal stuff which is where of course our consciousness comes in. Of course because our consciousness is our consciousness we grossly over estimate the role it actually plays in human decision making because it’s all we’re actually aware of. In fact what it’s mostly doing is ratifying our post rationalizing decisions our inner lizard has already taken. The virtues of the lizard brain, which is why we haven’t lost it completely, is simply that actually it’s very-very decisive and very-very fast apart from a few other virtues as well.

So, if you are about to be hit by bus don’t use complex physics to work out how to jump out of way. Rely on the lizard brain and it would be much more reliable. It’s much more decisive, it’s much quicker, it’s also extremely difficult, not quite impossible, but very-very difficult to actually make decisions which don’t involve the lizard. It’s the bit that actually plumps for ‘I’m going to do this, I’m going to do that.’ There are people who have lost that ability through a brain injury and they find it absolutely impossible to make a decision. If you say, ‘do you want to come and meet on Wednesday or Friday next week?’ they’ll start deploying all manner of statistical information like what the weather’s likely to be like and actually end up in a complete funk. That’s because they are trying to actually make decisions using only rationality which is almost impossible to do. The lizard is ultimately what makes the choice. The lizard basically only operates in the here and now. It’s very-very short term in its focus. That’s why it’s so difficult to give up smoking actually because that part of your brain’s decided to have a cigarette before you have a chance to over rule it in any meaningful way. The only solution would be actually to put a kind of timer device on a packet of cigarettes which require a 10 minute delay before it opened, rather as safes in strong rooms have, then might give you a chance of actually overcoming the problem. It’s why actually immediacy really matters to us in an emotional way. The speed of feedback is as anybody who is designed a website knows -just speed – is an extraordinary potent thing in the success of any transaction online. One of the worst things, there are several crimes that the DVD player commits against behavioral economics and one of them of course is choice architecture, where you have 80 buttons on the remote control,  40 of which you will never use and have no idea what they are for but those buttons are often no larger or no smaller than the buttons which control functions like ‘play’ or ‘stop’. The second rate crime of the DVD but most annoying thing of all is that when you press ‘eject’ nothing happens for three seconds so your lizard brain- panicking that actually you haven’t pressed the button, presses it again, [Laughter] which means that the DVD comes out, taunts you for a second and half [Laughter] before disappearing back into the machine. That’s what I mean, about immediacy really-really matters. The here and now really-really matters, extraordinaryly short term things will affect purchase decisions, even when you are choosing a pension the ease of form filling will have an effect on whether you choose the pension or not despite the fact that logically choosing a pension should all be in the sort of 30 year time horizon, our immediate irritation or the opposite has an insane effect on how we respond to anything.

Now, what’s quite interesting. This is a bit of game theory if you think about it. What’s interesting is that we understand a lot of this actually subconsciously. An engagement ring is a commitment device. It says that I’m probably going to buy the purchase of this extremely expensive thing in which I have very little you know, selfish interest but one of the reasons women like flowers and jewelry is precisely because men are not remotely interested in flowers or jewelry. Therefore, when you buy them flowers or jewelry it’s patently involved some sacrifice on your part. Whereas if you buy them for example a remote control modal car or PS3 [Laughter] there is the suspicion of self interest. Just a smidge of suspicion, whereas flowers and jewelry interestingly there is no such suspicion because basically they leave blokes completely cold, OK? This is an interesting thing because it effectively says, ‘if I were planning a one night stand it is unlikely that I would have invested this much money in jewelry upfront OK, it’s actually a commitment device. Brands work in a very similar way. If I have spent, in game theory there are of course two separate things; there’s the short game where you just grab as much as you can immediately and the long game where you try and build up some sort of reputational currency, OK?

All tourist restaurants play the short game, why? Because nobody ever comes back, possibly incidentally why things like trip adviser are changing that. Meaning the tourist restaurants that you visit once do actually develop a reputational currency and we can kill them off. But actually until recently tourist restaurants were notoriously bad because they knew you were never going to come back however good the food was so, why produce good food? What this is saying, what this upfront investment is saying is ‘I am probably because this is expensive and to have meaning signaling sometimes has to cost money, I am probably playing the long game’, OK? And a brand is doing the same. It has taken me 15 to 20 years to build this brand, it has cost me an enormous amount of money in terms of advertising and reputation building, therefore it is probably not in my interest to make a quick buck by selling you something that is rubbish. What’s interesting about this is its quite sophisticated game theory, we do it instinctively, we don’t do it rationally. We just instinctively know that someone who is a big brand is less likely to actually try and play the short game than someone who isn’t. So brands are, indeed as some economists criticize brands for being barriers to entry but they are barriers to entry precisely because consumers want to barrier to entry. I don’t want to spend £800 on a television from someone who can simply rock up and say I now make televisions. Just as actually I want my doctor, I don’t know about you, but I want my doctor to have some barriers to entry you know, maybe like spending six years at medical school rather than just deciding ‘today I will put on a white coat.’ [Laughter] That actually the upfront commitment, the upfront effort is a form of signaling.

Now, satisficing versus maximizing it’s worth knowing most decisions Herbert Simon and Carnegie Melon came up with these two phrases, “most decisions in most categories most of the time are satisficing decisions not maximizing.” Actually we are risk averting human beings -fear of loss, fear of disappointment actually act twice as powerfully on the human decision making process as hope of improvement. That’s why it’s actually so difficult to make progress through -a competitive progress- through gradual innovation. If you are bit better than Facebook I’m sorry you’re not going anywhere because actually for in many categories most of the time this category is already satisfied by something which satisfices. It’s pretty dam good. So, a little bit better is not, if you follow that sort of utility maximizing belief in human decision making in that classical economics espouses that everybody will actually replace everything with something a bit better, but actually something that you know that you are familiar with, that your friends have and it’s pretty good has a very-very powerful position at the market place. It can get absolutely wrong footed by total disruptive innovation, just as to some extent the Ipod totally changed the heuristic in terms of home recorded music, I had friends it was all about sound quality, remember that for years and years  it was all about sound quality and my friends would say you know, “my speaking cable cost $200 a foot and is woven by elves, OK?” [Laugher]. And then the Ipod came along and actually the sound quality isn’t all that great but I can carry all my music in my pocket, and that’s disrupt innovation. It changes the game completely but actually incremental improvements on what already exist are not a fantastic way to create market disruption simply because of this satisficing thing.

It also explains how brands work that actually if you want to understand McDonald’s – you know there isn’t a single town in the world where McDonald is the best restaurant in town. But most of the time it’s not worth the effort to find the best restaurants in town and finding it may entail significant risk. If you go to a Michelin starred restaurant your chance of having a horrible meal is actually much higher than it is at McDonald’s, to be absolutely honest, and all of you had had bad meals at expensive restaurants in a way, more of you have chosen the wrong thing because you didn’t know that word was actually the French for boars testicles or something like that [Laughter]. OK you know, the element of risk of finding out something better is quite high, I might cock up completely. Whereas there isn’t a single town in the world where McDonalds is the worst restaurant in town. I know exactly what I am going to get and McDonald satisfices brilliantly. I won’t get ripped off, I won’t get food poisoning – all those really bad things you know, don’t really apply. So, you can only really understand the success of very many brands if you understand satisfysing. The heuristics are fantastic because these are the subconscious processes I mean I suppose algorithms you can actually say in your language which we use to do things instead of using rational logic. Very few of the world’s best baseball and cricket players are fantastic theoretical physicists, you’ve noticed that. And the reason is that although the theoretical physicist are better at doing the physics of the trajectory of a ball, that’s actually a very slow way of solving the problem of where the ball is going to land. What we do is we use a heuristic, not only humans but just to share how deep in the human brain this is probably buried, dogs catching frizbees use exactly the same heuristic. What you do is you look up at the high flying ball and then you calculate the angle of gaze and run towards the ball at such a speed as keeps that angle constant. That’s the heuristic we use. It’s less optimal arguably then doing the physics but it’s about 100 times faster. So, also means you are of course solving the problem while you are actually running, while you are lessening the problem, see what I mean?  Whereas the physics requires you to sit down, get a calculator out and go ‘Oh dear it’s landed over there,’ OK ?[Laughter]

This problem, but there are huge areas in human decision making where we deploy heuristics without being even aware of it, presented with three things: cheap one, middle priced one, expensive one, most people -the very rich and the very poor are different – most people go for the one in the middle. Steve Jobs – a very big believer in the rule of three which is why nearly all of those products – the iPad and the iPhone etc come out in three variants. The choice making is sort of easier when we have three because we all understand that kind of rule of three. So that’s an example of a heuristic -the one in the middle for example -and this is sort of on the motherboard, it’s not in software as a lot of this stuff actually exists somewhere fairly deep within us. Choice architecture is how you frame choices so that people choose in the way you want them to chose or indeed simply in a way that makes it easier for people to choose. Because if you make it difficult to be able to choose, what they do which is bad in marketing terms is that they choose to do something else which is nothing at all, OK? There is always the fith choice or the fourth choice or the third choice which is don’t do anything at all, it’s a pretty common default for human beings -when in doubt do nothing therefore, in order to get people to change their behavior whether it’s to make them more environmentally friendly or indeed you know, to get them to buy something actually making the decision easy and risk free is spectacularly important.

This shows the importance of a kind of…This is the difference between different countries in Europe as to whether they agree to be organ donors in the event of their death. Nothing to do with the culture, religion, politics or anything else the whole thing is the countries on the left deploy an opt-in form where you have to tick a box, the countries on the right employ an opt out form where you take a box if you don’t want to give your organs in the event of your death. And that sort of known default which is I don’t really know whether I want to or not so I will just go with a norm, I will just do nothing, I will not take something because it’s seems the safe option. It has a huge effect. I always think the Japanese shopping trolley, the medium size shopping trolley was a brilliant idea. When I was a kid there were two ways of shopping in the super market; you had a massive truck size trolley and you had a basket and so you thought well that trolley is insanely large I’ll have a basket and you ended up buying a lot less you could of because the dam thing cost, weighed a tonne. The Japanese come up with the third option, you know, what you might call the 32 gigabyte version of the trolley. And it’s the one in the middle and that’s the one that everybody chooses and it’s an ingenious idea.

I work with BP back in the UK and they have BP ultimate, which is quite a bit superior I hasten to add.  But I suggested that if they wanted to sell a lot more BP Ultimate, they needed to create a third fuel called BP Super Bling-tastic Massively Expensive Ultimate which cost 15 dollars a gallon and everybody would look at that and go ‘well that’s a bit expensive, I’ll just have the standard ultimate in the middle’ [Laughter]. When we choose through a wine list, we all use heuristics like third one from the bottom, we don’t know what we are doing , we use prices a proxy for quality. Here is an example, how many people have seen this extraordinary case from (?)? The original choice was between the Economist subscription of $59 digital only and $125 dollars for Print plus digital. At that case 67% people or about two thirds of people at least chose the top one, I’ll  just have the digital one. They added a complete dummy choice $125 for the print edition only without the digital access to the archive. What’s bizarre is that that’s a completely daft choice. No one would choose it unless you have some bizarre hostility to online media. [Laughter] Nobody did choose it in the experiment but it completely changed the choice that everybody made. Suddenly two thirds of people choose the bottom one because the frame of reference changed. Ssuddenly the frame of reference was not ‘Ooo it’s more expensive to get it in print’ it was weirdly, ‘if I get print subscription I actually get the web subscription for free.’ So, this drives classic economists almost insane [Laughter]

A German car manufactures sells 30,000 more cars by simply not knocking 3,000 euros of the purchase price but adding 3,000 on to the trading price of your old car, it’s probably a framing effect that actually 3,000 euros on top of eight seems a lot more generous to deal than 3,000 euros knocked off 22. Now, this all you know, very-very well that our perception of everything- value included – actually it’s true of temperature, brightness, color, volume, pain, heat more  or less anything – pitch with if tiny exception of people who have perfect pitch – about 2/3% of people – all our perception is actually weird and relativistic and contextual just as the Austrians predicted under praxeology. We pay $2 for a tea or coffee out on the streets, we pay about 2 cents at home. It’s probably fair to say that’s not a 100 times more enjoyable, it’s just we have the different frame of reference when we do that and we don’t regarded it as particularly ridiculous. Strange but kind of true. We don’t have an inner unit called the hedon which measures a unit of pleasure, I mean I will $5 for a hedon, there is no means we have of actually making a trade-off between money you spend on property and money you spend on radio controlled helicopters. Personally my wife doesn’t agree with me, I prefer to spend the money on radio controlled helicopters but there you go. The problem is that in conventional market research first of all one problem; it defies logic, so logic, the engineering mentality, the physics envy mentality won’t get you there. Second problem is a lot of this stuff does not come out in market research because people are not consciously aware of their own heuristics. Not a single baseball player could describe to you how they actually catch a ball. They had to discover that by actually doing experiments with people catching balls and with dogs and with Frisbees, no one is actually aware of these mechanisms because they actually exist at a subconscious level.

So, in market research the danger is that they won’t come out. There is also a danger in market research which is people like to presents themselves as being maximizers because it makes you look more logical and sensible and sort of more demanding of quality. Whereas in reality many-many decisions are taken from a riskier version stand point not from a perfection stand point. Now there are exceptions, if you are getting married or you are having a wedding anniversary meal, there is a degree of maximization because it has symbolic value. If you are a massive motorbike fan and once every four years you buy a bike I think it’s fair to say that bike you’ve talked about it, read about it, you know, there is a huge amount of maximization involved in choosing your bike. If you are a real fan boy in one or two particular areas but in most categories most of the time most people satisfice. The only problem is they don’t realize it.

Now just to prove how relativistic human perception is, here is a chess board. You will agree that A is one of the dark squares, quite a bit darker than B. However, it’s only the context that is making you think that. If I change the context to show you the colors as they actually are you will see that in reality A and B are exactly the same color, they are exactly the same shade of grey. It may take a few seconds but you’ve all got that haven’t you? If I change the context back again it’s now impossible for you to see that. This isn’t one of those optical illusions where you go, ‘Ooo now I get it. Sorry, silly me.’ That’s how extraordinary relativistic our perception is. There it is, I think you will agree an even rectangle but if I change the context it’s now impossible for you not to see that as being darker on the right hand side. And that applies to our perception of value, it applies to our perception of pain, of pleasure, virtually everything we perceive actually operates on a kind of relative scale, not on an absolute scale. It’s one of the reasons, who’s got an espresso machine? I’ve got one. I love it. OK however, it occurred to me one day that if you actually filled this thing with a jar of coffee like Folgers or Maxwell House per unit of caffeine you’d be paying about a $140 per jar OK? Becasue this thing is fiendishly expensive and you will all agree OK. But the weird thing is they get away with it. Why? Because I don’t know how much a spoon full of Folgers or Maxwell House cost. I never bought Maxwell House by the spoon OK, and so because this thing doesn’t come in a big jar like Maxwell House I can’t do the comparison it comes in little metallic pods like this, so my only frame of reference is not Maxwell House it’s Starbucks and I am going well I pay about a dollar for a shot of coffee in Starbucks whereas this only cost 35 cents. The machine is practically paying for itself [Laughter] and that shows how powerful a perceptual relativistic frame is on our perception of everything. It also works I think after the event I suddenly  realized what went badly wrong with the marketing of Tele presence and video conferencing and no one could blame the people for doing it and I certainly wouldn’t have spotted this in advance. I can only spot it now in hind sight, which is they made the mistake of making video conferencing what economist call on inferior good, which is something you only buy when you can’t do something that’s more expensive -bus travel, coach travel is kind of an inferior good, unless you call it a jitney of course in which case you brand it completely. That’s a New York reference. Do you have a jitney in Boston? What they did with video conferencing is they made a terrible mistake. They made it the poor man’s version of air travel. They should have made it the rich man’s version of a phone call. If I’d been CISCO back 10-15 years ago I would have said we would install one of these things in your office but only in the Chief Executive’s office. Because what it became was like margarine to the butter of British Airways. It was like the pager to the mobile phone of air travel. It was what your company let you do if they didn’t trust you to get on a plane.

Therefore the relativistic frame even though all the logical arguments for this thing stacked up, in signaling terms it kind of said to your client, ‘I can’t be bothered to come and see you but I will go on video conference with you.’ But also to your staff it said, ‘we don’t really trust to you to get on the plane but you can video conference.’ It was like saying, ‘well we went let you go to Frankfurt because you’ll only get drunk in the mini bar and watch a pornographic film in the hotel, but tell you what we’ll trust you to go down into a basement room. You can look at a pixilated image of your client for 10 minutes.’ Now, if you position this as the rich man’s phone call, that incidentally is when they launched post-it notes, they gave post-it notes to the 499 other personal assistants, to the 499 other CEO’s in the fortune 500, this is three am. So, the first post-it note seen within an organization came from the top, not from the bottom. A very very important thing, the way that the executive mind works,’ my boss has small adhesive squares therefore, I must get some too.’ That’s the point of relative framing in terms of anything. If you end up as the inferior cheap substitute for something else you have failed.

We need comparison to decide.  I have Spotify which some of you will know is equivalent to -there are various US equivalents of music streaming companies. I said £9.99 a month for infinite music may not be a great idea because I don’t know what infinite music is worth, I haven’t got a clue OK? What’s infinite music worth I mean you know, I also would I also be sort of ripped off because I am subsidizing people who download a 100 times more than I do? You know, what’s all this going on? Asking how much do you want to pay for infinite music is like to me saying would you like to buy my unicorn? You don’t really have a frame of reference where you go “Yeah-yeah Unicorn $50” [Laughter] OK, so I asked theoretically I said, ‘would you actually have more success if you set an artificial limit you said actually 200 tracks a month, people then think $200 tracks a month, that’s 20 CD’s cost about you know, it cost about $140 OK, that seems pretty reasonable.’ But without a frame of reference we often find it very difficult to decide. This shows how hugely we are affected by one in the middle psychology. Two lagers; there £1 and £2, Carling and Budweiser. 67% buy the Budweiser £2. 33% buy the Carling. Add 30p Tesco value lager. Nobody buys it but it drags the rest of the category down market. 47% buy the Carling, 53% buy Bud. Now you add a premium French Cronenburg for £4 in a bottle, 10% of people buy that and 90% of people buy the Bud, nobody buys the Carling. That’s the extent which we choose things relativisticly, not absolutely. That would drive classical economists practically insane by the way, but that’s how we fundamentally choose according to what the frame of reference is that we are particularly looking at at the time. It shows the power I think of one in the middle bias as well that we tend to be drawn towards that on the middle it also shows an important thing by the way which is don’t necessarily if you have various levels of service don’t necessarily judge the profitability of each on the actual economic contribution it makes itself. I said to British Airways I said, ‘don’t judge the profitability of first class exclusively on how much money you make from first class passengers, you have also got to look into the effect that first class has on normalizing business class travel’. Because we can be pretty sure that  can’t we that company that if British Airlines get rid of first class it won’t be long before employers start saying I think you should move a little bit further down to the back OK? It’s a frame of reference once again Ops! I went back by mistake.

By the way you can exploit this frame of reference again,  if you want to sell these cars 350, 450, 500 thousand dollars, don’t sell them at a car show, sell them at a yacht or plane show. After you’ve been looking at Leer jets all afternoon and decided in a fit of responsibility not to buy one,            as you are walking pass the exit: “Ah I’ll have a couple of those.” [Laughter] OK?

Huge potential. Once we actually abandon the straight jacket of conventional, classical, logically economics the huge potential arises for innovation in terms of pricing. I mean,  I think Amazon prime is a work of genius. It also brilliantly gameifies pricing for me so I think having paid this £35/£30, it’s 50 dollars here, 79? Blimey! It’s gone up. But it hugely gameifies things because I go, “right, I am determined to get you bastards to pay me back” and sizes to ordering everything [Laughter]. I think that’s what you intended wasn’t it? OK but actually you know, the possibility to actually innovate in terms of price.. we are just looking at a brief for getting people to shave electrically again rather than using disposable blades and we ask the question if you could price electric razors monthly they’d look like a bargain compared to Gillette, Super nutter Bastard four blade whatever it is? [Laughter]

Impulse saving: I talked about the fact that we make decisions very instantaneously. Financial institutions knowingly discourage us from saving by the making of practice of saving very-very time consuming and boring and involving paperwork. This thing we invented with an agency in Australia for West Perth Bank it’s called impulse saver, it’s an app for the Iphone and when you are drunk you just press the button. It goes ‘kerching’ and it moves $10 into your savings account [Laughter].

My argument is; we can shop drunk so why don’t we let us save drunk? Let’s even the balance a little bit after all we are suffering from a savings crises but also you all know those moments. They don’t happen very often but you’re looking at your bank account and one in three months or something you know you think, ‘actually that’s slightly better than I thought.’ You can actually then exploit the moment, but actually its more like that you are drunk and you just like the ‘kerching’ noise it makes. But I mean, that’s why we shop most of time, let’s be frank about it. Most of you probably know the 300 million dollar button? How many.. changing one single word, er which is from register to continue on any retail websites checkout procedure increased sales by 300 million dollars demonstrably over the following year. It was very weird because it by stopping people to leave…By not forcing people to leave their Email addresses before they purchased and instead of giving the option of doing it later, you’d think that you know, this must mean people hate giving their email addresses so after they’ve purchased no one will leave their email addresses. Then when they changed it, 90% of people still happily left their Email addresses. What it was, there was something fundamentally wrong about that order. There was some element of unease that was just in encountered by the presumptions of asking for something from somebody before you have gone through the transaction page. The weird stuff like, you all know the thing, if you can reduce to checkout procedure in a website from 3 clicks to 2 your sales go up about 40%, that’s basically the lizard brain at work. It’s not rational economics at work, it’s the lizard just going, “mm, I don’t know, I feel a bit uneasy.”

You know, it’s look like those scenes in airplay, you know, that feeling of sort of you know, ‘should we turn on the runway lights? That’s exactly what they’ll be expecting us to do.’ [Laughter] You know, it’s that slight feeling of inner disquiet, which is trivial in the scheme of things, just prevents a sale from actually happening. If you can resolve in a disquiet, even if that disquiet only lasts a second or two, you can make a sale which wouldn’t otherwise. Now this maybe  totally uninteresting to Americans. Do you buy eggs in sixes and twelve’s? We do. Yeah, sixes and twelves. I presented this in South Africa. South Africa’s completely weird because you go into the Supermarket and you like buy a whole cow and things like that. [Laughter] They don’t have normal sort of quantities that we do in Supermarkets. And they say, ‘well, we buy eggs in hundreds’ or something… OK, well but anyway and I always have because I’ve got two young girls. Six isn’t quite enough and 12 is too many? OK, cus’ if you buy six then the girls decide to make cup cakes at home and I end up with one egg you know, left. Alternatively 12 sometimes seems to be wasteful and a bit extreme. And I always had that brief, I choose free range eggs because they’re nice and then I always have, it only lasts a second but if you ask me to do the market research I’d never be able to point it out, but also that slight little bit of “Ummm,” unease, “Do I buy six, do I buy 12?” Waitrose – work of genius – sell nine. It only lasts a second but it resolves that inner conflict.

Now bear in mind that inner conflict between things, we experience in a very similar part of the brain to which we actually experience physical pain. We actually experience things like information that contradicts are prejudices apparently, actually absorbing information which is contradictory to an existing prejudice, actually registers in the part of the brain where we actually feel pain. And so understanding that even if that’s only a one second dither, if you can actually resolve that problem in that one second you’ve probably got a sale. Path dependency and decision making needs much-much more work. I always think that 1800 mattress in Manhattan is a work of genius because one, it realizes that when people are thinking about replacing a bed their principle concern is not, ‘what brand of mattress shall I buy?’ It’s: ‘how the hell do I get rid of the old one?’ If you live in a really poor area you presumably just lob it out of the window. If you are a really-really rich you can get your butler to take it away but for 90% of Manhattanites, the problem is; ‘I’m in Manhattan, I probably don’t have a car, how the hell do I get rid of a mattress?’ So their promise: ‘we’ll take your old mattress away’ is a simple work of genius because it resolves the discomfort and disquiet where it is at the critical point in the decision making path. And it almost a preemptive strike, if you like, on the shops that actually sell mattresses conventionally.

A fascinating thing about the relativistic nature of perception, and I thought given them I’m in New England what better to have a Hopper painting, and one of the reasons why I love hopper is he completely re-brands, for me, experiences that I normally wouldn’t like – stopping at a gas station at 2 o’clock in the morning would normally be a bit of a miserable experience but if you, like Hopper, it becomes really new numinous and atmospheric and interesting. Just me then is it? But actually you know, what I mean, you know, sitting in a dinner on your own if you had not seen Night Hawks, would actually be pretty lonely and crap, but if you’d actually seen Night Hawks, you think what an interesting you know, this is extraordinary. Suddenly the experience is invested in all manner of social associations and values which you didn’t previously have, which means that actually like Tom Soy and Huckleby Finn, you can take things that are bad and reposition them as a good.

An awful lot of things, you know, that old joke about how many software engineers it takes to change a lightbulb? None. We’ll just have the marketing boys portray the dead light bulbs as a feature. You got me? [Laughter] Anyway, but actually this a little bit of truth in that. Actually there are things, a great advertising man retired to an apple farm in New Mexico and the problem he had is that the hailstones from the early hail falls pitted all the apples so they were all dented on the outside and no one in the market would buy them. So he sells them by mail order as ‘genuine hail pitted New Mexico apples’ and made actually, the fact that they were sort of like a golf ball on the outside actually a virtue, not a weakness. We can actually do that. I mean I think it’s an important thing to remember that we can actually sometimes, we automatically assume that the things are bad but with the right reframing we can made them good.

A very-very successful flu remedy in the UK was called Night Nurse. It started out being called Day Nurse. The only problem was that as effective as it was at relieving the symptoms of influenza, it also sent people fast to sleep.  Until a very genius marketing man said, ‘but actually if you position it as the night time flu cure, the fact that it sends you to sleep isn’t the problem it’s an advantage.’ That’s the point that actually the frame of reference can actually massively change things from bad to good. Ferrari does this most ingenuously: it’s always the cheekiest thing you could possibly do which is to say that you can have a Ferrari, if you buy a Ferrari you can have it delivered for free. All you need to do is go and collect it from the factory and pay $500! Now, it’s a really clever thing to do in a sense you know, if you think about it, it’s cheaper for them, it’s cheaper for them to actually get you to collect it, but by positioning this as an additional service -that you get little bit of a visit to the factory -  they’ve ingeniously got some of the richest people in the world to fly out directly to drive a Ferrari home and to pay for the privilege. I had an interesting idea about this in Airlines. The conventional airline modal in yield management is that you pay a premium to go on planes for which there’s more demand, OK? The more demand there is for a plane as it books up, you pay in more per seat. And I sais, “well, weirdly,” I said, “it may just be me and it may just be, you know, the other 10-20% of people who have mild sort of claustrophobia, I’d pay a premium to go on the emptiest flight of the day.”Iif British Airways said to me, “you can pay £50 and we’ll text you the day before and we’ll tell you which of the seven flights to New York you’re on but we guarantee it’ll be the one that’s least crowded.” Deal. You know, I’m not fussy, I don’t care whether I go to the airport at 11 o’clock or 4 o’clock. I’m not one of those weird people who says, “I’ll have a whole day of meetings and then I’ll go to the airport.” I write in my diary ‘going to New York’ and block out the whole day. My view is that in the 19th century it took six days, now it takes one that’s good enough, OK? I am not going to squeeze things down anymore. But if you take von Mise and his restaurant analogy, the royal mail in the UK were delivering 98% of letters, first class letters, next day. And they decide that this wasn’t good enough and they tried to improve the whole thing by getting it up to 99%. The effort required to do this actually broke the organization. It had a massive-massive damaging effect. All they failed to realize is that actually, it was like the restaurant which produces good food but actually stank because the perception of how many letters got there the next day was actually 60%. Now always bear this is mind, when you’ve got a business problem. If the bloody reality is better than the perception, what are you doing trying to improve the reality? If you think about it, the value of a letter is not the likelihood that it gets there the next day. The value of the letter is: my belief that the letter will get there the next day. That’s where von MIse is absolutely right. The subjective judgment is where a value lies. Logic won’t tell you, research won’t tell you this, no one would have said, “Red bull can charge three times as much as coke for a drink.” Why? Because they put it in a smaller can so we thought it was a different kind of drink. Now no one in a market research group would say, “im not gonna pay you $1.50 for a drink but I would if you gave me less of it, OK?” But that’s how the brain works. [Laughter].

A  couple more problems; ‘people don’t do what they say they believe, they do what’s convenient, and then they repent’ – I mentioned this lizard brain thing. In many ways, we act first and post-rationalise. The brain is not, the conscious brain is not so much the oval office of ourselves, it’s the press office. It actually issues hurry, denials and post rationalizations for decisions that are being taken elsewhere. The sadder one down here [pointing at slide] which came up with Paul Donald, the professor of behavioral sciences at the NSC, ‘when a man says, “my wife doesn’t understand me, it doesn’t mean he’s planning an affair, he’s already had one.” This is just to explain how human behavior works. It’s vitally important for the environmental movement because what it tells you is you can change behaviors and attitudes follow. All marketing tries to exist by changing attitudes and getting the behavior to follow. Actually it often happens the other way run; if you get people to recycle they become keener on environmental things. If you get people to ride bicycles they became more sympathetic to environmental things. That actually our attitudes are often a post rationalization of our behavior derived simply to avoid cognitive distance. Let’ be honest, students aren’t environmentally keen on environmental sustainability you know, they don’t…Students don’t ride bikes because they are keen on environmental sustainability, they are environmentally keen because they can’t afford cars. I guarantee, if you went to a student faculty and gave them all Lincoln Navigators, the attitude to the environment will become a little less intense [Laughter] OK?

But what im saying is that men don’t go, “I’ve noticed declining comprehension and empathy levels in my wife so I think it’s time to outsource a range of sexual services, maybe to alternative providers.” [Laughter] They probably do if they work for Accenture or something but I mean other than that. [Laughter] What actually happens is people get drunk at a party, they end up snogging someone they didn’t intent to snog and there is a desperate attempt to make sense of their actions post hock, they actually concoct a complete bogus case against their wife, basically. Now I think this is sort of weirdly depressing but it’s worth us knowing this because I think an awful lot of human misunderstanding can be avoided if we ask ourselves the question, “is this really happening the way round we think it is?”

Here are two heroes; von Mise is the left, Daniel Cameramen, the father of behavioral economics on the right, and finally back to that sweet spot… why I don’t have and behavioral economics doesn’t have and maybe never will have is a perfect answer to absolutely everything. What it does have is some very-very good questions which takes you back, just says, ‘logic bears this out, market research bears this out, however it is still possible you may be wrong.’ Is it, you know, in terms of human behavior we will never develop. There is a great phrase in economics actually, ‘all models are wrong but some of them are useful,’ which is not a bad and accurate thing to say. We’ll probably never have a single, you know, theory of everything model of human behavior nor should be necessarily attempt to have one- it might be dreadful if we did. However, what is worth accepting is; we can have multiple models. What people say can be interesting and revealing. Logic is not a terrible model; quite a lot of the time if you put the price of something down more people buy it, but as the Joel on software made the point, quite often the very opposite happens. There’s a saying in the art world actually, ‘if you put a painting in the window of your gallery £2,000 and it doesn’t sell after two weeks, double the price, you are just as likely to sell it at the higher price as you are the lower price.’ That’s crazy surely? No, because we actually regard price as a proxy for value and there are people wondering around with £4,000 to spend on art who don’t want to buy £1,000. So, I mean if you look at the psychology of wine the whole thing goes completely haywire by the way, which is we actually enjoy it more when we’re told that it’s expensive.

The vital thing to remember is that in any decision making unit. And this is where I think the composition of boards of companies needs to acknowledge that someone from a human understanding background needs to be there. The board diversity, you can’t just have eight people who are brilliant at reading a spreadsheet, you know, reading a balance sheet. There’s the gender, undoubtedly there’s a massive gender component which is; you know, a massive testosterone packed group of highly homogenous people will not on their own make the best decisions. They think they do off course because all boards of directors are great believers in the efficient market hypothesis because the market pays them a huge amount of money which is a very strong reason to believe that it’s sufficient, OK? But you know, in many cases what businesses need is actually you know, as well as technological engineering and mechanical ability, businesses that aren’t actually blessed with some really good psychological insight somewhere  at the top that can avoid the worst excesses of logic because unpleased logic, logic unpleased by creativity or psychology, can be just as wrong as the opposite. Then I think that will help places find what I call that ‘sweet spot’ where the solution involves not just technology, not just economics but actually what makes us human. Steve Jobs I think is you know, as a fitting tribute, was a man who solved problems by looking at the human and working and working outwards. That’s fundamentally what this is about. And they in that ‘sweet spot’ what you can do is make things charming, even advertising as I’ll show you just now. Thanks very much. [Clapping] [Music] End of file…

Professor Noam Wasserman is professor of Business Administration at Harvard Business School and the author of the recently-published Amazon bestseller The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup.  He will be speaking at this year’s Business of Software conference in October about how some of the lessons from his research can be applied to more grown up organisations.

We are touched and very grateful that he has taken some time out of a very busy schedule to tackle a question submitted by our readers. Noam considers some one of the biggest issues faced by founders – when is the right time to, ‘let go’.

Question:

“When is the right time to let go from having your fingers involved in everything about your company, and just focus on the vision and strategy and actually running the organization?  Also, HOW to let go?”

“Letting go” is one of the toughest challenges founders face, for very understandable reasons.  Founders’ strengths include their passion for the idea, their attachment to the early people who came aboard to help build the venture, and their love of working in the strong culture they created.  Along the way, they also become accustomed to their central positions and leadership roles.

“However, as the startup evolves, the demands on the founder often expand to include a lot of tasks and responsibilities they do not enjoy, or aren’t good at doing.  For instance, many founders love leading the charge during the early technical or scientific stage of product development, but later find themselves having to worry about sales and marketing or other functions they do not enjoy.  They also often find that they have little time for doing what they truly love.  The disconnect occurs at the levels of “can” and “want.”  To the extent that they do not have the skills to do those new functions well, they no longer “can” do the job as well.  To the extent that they no longer have an interest in those new functions, they no longer “want” to do the job as much.  At either of those points, you need to realize that it is time to find another role that is closer to your abilities and/or a better match for your interests.

“Founder-CEO succession can give us insights into the challenges and dynamics of letting go.  As I describe in Chapter 10 of The Founder’s Dilemmas, at the point where they have raised their C-round of financing, 52% of founder-CEOs have been replaced.  In only 27% of those replacements, the founder initiated the change, often understanding how the path would be a mismatch for his abilities or a mismatch for her preferences.  Two-thirds of those founders stayed as a lower-level executive in the venture, stepping into another, more-targeted executive position.  For example, one-quarter of the replaced CEOs – most often, those with a technical or scientific background – moved into the Chief Technology Officer or Chief Scientific Officer roles.  Many of the business-oriented founder-CEOs moved into the VP of Business Development role after being replaced.  Those specific roles were a better match for their abilities, and hopefully for their interests.

“As hard as it is to do so, there are strong benefits to initiating such a change yourself.  For one, seizing the initiative enables you to gain more control over the transition process.  Founder‐CEOs who initiate their own replacement remain on the startup’s board of directors 96% of the time, and remain in an executive position 37% of the time. In contrast, when the board initiates the change, those percentages drop to 60% and 24%, respectively.

“For you, the key questions are twofold.

• First, do you understand the road ahead of you and how it will change the demands on you?  (If you can’t answer yes, learn more about that roadmap, possibly by reading about it.)
• Second, do you believe that those changes will still match your abilities and desires?

If you can concretely answer yes to both questions, then it’s not time for you to let go.  Otherwise, start looking for a more targeted role that fits your passions and talents, so you can rekindle the magic while handing the steering wheel to a new, later-stage driver.

“Such a transition is never easy for the founder.  As Les Trachtman observes in Ch. 10 of the book, the founder thinks that the change will simply be a “title change,” rather than the “tidal change” that it will truly be.  However, that tidal change becomes smoother when you can find a new magical role for yourself and find a successor to whom you feel comfortable handing the reins (another central issue in that chapter).  Good luck with finding both!”

Thanks for taking the time to guest blog Noam. We look forward to seeing you in October.

If you want to see Noam speaking about the ‘Rich or King’ dilemma at Business of Software 2008 here he is…

The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup is an extraordinary book distilling the wisdom and hard learning of literally hundreds of founders across the world. A must read for entrepreneurs and we strongly recommend you read it. (Though a slight hint, if you are coming to Business of Software, you might not need to buy your own copy just now).

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