Business

Why Photography Matters: an Airbnb Case Study

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This is a superb read on one of my favorite start-ups, Airbnb, and how the company was able to double its revenues after a critical decision was made: get professional-looking photos of the listings.

At the time, Airbnb was part of Y Combinator. One afternoon, the team was poring over their search results for New York City listings with Paul Graham, trying to figure out what wasn’t working, why they weren’t growing. After spending time on the site using the product, Gebbia had a realization. “We noticed a pattern. There’s some similarity between all these 40 listings. The similarity is that the photos sucked. The photos were not great photos. People were using their camera phones or using their images from classified sites.  It actually wasn’t a surprise that people weren’t booking rooms because you couldn’t even really see what it is that you were paying for.”

Graham tossed out a completely non-scalable and non-technical solution to the problem: travel to New York, rent a camera, spend some time with customers listing properties, and replace the amateur photography with beautiful high-resolution pictures. The three-man team grabbed the next flight to New York and upgraded all the amateur photos to beautiful images. There wasn’t any data to back this decision originally. They just went and did it. A week later, the results were in: improving the pictures doubled the weekly revenue to $400 per week. This was the first financial improvement that the company had seen in over eight months. They knew they were onto something.

This was the turning point for the company. Gebbia shared that the team initially believed that everything they did had to be ‘scalable.’ It was only when they gave themselves permission to experiment with non-scalable changes to the business that they climbed out of what they called the ‘trough of sorrow.’

Here’s the takeaway:

Gebbia’s experience with upgrading photographs proved that code alone can’t solve every problem that customers have. While computers are powerful, there’s only so much that software alone can achieve. Silicon Valley entrepreneurs tend to become comfortable in their roles as keyboard jockeys. However, going out to meet customers in the real world is almost always the best way to wrangle their problems and come up with clever solutions. 

Read the rest here.

 

What are B Corporations?

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Something I learned today: so-called B corporations from this New Yorker piece by James Surowiecki.

B corporations are for-profit companies that pledge to achieve social goals as well as business ones. Their social and environmental performance must be regularly certified by a nonprofit called B Lab, much the way LEED buildings have to be certified by the U.S. Green Building Council. Many B corps are also committed to a specific social mission.

There are now more than a thousand B corps in the U.S., including Patagonia, Etsy, and Seventh Generation. And in the past four years twenty-seven states have passed laws allowing companies to incorporate themselves as “benefit corporations”—which are similar to B corps but not identical. The commitments that these companies are making aren’t just rhetorical. Whereas a regular business can abandon altruistic policies when times get tough, a benefit corporation can’t. Shareholders can sue its directors for not carrying out the company’s social mission, just as they can sue directors of traditional companies for violating their fiduciary duty.

Examples of B corps in America include Patagonia, Etsy, Seventh Generation, and Warby Parker.

A very nice conclusion to the piece:

The rise of B corps is a reminder that the idea that corporations should be only lean, mean, profit-maximizing machines isn’t dictated by the inherent nature of capitalism, let alone by human nature. As individuals, we try to make our work not just profitable but also meaningful. It may be time for more companies to do the same.

On Technology Advancements in the Grocery Store

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The Los Angeles Times reports how Ralphs, a grocery store chain, is using technology to speed up checkout times for customers:

Known as QueVision, the system uses hidden infrared cameras with body heat trackers to figure out how many customers are shopping at any given time. Managers use that information to redeploy workers to the cash registers when things get busy.

It’s already paying off. QueVision has trimmed the average time it takes to get to the front of the line to roughly 30 seconds from the national average of four minutes, a Ralphs spokeswoman said.

The checkout system is part of a long-overdue effort by traditional grocery chains to evolve and stay competitive through the use of technology.

I remember reading about this on Tesco’s virtual store:

In 2011, Tesco launched its futuristic Homeplus market at a Seoul subway stop. There’s no food in this virtual grocery store, only interactive walls around the station that display photos of fruit, vegetables, milk and other grocery staples. Using their smartphones, commuters can buy these products by photographing QR codes printed on the images and paying through their phones. Tesco delivers the purchases to customers’ homes the same day.

The article cites something else worth pondering: the grocery store industry is a $518 billion business in the United States.

 

Comment Less, Contribute More, Retweet None

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From Seth Godin’s brief take on why businesses fail:

What marketing mistake do most small businesses make? 

They believe in the mass market instead of obsessing about a micro market. They seek the mass market because it feels harder to fail–there’s always one more stranger left to bother. It’s the small, the weird, and the eager that will make or break you.

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(via @swissmiss)

Paul Graham on Good vs. Bad Start-up Ideas

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This is a wise essay from Paul Graham on why many start-ups fail while others succeed. The difference is that the founders who build a start-up to solve their own problems versus what they think people need:

Why do so many founders build things no one wants? Because they begin by trying to think of startup ideas. That m.o. is doubly dangerous: it doesn’t merely yield few good ideas; it yields bad ideas that sound plausible enough to fool you into working on them.

At YC we call these “made-up” or “sitcom” startup ideas. Imagine one of the characters on a TV show was starting a startup. The writers would have to invent something for it to do. But coming up with good startup ideas is hard. It’s not something you can do for the asking. So (unless they got amazingly lucky) the writers would come up with an idea that sounded plausible, but was actually bad.

For example, a social network for pet owners. It doesn’t sound obviously mistaken. Millions of people have pets. Often they care a lot about their pets and spend a lot of money on them. Surely many of these people would like a site where they could talk to other pet owners. Not all of them perhaps, but if just 2 or 3 percent were regular visitors, you could have millions of users. You could serve them targeted offers, and maybe charge for premium features.

The danger of an idea like this is that when you run it by your friends with pets, they don’t say “I would never use this.” They say “Yeah, maybe I could see using something like that.” Even when the startup launches, it will sound plausible to a lot of people. They don’t want to use it themselves, at least not right now, but they could imagine other people wanting it. Sum that reaction across the entire population, and you have zero users.

You should read the whole post here.

Outsourcing Sandy Springs, Georgia

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The New York Times has a profile of Sandy Springs, a city in the Atlanta suburbs that has almost completely privatized:

Cities have dabbled for years with privatization, but few have taken the idea as far as Sandy Springs. Since the day it incorporated, Dec. 1, 2005, it has handed off to private enterprise just about every service that can be evaluated through metrics and inked into a contract.

To grasp how unusual this is, consider what Sandy Springs does not have. It does not have a fleet of vehicles for road repair, or a yard where the fleet is parked. It does not have long-term debt. It has no pension obligations. It does not have a city hall, for that matter, if your idea of a city hall is a building owned by the city. Sandy Springs rents.

The town does have a conventional police force and fire department, in part because the insurance premiums for a private company providing those services were deemed prohibitively high. But its 911 dispatch center is operated by a private company, iXP, with headquarters in Cranbury, N.J.

How taxes play a role with Sandy Springs:

Sandy Springs residents still send roughly $190 million a year to Fulton County through property taxes, about half of which goes to schools, including those in Sandy Springs. But by incorporating, the town gets to keep $90 million in taxes a year to spend as it pleases.

On how the city initially handled delivery of services and keeping costs in line:

Initially, and for the first five and a half years of its life, Sandy Springs used just one company, CH2M Hill, based in Englewood, Colo., to handle every service it delivered. Mr. McDonough says CH2M saved the town millions compared with the cost of hiring a conventional public work force, but last year Sandy Springs sliced the work into pieces and solicited competitive bids.

When the competition was over, the town had spread duties to a handful of corporations and total annual outlays dropped by $7 million.

To dissuade companies from raising prices or reducing the quality of service, the town awarded contracts to a couple of losing bidders for every winner it hired. The contracts do not come with any pay or any work — unless the winning bidder that prevailed fails to deliver. It’s a bit like the Miss America pageant anointing the runner-up as the one who will fulfill the winner’s duties if, for some reason, Miss America cannot.

Very interesting. I wonder how many other cities will follow this privatization route, both here in Georgia and across the United States.

How Waiters Read Your Table

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The Wall Street Journal has an interesting piece on the increasing trend of restaurants training their waiters to read the tables they serve:

Reading a table happens within seconds of a waiter coming to a table. By asking for a cocktail menu or smiling and making strong eye contact, “they are saying ‘hey, I want to engage with you and I want you to make me feel really important,’ ” says Mark Maynard-Parisi, managing partner of Blue Smoke, a pair of barbecue restaurants in New York, owned by Union Square Hospitality Group. If people seem shy, “you want to put them at ease, say, ‘take your time, look at the menu.’ “

Blue Smoke does seven days of training with new waiters, five days of trailing an experienced waiter and two days of being trailed by the experienced waiter. Each day includes a quiz and a focus such as greeting guests.

With parties of four or more, “the most important thing is to read the dynamic between the group,” Mr. Maynard-Parisi says. Alcohol (who is ordering more or less) is a potential point of contention. He reads eye contact and body language to see if a group is friendly (looking at each other) or less secure, like an uncomfortable work meeting (glancing around the room, fidgeting). “Am I approaching the table to rescue them or am I interrupting them?”

At Cheesecake Factory, employees are taught to look every guest in the eye when moving through the dining room, watching for people looking up from their meal, pushing food around their plate, or removing ingredients from their dish—all signs they might not like their meal. Even if it’s not their assigned table, they are trained to ask if anything is wrong and try to fix problems.

The WSJ then breaks down the signals that the waiter senses (or should sense):

If you’re chatty… A waiter is more likely to assume a friendly, chatty table is there to party. Get ready for more offers of drinks, dessert and a talkative waiter.

If you act moody… You may get better service. Several waiters said they are more careful to get every detail right when they believe a table is already in a bad mood (a couple fighting or a tense business meal perhaps).

If you say ‘It’s OK’… To attentive waiters, saying food is ‘OK’ is a red flag that you aren’t happy with your meal. The waiter or manager might dig for more information to fix the problem.

If you ask about the menu… Food questions are a sign that you either like learning about everything you might eat or you feel lost and need guidance. One menu question could lead to a long, full menu description. If you seem overwhelmed, the waiter might try to steer you toward a particular order.

If you grab the wine list first… Expect the waiter to focus wine explanations and questions about refills to you.

If you’re early and fancy… Diners who are dressed up and have an early dinner reservation may lead waiters to suspect they have another event that night and serve them at a fast clip.

If you’re wearing a suit at lunch… Diners who look like they just stepped away from their cubicle, whether in a suit or business casual, are bound to get speedier service. The exception: If the waiter realizes the boss or valued client wants to set a slower pace by asking for more time before ordering or pulling out papers for a sales pitch.

If you act like the ring leader… 
A waiter will try to determine who is in charge at the table through body language, clues in conversation or by who made the reservation, and defer to the wants of that diner.

If there’s no obvious leader… 
If no take-charge person emerges at the table, the waiter may struggle to figure out whether to be chatty or invisible and whether to make the service quicker or more leisurely.

Something not mentioned and that is a big pet peeve of mine: when I am dining with a group and the waiter doesn’t ask whether the group wants to receive a single bill or separate checks. I realize that splitting a check may be more work for the waiter, but I think getting this wrong at the end of the meal may (and often does) lead to a lower tip for the waiter.

Ben Horowitz: Venture Capital Investor, Proponent of Rap

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Ben Horowitz is a prominent venture capital investor. He started the venture capital firm Andreessen Horowitz with Marc Andreessen, the co-founder of Netscape, and the firm made vast amounts of money on investments in companies like Groupon and Skype (and will make even more when Facebook files for IPO).

But it’s his stance on the importance of rap in teaching business lessons that is intriguing. Throw business classes and books out the window, Mr. Horowitz says, and listen to rap lyrics instead:

Mr. Horowitz uses rap as an introduction as he philosophizes about business challenges like how to fire executives, why founders run their companies better than outside chief executives and how to stand up to difficult board members.

“All the management books are like, ‘This is how you set objectives, this is how you set up an org chart,’ but that’s all the easy part of management,” Mr. Horowitz said in an interview in his spacious office here on Sand Hill Road, the epicenter of tech investing.

“The hard part is how you feel. Rap helps me connect emotionally.”

How to deal, for instance, with the stress of the 11th-hour, late-night auditing mishap that almost stymied the $1.6 billion sale of Opsware?

Listen to the Kanye West song “Stronger”: “Now that that don’t kill me/Can only make me stronger/I need you to hurry up now/’Cause I can’t wait much longer/I know I got to be right now/’Cause I can’t get much wronger.”

Much of rap is about business, whether the drug business, the music industry or work ethic, said Adam Bradley, an associate professor specializing in African-American literature at the University of Colorado at Boulder who wrote “Book of Rhymes: The Poetics of Hip Hop” and co-edited “The Anthology of Rap.”

Read more at The New York Times.

Profile of Manoj Bhargava, Creator of 5-Hour Energy

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Fortune has a profile of Manoj Bhargava, the creator of the 5-Hour Energy drink. At $3 a bottle, creating this concoction has made Bhargava billions (he claims that he’s the wealthiest Indian in America). The energy drink is sold under the company Living Essentials, which doesn’t report revenue or profits (but a source with knowledge of its financials says the company grossed above $600 million last year on that $1 billion at retail).

Early on he realized he didn’t much care what sort of business he was in as long as he was winning at it. At 17 Bhargava noticed that blocks of low-­income homes in the roughest North Philly neighborhoods were being razed and cleared. Bhargava bought a 1.5-ton 1953 Chevy dump truck for $400 and started clearing out debris from the demolition. He’d find rats bigger than cats among the garbage and rubble. “The stench was mind-bending,” he says. He remembers hearing gunshots outside a crumbling house on crime-ridden Girard Avenue and learning an old man had been killed for $5. Still, Bhargava made $600 that summer—and resold the Chevy for $400. He didn’t care if the work was unglamorous. It was profitable.

He won a full scholarship to the Ivy League feeder Hill School before heading to college at Princeton in 1972. Bhargava lasted a year. The pretentious eating-club culture wasn’t really for him, and he didn’t find his math classes particularly challenging. “‘Annoyed’ would be a mild word for my parents’ reaction,” he says. He returned to Fort Wayne, Ind., where his parents had settled and his father owned a plastics company. “There were no jobs; it was a disaster,” he says. “It was right before the oil embargo, the stagflation era.” He started reading books about a Hindu saint who’d spent his life on a spiritual quest. That, he thought, was something worthwhile. In 1974 he moved to India.

Bhargava says he spent his 20s traveling between monasteries owned and tended by an ashram called Hanslok. He and his fellow disciples weren’t monks, exactly. “It’s the closest Western word,” he says. “We didn’t have bowler haircuts or robes or bells.” It was more like a commune, he says, but without the drugs. He did his share of chores, helped run a printing press and worked construction for the ashram. Bhargava claims he spent those 12 years trying to master one technique: the stilling of the mind, often through meditation. He still considers himself a member of the Hanslok order and spends an hour a day in his Farmington Hills basement in contemplative silence.

Bhargava would return to the U.S. periodically during his ashram years, working odd jobs before returning to India. For a few months he drove a yellow cab in New York. When he moved back from India for good, it was to help with the family plastics business at his parents’ urging. He spent the next decade dabbling in RV armrests and beachchair parts. He had no interest in plastics whatsoever but devoted himself to buying small, struggling regional outfits and turning them around. By 2001 Bhargava had expanded his Indiana PVC manufacturer from zero sales to $25 million (he eventually sold it to a private equity firm for $20 million in 2006). He decided to retire and moved to Michigan to be near his wife’s family. “Nobody moves on purpose to Detroit,” he says. His retirement lasted two months. He knew from his plastics success that the chemicals industry was ripe for exploiting. “Chemicals are really simple,” he says. “You mix a couple things together and sell it for more than the materials cost.”

Aside from this feature on him, you won’t really find Bhargava on the internet:

His paper trail is thin, consisting primarily of more than 90 lawsuits. This is his first press interview. “I’m killing it right now,” he says, adjusting a black zip-up cardigan from behind the table of a soulless conference room in a beige low-rise building in a suburban business park in Farmington Hills, Mich. “But you’ll Google me and find, like, some lawyer in Singapore.”

What’s most interesting to me is that Bhargava’s idea for 5-Hour Energy wasn’t new (he went to a trade show where he tasted an energy drink and copied its ingredients in 5-Hour Energy). What was novel was his idea of incorporating energy drink ingredients in a tiny package and effectively selling the product (having it on Wal-Mart store shelves certainly helped).

The Case Against Private Equity Firms

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James Surowiecki has a brief but illuminating post about private-equity firms. He explains that while some private-equity firms do make the companies that they purchase better off, they do so by gaming the system:

Given the weak job market, it makes sense that the attacks have focussed on layoffs. But the real problem with leveraged-buyout firms isn’t their impact on jobs, which studies suggest isn’t that substantial one way or the other. A 2008 study of companies bought by private-equity firms found that their job growth was only about one per cent slower than at similar, public companies; there was more job destruction but also more job creation. And, while private-equity firms are not great employers in terms of wage growth, there’s not much evidence that they’re significantly worse than the rest of corporate America, which has been treating workers more stingily for about three decades.

The real reason that we should be concerned about private equity’s expanding power lies in the way these firms have become increasingly adept at using financial gimmicks to line their pockets, deriving enormous wealth not from management or investing skills but, rather, from the way the U.S. tax system works. Indeed, for an industry that’s often held up as an exemplar of free-market capitalism, private equity is surprisingly dependent on government subsidies for its profits. Financial engineering has always been central to leveraged buyouts. In a typical deal, a private-equity firm buys a company, using some of its own money and some borrowed money. It then tries to improve the performance of the acquired company, with an eye toward cashing out by selling it or taking it public. The key to this strategy is debt: the model encourages firms to borrow as much as possible, since, just as with a mortgage, the less money you put down, the bigger your potential return on investment. The rewards can be extraordinary: when Romney was at Bain, it supposedly earned eighty-eight per cent a year for its investors. But piles of debt also increase the risk that companies will go bust.

This approach has one obvious virtue: if a private-equity firm wants to make money, it has to improve the value of the companies it buys. Sometimes the improvement may be more cosmetic than real, but historically private-equity firms have in principle had a powerful incentive to make companies perform better. In the past decade, though, that calculus changed. Having already piled companies high with debt in order to buy them, many private-equity funds had their companies borrow even more, and then used that money to pay themselves huge “special dividends.” This allowed them to recoup their initial investment while keeping the same ownership stake. Before 2000, big special dividends were not that common. But between 2003 and 2007 private-equity funds took more than seventy billion dollars out of their companies. These dividends created no economic value—they just redistributed money from the company to the private-equity investors.

As a result, private-equity firms are increasingly able to profit even if the companies they run go under—an outcome made much likelier by all the extra borrowing—and many companies have been getting picked clean.

I also highly recommend reading venture capitalist Fred Wilson’s post “Why Taxing Carried Interest as Ordinary Income Is Good Policy.”