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Startup Thoughts : Prestige or Profit? (Part 1)

Posted on November 3, 2010

In the startup community, it appears to me that the metric of success is primarily focused on making money. This is not surprising as for most every businesses, this is the only value that matters. And you can break down the process into two conclusions.

a) Startup makes money = Success
b) Startup doesn’t make money = Failure

But I’ve come to focus a lot on a third option, a value that most people don’t think about, which is what I would call “Prestige”, and the concept is rather simple.

Create something with the goal of increasing your visibility in a particular group or scene. With hopes that by increasing your personal brand recognition, your prestige, you will have better opportunities in the future. This is where I feel I am lacking right now, in my community, or as Seth Godin would say my “Tribe”.

I need to increase my own personal visibility to generate the one thing that I desire right now more than anything else, opportunity. If I were more connected, with people that want to get stuff done, I could indeed make powerful things happen. But so far, Bend Oregon is not the bustling hub of entrepreneurial activity that one would hope, and is in fact far from it.

So lets put this into a real world scenario.

I’ve built a mobile app and I have to set the goal. Do I want to focus on Prestige or Profit? Well with profit I could specify a target sale amount of my app, say $.99 cents. And then just get an idea of the volume it would sell over the course of the next two-three years and grind away trying to create the value to sell the specified volume.

After the research I’ve done on the number of units one could potentially sell, it seems that it is a shot in the dark. But I think I could probably move about 250k thousand units based on current trends, then again I could just as easily move only 10k units.

My other option in trying to build out my community. Give the app away for free, and promote myself by saying something like

“Hey, connect with me on linkedin,twitter, or facebook. I’m looking to meet people who want to make amazing things happen!”

How many units could I move then? Well again, from some of the research I’ve done it looks like there is the potential for a 1000:1 ratio of free vs sold applications. That is, for every one app you sell, you could have given away 1000 applications for free.

What gave me this idea? It was when I was researching in-application advertising. I could give away my app away for free, but implement ads, hoping that enough traffic would be generated as to monetize the traffic from my app. But then I thought;

“Why couldn’t I buy out ads, to build out my community, in my own application?”

This goal totally seemS resonable, because I’ve been studying some of my rich friends. And even though they have a ton of cash, they never cash out, they still continue to work. You can even see this with people like Steve Jobs, Mark Zuckerberg, and many others. So knowing that I still have about 35 years worth of work left to accomplish, I would rather be working with people and on projects that actually change things. That make both an impact but also a profit.

And currently, that is what my brain is chewing on.

Prestige or Profit? Prestige or Profit indeed…

You will never own Real Estate

Posted on December 21, 2009
Its ok, I was there too. For a long time, I hoped and schemed that I could own a home with some property some day. But after spending a exorbinate amount of time (some may even call it obsessing) researching Real Estate, I know that it is an impossible dream. And I see the world, and especially the United States of America very, very differently.
“Bah” you say “I own my home! And I am damn proud of it!”
And to this response, I would argue that there is already a profusion of subterfuge about the very definition. So first we have to quantify what home ownership actually is.
Is home ownership an interest only loan, where the borrower takes out a  125% LTV suckers loan? On their dream property, in order to not have to put anything down?
Is home ownership a 30 year fixed rate mortgage. With the stabibilty in knowing what your monthly is never going to change over the life of the loan?
Or is home ownership when you finally pay of the mortgage, and you owe nothing more to the lender?
(I realize that there are many other financial instruments that we could list concerning housing. But for the sake of argument, I believe that these three represent a solid scale on which to reflect.)
So back to the question at hand. Which of these represent the term “Home Ownership”?
Now the first one is fairly easy to rule out these days. Most everyone has seen these loans explode and so lets just scratch it off the list.
The second one, is probably what the American populace would define as home ownership. But for now, everyone who is reading should be realizing that when you take out a loan on a home, it is actually the bank’s and not yours. So scratch number two.
At this point, most folks would settle on the definition of home ownership. Which is when you own the deed/note flat out, owing nothing to any lender. But if that were the case, then this post would be over. And my take is that most people forget about one very important aspect.
Taxes.
Yeah, good ol’ taxes. And here is where I reason that you never truly own your home. That at any point, the goverment can come and weasel your property away from you. And don’t give me the I have rights bull crap. This only goes as far as the illusion’s need. And if the need is great enough, the illusion falls right along with your rights. It is also my belief that the government is going to do whatever it can to increase taxes over the next decade (just the next decade?). I mean, face it, our nation is broke. We owe a crap load, to a lot of people.
But the land, the land is the real value!
Heh, right, the land. Is it on anything of value that can be sold on the world stage? If not, then I really don’t want the “value”. Especially the taxes that come with it.
So what I have been doing personally is realigning my goals. Understanding that a home, in an of itself, is a depreciating asset at best. And at worst, a depreciating liability when the note is held by a lender. At some point, you will have to invest your reserves into either fixing and maintaining, or all together rebuilding the home (disturbingly similar to a car, no?). And I do not want to be owned by my things. I will not sacrafice myself and my families’ opporutnites in order to make the pipe dream of home ownership into a ball and chain reality.

Its ok, I was there too. For a long time, I hoped and schemed that I could own a home with some property some day. But after spending a exorbinate amount of time (some may even call it obsessing) researching Real Estate, I know that it is an impossible dream. And I see the world, and especially the United States of America very, very differently.

“Bah” you say “I own my home! And I am damn proud of it!”

And to this response, I would argue that there is already a profusion of subterfuge about the very definition. So first we have to quantify what home ownership actually is.

  1. Is home ownership an interest only loan, where the borrower takes out a  125% LTV suckers loan in order to not have to put any cash down? (On their dream property of course)
  2. Is home ownership a 30 year fixed rate mortgage. With the stability in knowing what your monthly is never going to change over the life of the loan?
  3. Or is home ownership when you finally pay of the mortgage, and you owe nothing more to the lender?

(I realize that there are many other financial instruments that we could list concerning housing. But for the sake of argument, I believe that these three represent a solid scale on which to reflect)

So back to the question at hand. Which of these best represent the term “Home Ownership”?

Now the first one is fairly easy to rule out these days. Most everyone reading this has seen these loans explode. Either by watching family or friends, or experiencing it themselves. And so lets just scratch it off the list.

The second one, is probably what the American populace would define as home ownership. But for now, everyone who is reading needs to understand that when you take out a loan on a home, it is actually the bank’s and not yours. So scratch number two.

At this point, most folks would settle on the definition of home ownership. Which is when you own the deed flat out, owing nothing to any lender. But if that were the case, then this post would be over. And my take is that most people forget about one very important aspect.

Taxes.

Yeah, good ol’ taxes.

And with taxes in mind, here is where I reason that you never truly own your home. That at any point, the goverment can and will come and weasel your property away from you. And don’t give me the I have rights bull crap. These illusionary rights only go as far as their (the government’s) need. And if the need is great, the illusion falls right along with your rights.

But the land, even despite the taxes, the land is the real value!

Heh, right, the land. Is it on anything of value that can be sold on the world stage? If not, then I really don’t want the “value”. Especially the taxes that come with it. It is also my belief that the government is going to do whatever it can to increase taxes over the next decade (just the next decade?). I mean, face it, our nation is broke. We owe a crap load, to a lot of people.

But don’t worry, it is nothing to be afraid of, you just need to understand it. Once you realize that with most current home purchases you are only buying the “right” to further taxation, you are good.

I mean, think of it this way. Do you think I sat there after my brother died thinking

“Man, I am glad that Jaye got to see our new place before he passed away!”

Hell no!!!

I was happy that we had the money to make memories with him by going on trips and other awesome adventures through out his life.

And so the target must be ”buying” a home when it becomes less expensive than renting while projecting future tax increases into the model. Along with the understanding that a home, in an of itself, is a depreciating asset at best. And at worst, a depreciating liability when the note is held by a lender. At some point, you will have to invest your reserves into either fixing and maintaining, or all together rebuilding the home (disturbingly similar to a car, no?). And even with this, you must know emotionally that it will never be truly yours. And this is a good thing.

I personally do not want to be owned by my things. I will not sacrifice myself and my families’ opportunities in order to make the pipe dream of home ownership into a ball and chain reality. I plan on using my surplus cash to MAKE MEMORIES!!! That is the real value.

Despite these current beliefs, I am always open to new ideas. Because you can’t learn something new if you are not willing to listen right? And I appreciate people’s thoughts, even if I don’t always agree. So I would be happy to hear other’s perspective on this. And so I leave you with this.

“Why do you personally want to own a home?”

The intuition of Benford

Posted on December 15, 2009

Have you heard of Dr. Benford? What’s that you say? You haven’t? Well don’t worry you are not alone. Most people haven’t heard of the guy either, but it would be my advice to most anyone (especially business owners) to Google him.

You see back in the 1930s, Frank Benford was working away as a physicist. And being a physicist, he had to use a lot of math. And for the simple math, he would look up the answers in what is known as a book of log tables. (Now days we would just use a calculator but obviously it had yet to be invented)

For example, this could be how the book was laid out.

Pages 001-100 dealt with math problems starting with the number #1
Pages 101-200 dealt with math problems starting with the number #2
Pages 201-300 dealt with math problems starting with the number #3
Pages 301-400 dealt with math problems starting with the number #4
Pages 401-500 dealt with math problems starting with the number #5
Pages 501-600 dealt with math problems starting with the number #6
Pages 601-700 dealt with math problems starting with the number #7
Pages 701-800 dealt with math problems starting with the number #8
Pages 801-900 dealt with math problems starting with the number #9

Anyway, after several years of work, he started to notice something. Benford noticed that he used the pages at the front of the book a lot more than the ones at the back. Which means that he was doing the majority of his work with numbers that began with either 1,2, or 3. And this troubled him.

Am I a bad physicist? He thought. Am I only using a subset of the tools that are available?

And after several years of statistical work, Benford came to the conclusion that numbers seemed to form a pattern in most (but not all) logarithmic systems.

Numbers that began with #1 were used 30.1% of the time
Numbers that began with #2 were used 17.6% of the time
Numbers that began with #3 were used 12.5% of the time
Numbers that began with #4 were used 9.7% of the time
Numbers that began with #5 were used 7.8% of the time
Numbers that began with #6 were used 6.7% of the time
Numbers that began with #7 were used 5.8% of the time
Numbers that began with #8 were used 5.1% of the time
Numbers that began with #9 were used 4.6% of the time

Now, I know what you are thinking.

Jared, what the hell does this have to do with me?

And so here it is, in two words. Fraud detection.

That’s right, you can apply Benford’s law to most anyone’s financial books, and it will help detect if fraud is taking place.

Really?

Yes really! Take this little nugget from Wikipedia.

In 1972, Hal Varian suggested that the law could be used to detect possible fraud in lists of socio-economic data submitted in support of public planning decisions. Based on the plausible assumption that people who make up figures tend to distribute their digits fairly uniformly, a simple comparison of first-digit frequency distribution from the data with the expected distribution according to Benford’s law ought to show up any anomalous results.[5] Following this idea, Mark Nigrini showed that Benford’s law could be used as an indicator of accounting and expenses fraud.[6]

In the United States, evidence based on Benford’s law is legally admissible in criminal cases at the federal, state, and local levels.[7]

Benford’s law has been invoked as evidence of fraud in the 2009 Iranian elections.[8]

Pretty cool right? And please keep in mind, this is just one of many tools available to detect fraud. But for someone like myself who is responsible for large Oracle databases that process millions and millions of financial transactions a year, it is really nice to be able to use Benford’s law. It won’t actually solve any issues, but it will help raise those needed RED FLAGS. Not to mention the nerd in me had a lot of fun writing the algorithm :-)

So, to all you business owners who worry that someone is screwing with your money, it may be helpful to apply Benford’s law to your books, and see what pops up.

For the record, this it not legal advice, plus my field is computer science so this is more of a nerd out topic for me.

And here is a book with interesting information that I enjoyed reading (link)

Radiolab recently did a story on Math featuring Benford’s law (link)