Here’s a really interesting idea from a Harvard professor of computer science.  Apparently, like me, he is a Top Chef fan.  He proposes an incubator model for restaurants.  All the risk and overhead detracts and deters possible restaurants so why not remove those pieces?

I’d definitely like to go to that demo day — yum, a beta product you can taste and not just see.

tip of the hat @bosmeny

Between reading the WSJ article “The Price Isn’t Right” and buying a new accessory from HP, I came to realize a serious design problem with most consumer online shopping experiences — promo code fields (also known as coupon code fields).

Now, I have nothing against price discrimination, but the promo code field seems to me to be a poor design choice for a user experience.  It basically says “this is not the lowest price you have to pay” since its presence implies that all you have to do is type the magic password and voila, a new price will appear.  

At times, I feel like I’m overpaying as a result and come away dissatisfied even if I originally thought the price was okay to begin with.  Sometimes I will just search Google really quickly with “website name + promo code” to see what comes up and more often than not, a decent $5 off or 10% off promo code will appear.  When this happens, I’m happy but really because I beat the company which is probably not the user experience you want your customers to be having. 

Solution #1: Don’t have promo codes and tell everyone that

Zappos.com practically invented this solution.  They have a whole page talking about The Truth of Zappos.com Coupons that basically says why they don’t have promo code fields.   I never feel like Zappos isn’t giving me their best price and so I always check out feeling like the company treated me, as a customer, with respect.  

Solution #2: Do have promo codes but don’t distribute them publicly

If you are going to have promo codes, just don’t send them out to coupon/promo code aggregators.  Try to stop them from being indexed.  You can try to make it dynamic so they are very unique to a customer set and useless to the general public.

The idea here is you don’t want people to easily find this and get upset that they weren’t getting the best deal.  After a few simple searches that yield no results, I feel satisfied knowing I am probably getting the best price. 

Solution #3: Price discriminate subtly behind the scenes

A lot of websites now will change the pricing automatically depending how you get there.  If you click on an ad behaviorally targeted just for you, you may pay $15 for the product you were searching for.  If you get an email (since you are a repeat customer that opt-in), you will need to click on a special link to activate.  If you log into your existing account, you might even get a special offer or free shipping.  I think these are fine from a design standpoint since it’s not blatantly built into the customer experience that they are getting different treatment.

Solution #4: Give everyone a promo code

Okay, I’ve never seen this before and I’m intent on doing this once on my own sites, but I think it would be an awesome idea to put next to promo code fields a public promo code for anyone to use.  It could be like “type FREESHIPPING if you have no promo code” or something more creative like “type ALIBABA if you have no promo code.”  It’s be even more awesome if something unexpected happened.  

This may delight the customer even more than not having a promo code field at all — especially if the reward keeps changing.  Behavioral econ tests have even shown that if people win variable payouts, they’re more likely to try something.  

Bottom line: Don’t give customers a reason to doubt they are getting a good deal!

note: I feel like this applies primarily to consumer facing business. B2B companies cater to a group in which pricing is taken for granted to be negotiable. However, I can’t see how some design tweaks would hurt B2B sites to do.

Mark Twain

Entering your 20s I can say is like entering a whole new world — one that is ever-changing.  Apparently, I’m not the only one who thinks so nor the only person who thinks 20-somethings today have a different experience than generations past did. 

20-Somethings By Numbers:

• 33% move to a new residence every year
• 40% move back home with their parents at least once
• 7 jobs is the average amount held during this time period
• 66% spend at least some time living with a romantic partner without being married
• 28 is the median age for men to marry
• 26 is the median age for women to marry

From the New York Times article: “young men and women are more self-focused than at any other time of life, less certain about the future and yet also more optimistic, no matter what their economic background. This is where the ‘sense of possibilities’ comes in.”  I feel like this is truer today than ever — if that’s even possible. 

Problem: Quantifying Risk 

In my undergraduate financial markets class, we were taught Modern Portfolio Theory which seeks to maximize returns and minimize risk.  In one exercise, we had to calculate the best asset allocation between equities and bonds to give the highest expected return.  This calculation was based on some quantifiable risk and correlation of risk.  

The real world of course is quite different than what is on paper — choosing what to invest in isn’t quite so obvious.  In fact, a lot of the beliefs in quantifiable risk calculation have been thrown out the window in the last few years due to the financial crisis and the contrarian thinkers like Nassim Nicholas Taleb who were proven correct about financial institutions’ inability to identify and manage risks.  Without proper quantification, the models for asset allocation are thrown into question since you don’t know how much risk you are taking when buying publicly traded securities.

With this in mind, how can entrepreneurs improve asset allocation for their hard earned money?

Solution: Just Accept You Only Know Riskiest and Riskless

Taleb argues that if you accept that you can’t quantify risks well, then you should be hyperconservative or hyperaggressive instead of just mildly either. He writes in The Black Swan:

Instead of putting your money in “medium risk” investments (how do you know it is medium risk? by listening to tenure-seeking “experts”?), you need to put a portion, say 85-90 percent, in extremely safe instruments, like Treasury bills — as safe a class of instruments as you can manage to find on this planet.  The remaining 10 to 15 percent you put in extremely speculative bets, as leveraged as possible (like options), preferably venture capital-style portfolios.

This Talebian asset allocation could make a lot of sense for entrepreneurs.  You have no idea of the risks in “mild risk” assets and you have no ability to influence whether IBM stock goes up or down.  You do know your startup company can be worth a lot and you do have a say in its outcome; however, you also know it is extremely risky.

Examples of Talebian Asset Allocation by Entrepreneurs

Now, this may seem extreme, but I’ve actually met an extraordinarily successful entrepreneur in Norwalk, CT recently who has been doing exactly this since the start of his entrepreneurial career 15 years ago.  He plows some of his gains into angel investments but a lot into his own new companies.  He argues that in fact this is more manageable risk than putting money into a small-cap or blue chip firm since he directly influences the outcome and management of the company.  Putting the other 85% into T-bills makes sense since it will store the value, provide liquidity if needed, and generate some incremental cash.

Of course, he had the benefit of multiple successful exits so I asked one of my angel investors, who only recently had a huge exit from a successful company he founded, what he did with his fortune.  After selling some of his shares to a private equity firm in 2008, he was going to give his money to a major private wealth manager to handle; however, he was in the middle of starting a new company so he forgot to authorize allocation of his money outside of cash and t-bills — fortunate for him since the market dropped double digits during that time.  Now, he primarily makes angel investments and starts new companies.

That brings me to the last case, where you haven’t had a large exit yet and in fact don’t have substantial piles of cash — this would include myself.  In that situation, entrepreneurs are generally inverted in asset allocation (85% in venture-capital style assets which is really just 1 company, 15% in cash or treasuries).  I think this actually make sense when you’re young and can try several times to achieve an extraordinary return from your sweat without the same risks you have later in life like failing to pay a mortgage.  

Other Ways Of Improving Asset Allocation

Ideally, young entrepreneurs would be able to at least spread risk a little across a few companies.  This will expose me to the same possible returns with a lot less risk.  This is why I think what Josh Kopelman at First Round Capital is doing with its startup equity exchange for its portfolio companies is amazing.  

SecondMarket recently opened up the illiquid market for later-stage startup company shares.  Of course, the companies have to be huge by then often times with market caps in the hundreds of millions or billions.  

It would be great (though unlikely) for financial reform to allow startup founders to be put their own equity value toward meeting the accreditation requirements for angel investing. 

Does anyone have other great ideas for improving entrepreneurs’ asset allocations? 

Ka Mo Lau, co-founder of PaperG

The WSJ had an interesting piece this weekend about how The Prince had it wrong and nice people are more likely to rise to power.  However, once they get to be powerful, the position changes them to be bad people.  This is known as the paradox of power.

The good news is that nice people are more likely to gain power because people give authority people whom they truly like.  So nice guys finish first!  

The article claims this refutes Machiavellian belief that it is better to be feared than love as a leader.  However, I believe the article overlooks the fact that in the 21st century, we simply live in a democratic, modern society whose corporate and political world are free of violent repercussions for decisions.  Consequently, fear isn’t as much of a factor when deciding who to follow as leader of your organization.  

In the modern day world, people have a choice of who to follow, and so they will of course follow people whom they admire and respect the most.

There is a lot more bad news (summarized below):

• The feeling of power is similar to brain damage.  People with authority tend to behave like neurological patients with a damaged orbito-frontal lobe, a brain area that’s crucial for empathy and decision-making
• Authority makes us less sympathetic to the concerns and emotions of others
  
• People of power spend less time making eye contact with people of no power
• Power makes it easier to rationalize away the ethical lapse
  

The best remedy they say is transparency and having the leaders know they are being monitored whether it be by regulators, a strong board, elections, or perhaps just good advisors and friends.   

Giuseppe Tomasi Di Lampedusa, Italian novelist

Here is a well articulated summation of how business should be done — everything I strive to abide by.  For greater detail, click through to read why these principles make sense.

Principle #1: Take fewer risks as you get older

Principle #2: Never lose your investors money

Principle #3: Spend 10% of your day thinking about new ways to make money

Principle #4: Over communicate

Principle #5: Never burn bridges

Principle #6: Spend 10% of your day networking

Principle #7: Never bail on business partners or investors

Federal Reserve Bank of Boston says merchant fees and reward programs take from those who have the least and give to those who have the most.  Credit cards programs have grown to a point where there is a self-feeding cycle:

1. Merchants must accept credit cards cause consumers expect to be able to use them.

2. Credit card company pays consumers with a hefty slice of the transaction fee as a reward for using the credit card.  Credit card company keeps the remainder.

3. Consumer wants to use credit card even more!  As usage goes up, merchants have less bargaining power and fees can get hiked up.

Whenever I’m at a small business where cash could be reasonably used given purchase size, I try to do that instead of credit card.  I’m sure they appreciate it (or at least I would if I were them).