Labor-positive innovation

It’s Labor Day 2013, and the people-work we celebrate today is under siege. In Marc Andreessen’s famous words, software is “eating the world,” and every redundant, repetitive job that previously required the skills of a person is a target.

Take for example the driverless car that’s been making news lately. In ten years, this technology alone promises to rescue billions of dollars in lost productivity from people sitting in traffic, replace every 1,000 cabbies with 250 new GUbers, and increase utilization of each car (converting ownership to temporary use) so we need fewer on the road.

Sounds great, until you realize that in one fell swoop, we’ve eliminated thousands of jobs in transportation, auto manufacturing, and even $121 bn in services jobs due to productivity gains from sitting in the car but not driving. That’s a lot of work displaced by just one technology, and the rate of these disruptions is only accelerating.

Responsible tech investing

I’m embarrassed to admit that, as an investor in startups and a member of the tech community, I’ve added fuel to this fire. I’ve rationalized the rapid job destruction by our industry as only temporary, wanting to believe that today’s disruptive technology will just create new kinds of jobs that we couldn’t have imagined before.

But the truth is, all this progress doesn’t benefit everyone equally. When investors back efficiency innovations that replace jobs, we make money at the expense of job holders. We then use that money to invest in even more technology, a vicious cycle akin to “standing on a beach holding our fire hoses full open, pouring more capital into an ocean of capital“.

In that way, tech investors have been acting no differently from the corporations that polluted the air and leveled the forests before us. I’m no Luddite but I know it’s not inevitable that software eats the world tomorrow. We’re just getting greedy and overfishing the lake.

So it’s time to prioritize labor sustainability.Tech entrepreneurs and investors are stewards of the capital that used to belong to workers, and we owe it to them to invest in technologies that create more jobs than taken away. I call these labor-positive innovations.

Here are the top three ways I’ve seen for us to invest responsibly.

1) Transition education

Millions of people who are getting displaced don’t have the luxury of learning their way into the services economy. The high cost of college or even online degrees, and the slow rate of skill acquisition in MOOCs makes those solutions intractable for people who need a job ASAP to support their families.

But thankfully, there are a few segments of the “middle-skilled” economy that are still growing. So new tech companies will be created that help people, through vocational education, to transition into the repetitive yet non-redundant skill work (eg in construction, hospitals, and new manufacturing) that humans are great at.

Often these middle-skilled jobs involve interacting with other people and complex coordination tasks, so we’ll need to modify traditional adaptive learning techniques to deal with this unique cross between online and real-world training. We’ll need new credentials such as tests and reputation systems to get these trainees into the workforce, and new cultural norms around vocational education. Germany provides a great example as Smil notes here.

2) Freelance and Entrepreneurship

Aside from educating people into today’s remaining growth sectors, we can also create new sectors that allow middle-class workers to make money on their own. In the physical goods and services worlds, this comes in the form of micro-entrepreneurship and freelance marketplaces such as Etsy, Kickstarter, Odesk, Elance, and 99designs.

These marketplaces are all labor-positive in and of themselves, helping people find work by aggregating supply and demand, providing access to capital, and reducing transaction, distribution, and coordination costs. There are hundreds of niche marketplaces still yet to be created, particularly those that are natively mobile (eg WorkMarket for hourly workers and Lyft for drivers).

But marketplaces that support micro-businesses and freelance are also enabled by a kind of labor-positive software. Tools for everything from payments processing to shipping to fraud detection to storefront building and optimization all serve to take the specialized knowledge out of building a small business. These often start as APIs for developers, and then evolve into full-service tools that make novice users look good without even trying (eg Shopify or Squarespace).

It’s critical that labor-positive marketplaces and software help individuals show off their uniqueness and creativity. This fosters clear differentiation of their goods and services on quality and perceptual value rather than destructive price competition. And facilitating one-to-one interactions engenders the kind of hyper-personalization that software can never replicate.

3) Entertainment and Leisure

Though education and micro-businesses can do a lot in the near term to stave off unemployment, in the long run the very notion of a job and the benefits it provides may have to change. What will it mean to live in a post-work world?

With technology and middle-skilled services taking over both full time jobs and mundane tasks at home, that frees up a whole lot of time for people to be bored out of their minds. So the entertainment, travel, and leisure industries will likely explode. Again, platforms and tools that make it easier for people to produce creative works will grow rapidly. We’re already seeing this happen with “long tail content” in TV / video, music, games and apps. Publishing tools and distribution platforms for the sale of digital goods will grow rapidly.

But digital goods have one extra benefit — the ability to create perceptual value out of thin air. Gaming worlds such as MMORPGs and casual games can have entire economies built around them, and “gold farming” in those worlds can be a full time job. I expect to see tons of innovation at the intersection of virtual goods markets, gaming, and entertainment of all forms — once again unleashing creativity and imagination to help people make money from what makes them human.

What else?

On Labor Day 2023, I hope we can say that we avoided massive unemployment, wealth inequality, and social unrest because our industry banded together for what’s right. When we cut down a tree, we need to plant five more.

Here are a few great thinkers on this issue for further reading. I don’t agree with all of them but think they provide a valuable diversity of perspective:
Albert Wenger’s series on Labor and Innovation
Vaclav Smil on The Manufacturing of Decline
Andrew McAfee on The Great Decoupling of the US Economy
David Autor on How Technology Wrecks the Middle Class
Clay Christensen on A Capitalist’s Dilemma
Tyler Cowan on Who will prosper in the new world and 10% Unemployment Forever
Sam Altman on Growth and Government
Paul Krugman’s various posts on Technology and Wages
Ashwin Parameswaran on Technological Unemployment Amidst Stagnation

If you’re a labor-positive builder, have read anything else I should check out, or think of any opportunities I’ve missed, I look forward to learning from you.

Design by data: A/B testing

I was just reading Uday Gajendar’s post on why designers don’t like A/B testing. Uday feels that, as a designer, his job is to uphold aesthetic integrity while keeping business metrics in mind. The prevalence of A/B testing, he says, has the effect of diluting a strong design into an “unsightly pastiche of uneven incrementalism.”

Though I have no experience as a designer, I can’t help but disagree with his way of looking at A/B testing. Uday and many of his peers believe that a design must remain thoroughly consistent with its creator’s vision and intent in order for it to accomplish its purpose. He asks that we place more trust in the implicit data from designers’ experience and pattern-recognition as they implement their visions.

But let’s get real. A lot of UI design, just like a lot of engineering design, involves a larger goal supported by many small, arbitrary decisions that could easily take one of several options. Yes, there are lots of choices where a designer’s experience should be trusted completely in rendering an artistic vision. But for every one ‘vision’ decision, I’m willing to bet there are 2-3 choices in which the designer has no strong preference but says ‘I like that better’ and runs with one option.

Painting these small decisions as central to a design seems a bit too auteurist for me. Color me prosaic, but the same design could very easily exist in millions of slight variations, changing one or more of the arbitrary choices. Digging in and refusing to change an original design — in light of evidence that another design accomplishes its purpose better — seems like escalation of commitment.

So it makes perfect sense that designers would want to avoid A/B testing. Changing a design or having to fight for one’s decisions is a lot of work, and I can easily see how it would start feeling like red tape. Why would designers ever want to engage in a process that actively seeks out ways to create more work and question their assumptions? Instead, much easier to stay in the trenches and fight it out.

It’s worth note that good management practice demands prioritization. Optimizing a design isn’t worth the time when more important things still need to be created, and the A/B testing process does take some time. But evidence suggests that qualms about A/B are based on two misconceptions about the right way to apply it. Great design by data is a result of deeply mapping out a solution space, and rapidly testing options with a well-formed experimental design.

Generate lots of possibilities

Web and software designers like Uday often cite examples of truly innovative design in hardware as evidence that a great design need not be A/B tested. Apple for instance did not A/B test the iPhone. But they forget that these products have been extensively prototyped. The absence of A/B testing isn’t for lack of desire to test, but the dynamics of hardware businesses. Apple can’t afford to A/B test a phone because their distribution involves manufacturing, sales training, and so on. So instead, they make tens if not hundreds of prototypes before arriving at features that will ship.

So to Apple, A/B testing happens on a regular release cycle. They only have one bullet in the chamber and reloading takes 6-12 months, so they choose wisely of many prototypes. But for web companies, we have the advantage of rapid deployment and the ability to live-test multiple potential options in a production environment. It’s like comparing digital photography to analog. Maybe analog photographers developed more finesse taking ten minutes to set up a perfect shot, but digital photographers achieve better outcomes faster taking lots of small variations on the same shot and picking the best one.

The key here is lots of variations. It turns out, all types of innovation benefit from simply coming up with more ideas. In Innovation Tournaments, my design professor Karl Ulrich wrote about the massive marginal returns to producing more raw opportunities. The curve below depicting best opportunity vs quantity of opportunities generated doesn’t level off until between 70-100 options have been created.

That’s a massive challenge to the “trust my vision” type of design thinking. Though it’s a lot of extra cognitive effort, designers need the discipline to push way harder than the average 1-5 ideas for a UI. If the cost to generating many small variations on ideas is low (which it is with web and automated tools), and we have a good process for evaluating their quality, then we should push to have a lot more ideas than we would generate if relying on intuition alone.

Structuring an experimental design

In his post, Uday asks: “A/B testing locks you into just two comparative options, an exclusively binary (and thus limited) way of thinking. What about C or D or Z or some other alternatives?

After generating lots of options, we need an effective way to test them. Fortunately, as others replied in the comments, multivariate testing is possible, using different permutations and combinations of feature choices. The key is to test out several orthogonal groups of options together, and use multivariate analysis to see which groups of options worked best. Then test them together, and test again.

Finally, and most importantly, a designer’s tacit knowledge should always be the final arbiter of these decisions. After exploring the solution space by generating many, many possible options, and then seeing user behavior under options tested, a designer can be armed with the right data to make an informed selection.

A design as a whole can’t be right or wrong, but small arbitrary decisions between different options can be. Designers can improve their practice by learning to use the A/B/n test to rapidly improve their designs. It shouldn’t be applied by business or engineering as a litmus test against designers, but rather demanded and owned by the designers themselves. Beautiful, useful designs — an inherently emotional thing — can be arrived at through the right combination of design and data.

Brand pollution in the home

This morning I walked from the bathroom to the pantry, and for some reason the five minutes that passed left me feeling exhausted.  In that small amount of time, I had passively interacted with over 60 brands.

Or rather, been assaulted by them.

 

Packaged products companies spend millions of dollars on package design to make sure their boxes and containers stand out on supermarket shelves.  Attention is a scarce resource, and a slight difference in focus can cause a brand to win or die.

But why do we have to tolerate flashy, in-your face grocery aisle advertising after we’ve already bought the thing? Seems more like a punishment than a reward.

This is precisely why I feel the need to hide all the products I use away in cabinets, turn boxes around, and peel off labels whenever I can.  A glass bottle or a can of sauce that just features the product itself is much more pleasing to look at, and makes me willing to keep it out in the open at home.

Understandably, brands want to develop equity in a recognizable package so your recognition in-store is tied to your us experience at home.  Yet I can’t help but believe there’s a better way that would make us feel less visually offended.

Some forward-thinking companies, mostly in the natural/organic trend, have started using clear packaging with minimalist labeling as a way of communicating their dedication to natural product.  But I think even the ugliest products could benefit from designing packages that we aren’t embarrassed or annoyed by seeing all the time.

Maybe brands with visual pollution on their packages can experiment a bit.  Try peel off labels, or make half the package clear or more visually appealing.  Customers are averse to advertising on TV and the web, so why believe we like it on our shelves?

In Google We (Anti)Trust

Today the FTC launched an antitrust inquiry into Google’s core search business. This is a departure from the past, in that it’s not an analysis of their acquisitions as an indicator of trust formation, but rather taking a look at their main business.  Coverage on TechCrunch and WSJ.

Naturally, many Google competitors have called for such an investigation in the past. What’s monumental about this inquiry is that it’s happening now, a leading indicator that Google has almost reached the height of its market power as it stands today.  It has 2/3 of search share in the US and over 80% in Europe.

While many of us trust fully in Google having good intentions and doing no evil as a firm, I’ve been wary of their strategies for a while.  In an OPIM class taught by professor Clemons in spring 2010, we heard him discuss his theories about Google with a representative of the Google Legal team. Needless to say, they didn’t reach agreement.

Prof. Clemons wrote about what an antitrust case against Google would look like, back in March 2009 (on TechCrunch).  It was controversial, as was his later post that Google’s search results often qualify as misdirection.

For anyone who doesn’t feel like reading his posts (which are excellent by the way for anyone interested in the dynamics at play here), I’ll summarize.  It’s notable that, while Prof. Clemons focused on Google’s use of market power to send searchers to other companies’ websites, the new case might focus on Google sending searchers to its own web properties.  Both are damaging, but in different ways.

Search is an essential facility

The first part of Prof. Clemons’ argument is that search is an essential facility on the internet for companies to reach customers.  Search engines have become our default behavior online — we search even for things we know the URL for.  So the geometry of the web looks something like this:

This means that if a company’s page is not carried by a search engine, or is not given its due exposure, it can be basically ‘killed’ by being denied access to the way customers usually use the Internet.  Even if the customers still have a (less lazy) option for typing the site’s URL directly.

Google’s search function is not contestable

Next, we notice that Google is able to use its product in one market (search advertising) to completely subsidize its entry into other markets (like document editing and email).  The use of one market to subsidize another is a failure of the contestability test and often an indicator of abuse of market power.

Is there consumer harm?

This will be difficult to prove and hinges on one of a few arguments. One possible path is to charge Google with setting the prices of sponsored search too high, which limits the results that people see and causing them to go to web properties they didn’t intend. Another path is that Google is unfairly setting the organic search location of its own YouTube and Places properties to an artifically high rank.

Overall, while this particular inquiry may turn up fruitless (Google has undoubtedly learned from the Microsoft case), it’s certainly food for thought as we consider our own search behavior.  Ask yourself this — do you rely on Google’s answers too much when you search?  I’d be willing to bet that most people can count the monthly times they’ve clicked page 2 in a search result on one hand.

Getting into the 10x revenue club

All Revenue is not Created Equal: the 10x Revenue Club

What gets a company into the 10x forward price/revenue multiple club?

– Competitive advantage period — how wide is the ‘economic moat’ that protects your castle, and how long will it take for that moat to dry up?
– Network effects — increasing value of using your product as more people use it. A positive feedback cycle that gives you an unfair advantage the more customers you get.
– Predictability — make your revenues repeatable, e.g. get people to subscribe so you always have a ‘base’
– Switching costs — decrease customer churn by giving them a reason to stick with you even if competitors undercut your prices.
– Margins — make a lot of money from every revenue dollar.  Duh.
– Marginal margins — make more money as you make more revenue.  Less intuitive, but it means to make sure you select a business that scales well.  Labor costs = death; information goods = amazing.
– Customer/Partner concentration — are your revenues reliant on a relatively small number of customers who might leave you?  Does any one customer (or partner or supplier) have too much control over your company’s future revenues?  Arguably, partners are getting even more important, as so many web businesses make money as affiliates or platform applications for another company’s product.  The article focuses on partners as a source of revenue, but dependence on a partner’s platform (e.g. all the apps who might have been killed by Apple’s announcements today) is also threatening.
– Cost per customer acquisition — is your marketing really expensive? Or do you grow organically well?  Bezos quote is perfect: ““More and more money will go into making a great customer experience, and less will go into shouting about the service. Word of mouth is becoming more powerful. If you offer a great service, people find out.”
– Growth, with caveats — growth is good, but it can’t be “profitless prosperity”. Growth can be misleading if it can’t be sustained profitably over time.  And growth because you’ve discovered a new market will bring other competitors, so if you haven’t established barriers to entry, you’ll see margin erosion (possibly for Groupon?)
– Cash — collect your cash before you recognize revenue; and spend less of that cash on capital investments to run your business
– Real options — ability to naturally expand your business into adjacent markets without diluting your brand or efficacy

How can a company manage expectations to get strong multiples in the market then?  And, since that analysis was based on public companies with lots of disclosures, what can private startups learn from the scorecard?

– Delay announcements of products but hint about them secretly, to make your company seem dangerous and competitive.  Kind of like installing lots of missile launchers on your beaches (arguably, people you hire fall into this function) but not showing how many missiles you have.
– Cohort analysis — show that earlier cohorts of customers use your product more frequently / engage for longer periods of time per use / pay more as you get more customers registered.  I.e. network effects.
– Footprint — don’t limit your product to a single platform, region, or business model.  Clearly you can’t overstretch, but have at least two major stories for each.
– Be noteworthy — take risks, develop a brand personality, and spend time doing things that are worth talking about.  Instead of spending too much on marketing.
– Focus, but don’t limit yourself — a key decision involves your branding and even company name.   If you’re a printing business, printing.com is better than paperprinting.com, because it leaves you open to printing on tshirts and birthday cakes later.