More Heat than Lytro: The future of digital photography

It seems like only yesterday that I was growing up learning the art of choosing the right settings on film cameras and using a darkroom.  Then, out of nowhere, digital cameras made it (nearly) all obsolete.  Even the darkroom snobs have professional-grade SLRs to lug around, and that very wave of innovation may have saved mighty Sony from the dustbin.  Quickly after digital point-and-shoot technology reached maturity, it saturated the market. But there may be another wave of innovation coming again in photography, and Silicon Valley-based Lytro is leading the charge.

(credits: Kamil did primary and follow-up research, Steve helped with discussion and write-up)

The Company

Lytro is the commercial end-stage of a Stanford PhD research project that dates to 1996, and seeks to revolutionize digital photography.  The product is a digital camera, similar in size and shape to today’s ubiquitous models, except this one doesn’t require focus; it “captures all the light” from a particular image at a moment in time, much the way our eyes do, and allows us to choose which particular objects or views to bring into focus post-hoc, via separate editing software.

Here’s a Youtube review.  Here’s an Engadget review article.

The product advantages, briefly, are:

•  Greatly reduced shutter speed (almost no moving parts), so you can literally just point and shoot
• Minimal blurring in normal blurry situations
• No focus necessary; choose the optimal focus later on
• Less power consumption: Lytro claims a 2-week battery life (due to no motors for moving parts)
• An ability to render a photographed scene in 3D
• Future 3D video capability with existing camera

 The “catches” are as follows:

• Limited features for preview screen, no playback, no video recording, etc.  Just straight point-and-shoot.
• Slight (but not major) price premium to today’s cameras: price tiers are $399, or $499 for a model with more storage capacity.
• Slightly less zoom and field of view (both of which are probably engineering challenges rather than fundamental limitations)
• Custom image file format and storage type, due to the novel way that images are being captured.  External, proprietary software package required to view, edit, and save to normal JPG, GIF, PNG, TIF etc.

The commercial company was formed in 2006, and currently has ~20 employees and $50M (!) in funding to date,from  top funds including Andreesen Horowitz, Greylock, and NEA.  CEO Dr. Ren Ng has an academic background (math, compsci, Stanford PhD) and this is his first significant venture; CTO Kurt Akeley co-founded SGI.  Other employees come from Apple, Cisco, Google, Yahoo, etc.  So, no serious concerns about the team’s credentials other than the CEO’s limited commercialization experience.

The Market

Today’s digital-camera market sells 140 million units annually worldwide.  America snaps up 36 million digital cameras a year, for a cool $6.9 Bn, an average price point of $192.  Margins remain pretty good even 15 years after the introduction of digital cameras.  Based on penetration rates, this number suggests that Americans replace their cameras every 4-5 years on average.

Good use cases:

• Professional photography, in the medium-term.  Once flash, shutter speed, and other standard SLR features are added to the core tech, professionals will be rapid adopters.  The DSLR market sells 10 million units each year, so at 3% of the current market this may be an early cash cow but will not drive the company’s long-term prospects.
• Cell phones.  The team’s Apple roots and design aesthetic suggest that many forward-thinking phone manufacturers may latch onto Lytro technology as a key competitive advantage in the ongoing smartphone wars, and exclusivity may come with a high price tag.
• 3D modeling.  The ability for Lytro to capture information on depth and shading and “understand” an image in three dimensions is in many ways the most compelling part of the technology, partly due to the numerous potential industrial, enterprise and military applications.  Spy technology, drone scouting and recon, night photography, satellite surveillance.  Medical uses like creating dental casts or picking up subtle appearance anomalies.  Engineers and architects generating designs, turning physical models into digital design diagrams through the medium of photography... the ideas roll out fast and furious.

Tough use cases:

• Amateur market.  Grandma in Kansas can figure out how to take pictures.  She may even be able to automatically send them to Billy and Suzie, if the interface is intuitive enough.  But she probably can’t upload pictures to her desktop, pull up custom software, tune the focus of the shot, and print output to standard image formats.
• Video recorders.  If the features exist, even in the R&D stage, for video production using this whole-image capture system, I haven’t heard of it.  And even if it did, the amount of post-production required (special software) would probably eliminate the casual video recorders & uploaders (the Youtube crowd, let’s say, or even the Vloggers) from seeing this as a viable – and necessary – enhancement. Expect this feature to be implemented in the distant future.

When it comes to pricing, Lytro is testing how high consumers can jump.  Currently, at least on Amazon or eBay, you can get a respectable point-and-shoot camera for $50, while a good one will set you back $150.  Obviously, given the average price point of $192, many of consumers are paying hundreds of dollars for the latest-and-greatest, and they are great Lytro customer candidates. If the entry-level product, at $399, is double the average cost, this represents a big barrier to the average consumer.  Lytro may have to go through several R&D cycles (and several years) before making its product price-competitive..  Luckily, Lytro isn’t competing on price, but rather on features and potential, and the mainstream media attention they’ve received (NYT, WSG) suggests they’re at least capturing the imagination of gadget lovers out there.

Analysis

Unfortunately for Lytro, the selling points of the first digital-camera revolution (convenience, portability, no time/money costs to develop or scan to digital, no special expertise required) don’t apply here.  That first revolution expanded the market by allowing more-ordinary people to be photographers, and allowing current photographers to do their jobs better.  Lytro is counting on introducing a product that solves a pain point of “focusing my shots is annoying”, and does so at the expense of price and convenience.  That’s a tough hurdle to clear.

In terms of product-market fit, it may be helpful to think of Lytro from a 5-Forces perspective.  Because they control the core IP behind this light capture technology, they are not very vulnerable to supplier influence and even less vulnerable to the threat of new entrants.  Competitors don’t exist within the segment (for the foreseeable future).  Customers don’t have a ton of power because this is not a commoditized market but rather a new product being introduced, and customers will either buy the value proposition or remain with the status quo – if the product takes off, margins won’t be under pressure.

The threat of substitute products is real and meaningful, that substitute product being “the $50 Kodak I have that gets 8 megapixels”, but nothing can really substitute at the high end for the pains the Lytro solves, namely 3D photography and rendering, and freedom from focusing.  Overall, though, Lytro is insulated from standard market forces for the time being.

Lytro’s primary strengths as a venture proposition, of course, are their barriers to entry.  As the first-mover and patent-holder, their competition for the foreseeable future will be the status quo.  Sony, Kodak and Canon won’t be worried as long as Lytro is a premium product for a niche audience.  If the broader-appeal questions get answered, then we can expect a significant resistance to market entry: a marketing blitz and price competition by the incumbents that even a VC-backed startup can’t afford to fight very long.  So long as the giants slumber, Lytro can count on undermining them slowly from the top of the market.  And perhaps those incumbents could even come to see Lytro as more attractive from an M&A perspective than a crush-the-upstart perspective.

Kamil’s Take

These sensors can fundamentally replace the camera lenses that we see today.  Consider:

• Security cameras
• Augmented-reality eyeware
• Cell phone cameras
• Laptop cameras
• Robotics (e.g. vehicle automation)
• Medical applications
• Military

The Lytro cameras offered today and in the near future aren’t game changers, but merely a herald of what will eventually be game-changing sensor technology.  The coming convergence of 3D video, augmented reality, computer vision, etc will turn up applications we haven’t yet considered.  We can’t limit our analysis to disruption merely of the consumer point-and-shoot digital camera market, because that misses the big idea at play here.

In the immediate term, there will be a small core group of early adopters, and mainstream adoption will hinge on product design and whether the current inconveniences can be minimized or eliminated, the current feature gaps can be bridged, and the current pricing can be either reduced or (ideally) become a non-issue because price isn’t a primary consideration for customers.

Medium-term, we can gain a lot of optimism from the apparent viral nature of the product.  Tech blogs and professional or famous photographers have been effusive in their praise and the launch (and PR blitz behind it) has been very reminiscent of Apple’s launches of various consumer electronics over the last decade.

Longer-term, the success of this technology probably hinges on cell phones, and I think it makes a huge difference there.  Utilizing the expertise (and media clout) of Lytro’s VC backers will inevitably allow them to punch above their weight.

Steve’s Skeptical Rebuttal

First of all, Lytro has not exactly put up a bunch of pages on its website advertising the various enterprise applications or sector-specific solutions utilizing their technology.  Until they do, I think we can conclude that those applications are either not yet baked, or would not be economic for them to continue baking.  I’m fine talking about a hypothetical world where we can instantly create 3D maps of an area the way our brains do with the data stream coming in from our eyes.  But Lytro does not (yet) bring that world into reality.  Nor are they trying to do so, in all fairness.

Secondly, there really is an annoyance factor involved here with the external software package for editing.  I’m not a photoshop whiz, but copying-and-cropping is something that even a basic MS Paint or Word/Powerpoint user can figure out.  Even if the software is intuitive, the fact that people have to use it at all is annoying (and annoyingly Apple-esque, but I’ll spare everyone that rant).  If the file format that Lytro was introducing was an open standard, and there were ongoing open-source projects to create editors for the file format or integrate it into standard graphics packages, then I can see this becoming less of a big deal.  But Lytro is no more going to create and keep customers by forcing proprietary toolkits on them than AOL kept customers by promising them a “walled garden” of internet content unavailable to non-AOL netizens.

Lastly, partly as a result, it’s important to emphasize that the consumer applications of this device appear, on the surface, to be limited to hardcore photo-artists and professionals who see a particular value-add to their niche.  The proverbial Kansas Grandmother, taking pictures at the church social, has neither a huge need for Lytro (focus really isn’t that big a pain point for her) nor the inclination to deal with the marginal hassle, learning curve, or price.  Tech bloggers can rave about this, but I want to see focus group studies or the equivalent before I’m convinced that Lytro is ready for prime-time.

Fixing the High-End Hiring Process

I had an interesting conversation with a serial startup CTO yesterday. He's had some experience in the recruiting-website world before - think Monster, or HotJobs, or CareerBuilder - and despite success at all tiers of the market, believes the system is still broken.

Together we arrived at the following categorization of the job-placement system:

(1) There are some jobs for which anyone who meets minimum requirements can ably perform the job duties. These are "square peg in a square hole" kind of jobs, usually which entail no performance expectations or bonus. Can they answer phones? Can they operate the machinery properly? In this category, a Human Resources department or a basic posting to major jobs sites can pretty well find people to fill these roles.

(2) Then there are jobs where performance, motivation and/or competence are at a premium. You need someone who won't just do a job, but will oversee something important. A salesperson, or a department head, or a researcher. These qualities in the employee will not be immediately apparent from a resume, but a more detailed background check, reference check, and interview structure can usually weed them out sooner or later. Looking at things like sales track record, or doing case interviews for consultants, or even internships, can do an acceptable job of filtering your job candidates. These people will usually already have pretty good jobs, so it can be hard to reach them and harder to entice them to jump.

(3) Finally, there are jobs for which the judgment of the employee, or the extreme motivation for them to go above and beyond the call of duty, will materially affect the outcome of the company. Founders and cofounders, executives, top sales or business development people, top strategists, partners at services firms. When you hire for these roles, the value you're getting - i.e. the results of your choice - won't be necessarily apparent for months or even years after the hire is made. Someone gets picked based on relationships or on faith, and the company will rise or fall to a significant degree based on how awesome they are. Finding them is usually a matter of an Executive Search recruiting firm, a network of high-end professionals such as the personal networks of angel, VC and private equity investors (if they're good), or identifying them through industry experts. And hiring them usually requires significant equity or compensation packages that reflect the magnitude of importance they have and the risk they would be taking by joining, for which they must be given sufficient upside.

For fans of marketing and economics, these 3 categories are pretty able illustrations of the differences between Search Goods, Experience Goods, and Credence Goods, respectively. Depending on how critical that employee is, hiring one may be like buying a head of lettuce (you know what you want and you go get it), like taking a tropical vacation (once you go, you know if it was worth it), or like choosing a surgeon for your knee (their skill may not be manifest for 10-15 years).

My friend's point was that the candidate-search process is pretty efficient at this point for category 1. It does a poor, high-friction, high-variance job of #2. And for #3, the market is absolutely broken. Consider tech startups, for whom the first few engineering or marketing hires are crucial, and the difference between a merely good and a great choice can be a productivity factor of 30. That's the reason Google and Facebook are so fanatically picky about its engineering hires. If they choose a Credence Good like a Search Good, their quality - and their image - will quickly degrade. We see this even with Google these days, from some snarky corners.

The reason this system is so broken is that no HR person, and no recruiter, can ever really discern the fine gradations of skill, judgment, mental agility, and most importantly motivation to go the extra mile, that are the difference between those good and great hires. Entrusted to a person who has never held a job anywhere close to the target (i.e. an HR person or recruiter) is the duty to flip through hundreds of resumes, pick some to phone screen, and pick a few of those to refer on. How many false negatives are there? How many false positives? It's not an HR guy's fault that he can't replace the sophistication of a hiring manager for Category 3 jobs. That's not his role; he's been hired to manage the process, take care of the basics (background checks, verifying facts, reducing noise), protect the company from liability, and leverage the hiring manager's time. Same is true of recruiters, except for the liability part.

We believe someone has yet to bridge this gap - the "high-end job search" market. TheLadders filters for high-salary (i.e. $100k+) jobs, but there's no real filter beyond that. IvyExec and other startup sites aim for high-quality jobs but end up being a somewhat-curated job posting board. For certain disciplines - say, technology - there are sites like Dice, but they suffer from a lack of quality filter. There are top recruiters who handle financial services front-office roles - see Glocap or Mercury Partners - but while they may do better, their process takes a long time, still has plenty of noise, and costs 30% of a year's salary or more for a successful placement. That's huge market friction!

So what are the characteristics of a better solution? Let me brainstorm here.

1. The site must filter only for top-quality people. People whose motivation to stay late, come up with new ideas, build consensus, get along with everyone, and build a team or sales pipeline or set of partnerships, is all unquestioned. Such a filter will always be very subjective and lots of people at the margins will try to game it.
2. The site must also filter only for jobs that will be interesting to top-quality people. Jobs whose level of responsibility or criticality gives sufficient challenge, opportunity and reward to be worthwhile considerations for these top workers.
3. The site cannot unnecessarily flood or spam its workers. Any outreach must be bespoke and conservative in the choices. Of course, if the workers are actively searching opportunities, that's fine, they're only spamming themselves.
4. Likewise, the site cannot allow workers to find opportunities and submit themselves willy-nilly without some quality filter in place. Signal to noise ratio for applicants going to a hiring manager must be very high.
5. This site would replace the role of an HR person or recruiter, at least at the filtering level. HR will still be necessary to make sure the person isn't faking a degree, hiding a felony conviction, or that the search process itself meets all the legal requirements to avoid liability for the company.

How would we construct such a site, and seed it with people? How would we ensure such filters? The goal here is to eliminate the prohibitive amount of human time spent on intermediaries in this process, to make it cheaper while still being very profitable for the site itself. I don't have a firm answer, but my ideas include:

• Personal testimonials must be much more important, and given with significant anecdotes. Something like the review approval system currently used for CULPA, Columbia University's professor-ratings website, where trained admins scan every submitted professor-review by hand and grade it on a 10-point scale. Surely that's a task you could give to a Mechanical Turk-style group of high-school-grade people.
• Anecdotes from a worker's professional history, personal hobbies (in the evening, do you watch TV, or code projects for Sourceforge or Github? Have you ever voluntarily stayed late at work because you had an idea you just had to work on?), etc.
• A User's ability to invite trusted connections into the network depend on how highly rated they are, and how many ratings they've received, in the form of recommendations from professional connections.
• You could seed much of this with LinkedIn. The problem is, LinkedIn isn't just for high-end professionals anymore, and the signal/noise isn't maintained as carefully as it should be. Evidence: the LinkedIn Open Network. People with 1000+ connections. So you'd have to be careful about what you pull in, but it would be the only source I'd use to suggest initial connections to people.
• You'd have to start by targeting very small verticals. Probably communities who all know each other and have a high regard for each other. Investors. Entrepreneurs. Top/famous engineers. Scientists and researchers in particular fields. You might need a landing page / curated site for each discipline or category you launch.
• Job postings would have to have qualifications or detailed, subtle screening questions as a pre-qualifier for submitting yourself as a candidate. Maybe a startup hiring a Chief Revenue Officer doesn't need the CRO from Amazon or eBay, but "have you ever managed salespeople before" is a worthwhile screen. People who answer falsely get marked down by the hiring manager for wasting their time, and may eventually get shut out of the community if they're too disruptive/greedy about applications.
• Startups, in particular, are always looking for top people. They might be the easiest target market to seed this with, because the cost/benefit to posting their needs on the next new job site is very favorable.
• You could also use professional associations - think the AMA, ABA, NVCA, ACG, etc - as marketing partners. Who knows what they would require for helping out, but if you can help those organizations become a central part of the job market within their industry (or niche), they'll probably understand the value that coems from that and from being a partner.

Monetizing this is simple: you charge big bucks, probably several grand, for a successful hire. A headhunter firm might get $10-20k as it is, even for employees in the "Experience Good" category. Charging $4k for facilitating a crucial hire will probably be a price a startup is happy to pay. The human overhead will be in the form of moderation, but there will still be a lot of work in that regard.

Could this work? Depends on the network of the people starting this, I suppose. But as a model, getting paid as a result of disintermediating human brokers is a very successful tech startup model. eBay disintermediates the garage sale; Craigslist, Amazon, even Paypal generate network effects from disintermediating brokers who otherwise add no value. The key is how to make the user experience better than the human-moderated thing, or close enough so that price matters. In terms of creating a community like this, Quora has done a very good job of being fanatical about quality for user submissions, and having the community enforce such standards. Maybe a startup team exists out there that can recreate such a community for high-end job hires.

Crowd-sourced TV Advertising Creative

Sorry for the gap in posts. I've had a few invention ideas I've been jotting down - like an automatic egg boiler device, since I always forget the damn thing is there - but this latest one was good enough I wanted to put it out for comment.

So, at this ski trip I'm at, a few friends of mine get to talking while the TV is on, and after a little Absolut Brooklyn, we start doing what MBAs do best - criticizing something and talking about how much better we could do, from the comfort of our couch. In this case, the victim was TV advertising. We agreed on two things: over the past couple of decades, the ad creative (across all mediums) had improved markedly, but each of us either had ideas, or knew people who had ideas, which we thought would be no-brainer winners as ads.

One example suggestion, for a telecoms company (say Verizon): a bunch of elephants are migrating across Africa, but in order to coordinate their migration (these are big herds of big animals), the lead and trail elephants are calling each other with cell phones to plan where they're going. The key visual gag: enormous bluetooth earpieces on the elephants, with the phones ludicrously small by comparison. Maybe the key product focus of the ad is your reception in rural areas, or how widespread your user base is, or how wise everyone knows elephants are. But, elephants with bluetooth headsets - sure winner.

Well, maybe, maybe not. But the point is, most of us have thoughts like these every so often, right? Some of us may have had the gumption to, say, submit ads for Doritos' Super Bowl ad contest. And yet the vast majority of marketing agencies and CPG firms all have big warnings on their online Feedback forms: "DO NOT SEND US PRODUCT OR MARKETING IDEAS, WE CANNOT USE THEM FOR LEGAL REASONS", or the like.

That strikes me as ludicrous. iStockPhoto has many thousands of users, all of whom click through some user agreements which (let's just say) were not crafted by the finest legal minds of our time. And commerce goes on. Ben & Jerry's is well-known for taking flavor suggestions from their users. Doritos clearly crowd-sourced a Super Bowl ad. We're not breaking new legal ground here - some executives have, I think, just been made paranoid by their General Counsel, and inertia sets in.

So how's this for a market opportunity? Do the iStockPhoto for commercial advertising. Solve the dual problems of crowd-sourcing and legal issues for all these brands.

• Take a product you love and propose to the company which makes it that they do this or that-themed commercial.
• Paying corporate clients can post contests publicly, winners get a predefined prize, credit on the website, payment-in-kind, etc.
• Users can submit ideas which aren't for a specific company, but instead for a broad industry (i.e. the elephant example above, which could frankly work for any major telecoms firm). Perhaps for even broader ideas, they tag a bunch of industries for which it could work, in order to simplify searching/browsing of ideas.
• Corporate marketers searching for ideas (the customer, really) agree in advance that if they're going to use an idea, they will have to offer some compensation, but otherwise they can listen to the ideas for free (and the users agree that they can).
• As a first-pass, we'd try negotiated compensation. Submitters put an offer price up, an interested marketer counters with a bid price, they negotiate offline for whatever forms of compensation they agree on.
• Users vote on each other's ideas. If you're submitting this stuff for fun, you'll want to take inspiration from others' creativity, and judge peoples' dumb ideas. Highly rated people get browsed by customers more readily, and can probably charge a higher price for their best ideas.
• In theory, you wouldn't have to limit this to TV advertising. Digital advertising usually doesn't depend too much on the creative, but maybe there are innovative campaign ideas (particularly viral ones) that people want to suggest. Same with physical display ad campaigns, or even (*gasp*) print ads. My hypothesis is, most user ideas will be in the form of TV ads, but might as well remain open to all possibilities.

Okay, enough with the fantasy here. What are the risks of this business? As with VCs refusing to sign NDAs for entrepreneurs who come to them with the ideas, the risk for the corporate marketer is that someone who had an idea will sue when they see something like it on the TV. We can, of course, track whether anyone actually saw that post or not, but there's some legal risk here. We'd need some pretty airtight legal agreements drawn up.

The biggest risk isn't a competitive risk, though, it's simple user adoption. Before we get brand managers spending their precious time, we need content. I think it would be pretty easy to kick-start a community for this, though:

1. Convince a few brand managers to sponsor contests in their industry, with no guarantee of a winner being awarded but any winners (meaning, the company uses the idea) get nontrivial cash.
2. Promote to the marketing clubs of major business schools and the departments of major undergrad programs - anyone in a Communications or Marketing major fancies themselves a great ad designer. Maybe some of them are.
3. There are fanclubs of all sorts of products out there, forums, etc. It doesn't take a genius guerrilla marketer to find a bunch of them and promote the site to those kind of rapid adopters. Find me a mass-market product and I'll find you some group of people who love it so much that they want to talk to other people about it.
4. Surely some video editors out there with some free time would actually produce video mock-ups of some of these ideas (or their own). That would be some flashy content which we could promote on the homepage and also use to rope people in.

What I love about this idea is how big a competitive advantage the network effects would be. Implemented properly, with a critical mass of power users and enough brands engaged, only one site like this could really exist on the internet. Anyone with an ad idea would want it to reach the most number of people possible.

Over the past 15 years, our information sources have gone from top-down (Big 3 networks for TV, major national newspapers) to bottom-up, across not just media but many sections of commerce and society. Yet our advertising creative continues to be the domain of specialized knowledge workers who are paid a lot of money to come up with ideas that may or may not work, and may even backfire. Maybe the average Joe couldn't do as well as your Don Draper types on first try, but a million average Joes will surely have some diamonds in the rough.

Art & Wall Hangings sharing

So I heard a pitch at the NYC Entrepreneurs Roundtable event on Tuesday where I heard Laurence Lafforge describe her startup, Art We Love. She described her customer problem as "too many bare walls in peoples' homes that they would like to hang stuff on", and her solution is to contract with specific artists and galleries to provide limited-edition prints at affordable ($20-200) prices. This has led her to be the darling of amateur collectors with limited means, and her following is very devoted but very little in the way of casual.

This got me thinking about an alternative idea: A wall-hanging swap network. There are currently website networks out there in which people can swap video games, DVDs, and so on (i.e.: www.swap.com ). These sites could be generalized as places to exchange collectibles that we rarely use but often wish we could expand our variety of. Things which generally are "single-serving" in our consumption, but which we want to have around occasionally for showing off to friends or just to display a collection. It occurs to me that wall hangings work roughly the same way. People put them up in order to avoid being one of those uncouth bohemians with bare walls (you know, because there's nothing worse than putting your spending money towards, say, vacations or restaurants), but may find themselves bored or unsatisfied with the condition that results. I know I, for one, wish I had the eye of my architect roommate who paints, or the collection and taste of my parents or grandparents. It almost doesn't matter what's up there - it should probably be something, no?

Well, clearly I'm not the only one who wishes they had wall hangings but generally doesn't want to devote the time or money to collecting them. I guarantee there are people with more things to hang than places to hang them, too. Enter: a market-based solution! Here's the proposal:

• Set up a website where people can sign up for free, post what they've got, describe what they'd like to get, search, browse, and communicate
• Set up features whereby they can arrange to borrow and lend wall hangings, be they paintings, canvas, rugs, photo arrangements, or whatever.
• Give them an easily customizable set of parameters to contract these things for their security. They still own what they own, but they're shipping it out for someone else to hold for a set period of time. Maybe they charge some minimal rent, say, $1/month or even a few bucks a year (or more for something really exotic, big, or valuable). Maybe they just expect the borrower to pay for shipping to and from, and are happy to reduce the clutter in their closet - the happiness of the recipient is its own reward.
  
• The site provides a ready place to track these things, electronic signatures of promises to return them, enforceable contracts, and credit card numbers of borrowers (just in case of damage, theft, etc), and sells insurance products (hey, why not?).
• Maybe you can cut deals with good shipping-and-handling people - discounts in exchange for peace of mind by people who know how to treat a good painting. Maybe you can get a kickback from a FedEx or UPS for sending them new business.
  
• Eventually when you hit a critical mass of participants, you sell advertising.

So there's some nice advantages of this:

• No inventory held by the company
• Easy scaling to national or even international proportions
• Users can borrow locally (no shipping), or use shipping services (greater variety to choose from)
• Build a community discussing art and interior decorating
• Operating costs are tiny - this is a classic eCommerce play

So the real questions are:

1. Does this already exist? Swap.com is focused on electronics stuff, it's designed to appeal to techies, not to artsy types or the proverbial grandmother.
2. Can you build awareness and a community cheaply enough?
3. Could Amazon or Yahoo crush you if they decide you're getting too nice a market? Well, build the market first and it's kinda defensible by its very nature (see: eBay).
4. Can you avoid charging fees eventually? It certainly looks like it - Swap.com has a team of 15 and makes money on kickbacks from the USPS.

The biggest one, of course, is #2. Building a community is tough and most of the obvious low-hanging fruit has long since been plucked on the internet. A successful effort at this probably has to start with someone influential in home furnishing - a Martha Stewart-grade personality, who would want to invest and then help promote. This is not a luxury-type appeal, where people who know what they're talking about get together secretively and act superior (see: Gilt, RueLaLa, and similar names in fashion). This is a mass-market play, because its value derives from network effects, which as everyone knows, is the idea that for every new person who joins the network, the network as a whole is more valuable to each person there.

So, is this a good idea? Only with a solid plan for building a community. A team that's done it before or a mass media personality who's backing it. In my opinion, the other problems kinda solve themselves once you get the network in place.

Somali Pirates' Business Model

This is too rich not to share:

http://www.undispatch.com/somali-pirates-buisiness-model

Details on the multiple classes of shares, liquidation preference, and complex financing arrangements that go into a Somalian ransom operation. The thing practically reads like a VC term sheet.

Check out the UN report from which their description was pulled here.

Toilet Overflow Protection

So a friend of mine mentioned one invention idea he'd had, a while ago, that got knocked down by naysayers. I'm here to pick it back up. As he puts it,

I came up with an awfully tremendous idea one day while shaving. I'd pulled up the stopper lever in the sink, and as it filled up with rinse water I started thinking about the little overflow hole near the top -- the one that channels excess water back down to the drain instead of letting it spill over the vanity top and onto the floor.

"Hmmm..." I wondered, "What if you did the same thing with a toilet? Just put a few draining holes in the toilet lip, above the channels where the flush water enters. Then when you launch your next Trident nuclear submarine and torrents of water start filling up the hopelessly clogged bowl, the excess flows right into the holes and back down to the DWV pipe where it belongs! No more scrambling like a madman to remove the lid to the toilet tank and grab the float valve! No more having to mop feces and urine off the bathroom tile!"

So, firstly there are technical problems with this, such as:

• How do you clean the new drain channel? Engineering solutions could surely be found, though, ranging from mesh screens to an access point for dropping in some drain cleaner.
• How do you build a new drain channel? Currently, water flows from the main storage area into the front of the bowl and flows down and towards the back. Any overflow hole would need to allow for that "main" inflow channel to continue, and find its own drain path somewhere else which then joined up with the usual drain channel. But all this means is that the overflow hole has to only accept water, you can't intend for it to be an alternate exit point for the, um, clogging entities.

Let's assume for discussion that these engineering problems can be overcome. You then have some IP issues, because this isn't the first time someone's thought this might be useful. With thanks to Steve Mastroyin, we have Patent 1 (2005) and Patent 2 (2000). They are for slightly different procedures but represent the same idea, and there are other filings which haven't been approved or are still in process. Basically, you have an uphill battle.

So that's all of the bad news - well, that and the fact that you are probably not a major home retailer with an 8-figure advertising budget. As we all know, IP has limits in its usefulness. But there is some good news:

1. None of these patents have been successfully commercialized. You know this intuitively because no one has ever mentioned to you about that "clog-proof toilet" they just bought, or saw on TV, or heard from a friend. All of these patents - I've checked - have not been assigned to a corporation, so nobody's even given this a serious try. They paid their patent attorney so they could tell their friends at parties, "hey, I have a patent for a clog-proof toilet!", but never had the gumption to try and beat a major corporation at its own game. This means that they are likely available for sale, and there may be multiple offers that a bidder could choose from, i.e. the price will be attractive.
2. The market for this, I believe, would be huge. Properly constructed, this wouldn't cost much more than a normal toilet. But the savings when you don't have to mop up, ruin towels, ruin an evening, would all be well worth it. Any homeowner - particularly those who like their red meat, shall we say - would gladly spring for this. Between residential and business locations, there's almost certainly more than one toilet for every person in this country. Let's assume 2/3s - that's 200 million - are residential. Yeah, your 100 million US households have an average of 2 toilets apiece. Maybe it's 150 million. Whatever. You can: (A) charge a price premium, (B) defend against someone like the Home Depot encroaching on your turf, and (C) sell almost by word of mouth alone, not that I'd suggest it. The ability to have fewer dealings with bowel movements in your life is a really strong value proposition - imagine if you invented a self-cleaning baby diaper. Think new parents would buy those? Bet on it.

Yeah, you're not going to build out a national sales, distribution and maintenance infrastructure to support a single product line. The efficiencies just aren't there in today's market. But there is a clear path to profitability here, and I think it runs along these lines:

1. Approach the current holders of these patents, negotiate a purchase with one of them, and acquire the IP. cost: $2000-5000, plus 1-2 months. You could try to do this without one by just ignoring a bunch of guys who can't afford to enforce their IP - ask Xerox how they feel about MS Windows - but your credibility would be shot on the sales end. So do the legwork.
2. Build a working prototype (or buy it off the previous patent holder). Heck, build a few, refine the manufacturing process. Get a demo procedure going, where you show how the thing gets clogged, starts to overflow, and then is saved by your overflow valve. Cost: ~$5000, 3-6 months realistically.
3. Source the manufacturing from China, or somewhere where there are major porcelain works. Your American Standard toilet over in your bathroom is probably not manufactured in this country. If you're going to mass produce these things, at least secure rights to the supply chain. Maybe you don't sign contracts, but at least get bids or letters of intent. Cost: <$1000, 2-3 months, can run concurrently with #2.
   
4. Now you approach major toilet manufacturers and major home retailers. The Home Depots of the world would love to be able to sell this, because they have the expertise to know exactly how much of a price premium they can charge, and their whole business is built around selling middle-aged men on things they don't necessarily need, but can be convinced they want. They break even on the really commoditized stuff like lumber, but they make a killing on tools, cabinets and appliances. The secret sauce here is to get them interested, get multiple bidders, and either strike a joint venture deal where you retain 10-20% of the equity, or at least an exclusive licensing agreement that pays you a % of gross sales. You don't need to convince them that it will change their business, you just have to convince them that if they don't buy it, their competitor (say, Lowe's) will, and will then have an edge (in a niche market, admittedly) that they can't match.

Millions of toilets are sold every year as old ones break down or homes get built or renovated. Think this wouldn't be a selling point of a new installation, or a consideration in every contractor's offerings? The tough part is making the sale, and that can only be done by convincing a company that:

• You're the furthest along in developing store-ready technology here
• They can't straight-up copy you or you'd actually have the resources to enforce your IP. Basically, a credible enough threat that it's cheaper for them to work with you than against you.
• You have a supply chain, or a plan for one, that would be able to credibly enter their market and actually compete if you wanted to. They don't have to know that you have no intention of quitting your day job to do so.

Yeah, it sounds a bit like a Bud Light "Real Men of Genius" kind of subject matter. But there's also some commercial sense behind all this.

Regional Snowplow SWAT team

So the recent snowfalls in the DC / mid-atlantic region of the US have kinda shocked everyone in the whole region. A BoltBus driver admitted to me yesterday that their services to DC/Baltimore were shut off for "up to 6 days". The Federal Government shut down. Clearly, billions of dollars were lost in worker productivity, never to be regained. And this happens every time there's a nontrivial snowstorm in North Carolina, Virginia, DC, or anywhere used to occasional but not yearly blizzards.

At the same time, it would be hugely uneconomical for any of those areas to maintain and coordinate a fleet of professional snowplows, such as the ones that often have Boston-area school systems opening on the day after a 10-inch dumping. Those fleets require not just the trucks, not just the plow hardware, but also trained drivers willing to drive all night to plow an area. Doing multi-lane freeways requires even more coordination, typically a series of big plow trucks going in series to drive all of the snow off the entire highway rather than just a lane. Last year, London was hit by a fairly large snowstorm which shut the city down and resulted in an outcry for why the City was unprepared. And to his credit, the Mayor basically told everyone "it's not worth keeping all that stuff around for the one time every 4 years that we would need it". And he's right.

But when that storm comes, a place like DC would be willing to spend almost any amount - at least tens, perhaps millions of dollars - to avoid a regional shutdown of all commerce and non-emergency services.

So, I (and my friend Sasha, who debated this with me) wonder whether there isn't SOMEONE for whom it's economical to have such a system around. Consider the following proposal:

1. We pay, on a small retainer, a number of pickup truck drivers to be on the ready for a storm. But these guys aren't in the mid-atlantic, they're in Minneapolis, or Buffalo, or Vermont, or anywhere a plow will be needed more frequently. And we have hundreds of them - some of them trained to operate the really big machines that do the highways and main streets.
2. We give them plow hardware, and the right to use it for their own purposes (read: plowing driveways for cash) as much as they want, as long as they keep it tuned and repaired
3. When a major storm hits an area that ISN'T used to a big snowfall - I don't care if it's Kansas City, Cleveland, Seattle or Washington DC - we are the first-responders. Everyone in the network drives down to where we're needed. We will be there within 12-15 hours of snowfall hitting pavement, we will be there until it stops snowing and we've cleared the highways and streets of a region, and then we leave.
4. We charge not by some hourly rate but by a % of the amount of economic activity (= tax dollars) we save by having businesses open. States are the ones paying us, based on which municipalities want in. Smaller areas (say, Toledo OH) will get fewer plows sent to them, but something like North Carolina getting 6 inches will result in statewide efforts. And then we pay our snowplow respondents pretty good coin for their troubles.
5. Oh, sure, these states already have SOME plows. But they can't cover everything, and you can't work the drivers 72 hours straight until the state is open for business. There's not enough No Doz to make that happen. That's where we come in - we're a nationwide service, and function almost like Snowplow Insurance. We have large numbers of guys who (A) are used to doing this all the time, and (B) have signed contracts saying that they will drop everything and drive to the point of necessity at whatever day and time they're required. That's worth a lot, to avoid a 6-day shutdown of the federal government.

So now let's think about this harder. Clearly, a fundamental characteristic of this business is that it's dependent on there being bad storms at unpredictable intervals in unusual locations. In a year without much snowfall, we're going to lose money, and in a year where El Nino goes on a bender, we're going to be shoveling it in (sorry). We assume risk in exchange for an expected value that is highly profitable, like any insurance company.

However, what's different about this business is that we have the ability to keep fixed costs low. Aside from basic retainer fees (whose purpose is mostly to make the drivers feel obligated to come across the country - their contracts say that they have to give all that money back if they flake on us for something other than a family emergency), some space for field ops and coordination when we're "live", and a very small sales staff, we have no fixed costs. Even one big storm along the eastern seaboard probably makes us turn a profit, and other smaller jobs may still be very profitable if there isn't a big opportunity at the same time.

The bigger problems with this business are:

(1) Setup costs. We have to find the guys with willingness and ability to be part of our plow network. We have to make them understand exactly what they'll be responsible for, and we need them in a critical mass.
(2) Sales complexity. Oh, you want to plow our region when we need it? And we only have to pay when it actually snows? That's fine, but now you have to learn our entire street network, coordinate with the local plow jobbers, set up optimized routes, deliver timely information to authorities on progress, and be 100% reliable so that school districts can count on your promises. Oh, and we want references. What? We're your first client? Where's your credibility, then?
(3) Limitations of scope. There's only so many places which could conceivably be profitable clients for this business. The obvious ones - Washington DC, Virginia, North Carolina - are all close together, and while others exist across the country, the ease of "sending in the troops" will decrease the farther you get from New England, the Rockies, and the parts of the mid-west north of Chicago, where plows and plow guys exist in abundance. And the smaller the population centers, the less profitable this will be.
(4) Demand events are highly correlated. A blizzard sweeping a region probably creates lots of clients, but they're not spread out. Fill in the blank: We should be prepared to handle snow removal simultaneously for a combined population of _____ people. Got a number handy? What happens if a blizzard hits the whole east coast and we can't fulfill our obligations to a client? Do you start segmenting them by priority? Do you purchase insurance for this at Lloyds for this specific scenario, to cover your liability? In the short-term, I imagine you wing it and drive your guys as hard as you need to.

So despite all those obvious and semi-obvious problems, this still has the potential to be massively, massively profitable if the logistical considerations can be worked around. Let's do a back-of-the-envelope: Consider the greater DC area. The population of the Baltimore-Washington Metroplex is about 8.2 million. Let's assume half of them work, at an average economic value of $50,000 a year, they each pay an average of 20% taxes (including sales taxes to the State), and the average storm would disrupt 80% of economic activity for 3 out of 250 working days. Lastly, assume that by plowing, we allow economic activity to go from 20% up to 60% of normal for the duration of when the streets would otherwise be un-driveable. There may be only 0.5 or fewer such storms per year, but let's calculate the impact of a single storm merely half as vicious as last week's.

Year-long regional GDP = 8.2M people * 50% working * $50,000 each = $205 Bn.
GDP loss for duration of storm = $205 Bn * (3/250) days * 80% disruption = $1.97 Bn.
Taxes lost from that activity = 20% of $1.97 (=~2) Bn = $400M.
And we can save half of that loss by going from 80% disruption to 40% disruption, aka $200M in tax savings.

Even if we further suppose that these cities and states keep enough plow capacity to save 1/4 of that value by plowing more slowly (because they can't just trust the safety of their people ENTIRELY to a for-profit company), and we offer to work in conjunction with them, that's $150M of taxes still lost. Suppose we price our services to charge 33% of just the taxes saved - to say nothing of the economic activity - then we're at a $50M charge for 3 days of work by, what, several hundred people? We can pay them ludicrous amounts and it still would only add up to 10% or less of what we charge. The margins on this would be obscene, for both us and the network of semi-employees.

Or we could just give the kids a snow day and let mom and dad telecommute. But the grocery stores and doctors offices and malls and restaurants will still not be amused.

This would require the expertise of someone with high-end FEMA operations experience or running the snowplow network for, say, upstate NY or Colorado or something. But a good enough entrepreneur might be able to get some letters of intent from states or municipalities ("you show that you can deliver X subject to SLAs Y, and we will pay you $Z based on these metrics"). And with those LOIs, I bet a good private equity shop would fund your setup costs.

Trial Balloon: Starting a Church

To kick this off, I figured I'd start a little tongue-in-cheek. I'm only half kidding, but I think churches are the most brilliant business model ever invented.

Think about it, would you want to run a business in which:

1. Had huge market saturation and acceptance, well above 90% of the global population
2. Not only are your profits completely not taxed, and your tangible assets (real estate) not assessed property taxes, but customers purchasing your product don't even have to pay taxes on the money they send to you [1]
   
3. Most of your customers agree your product makes them better off, and there are network effects (community bonding) driven by scale, but the intrinsic value of those products is completely un-testable and un-refutable
4. Has a brand which is so unshakable that no public figure in the world can express a negative view on your product without ruining their career [2]
   
5. You are able to mix up your price point, and charge more to customers with a greater ability (or willingness) to pay - in fact, they'll voluntarily contribute more if they start earning more
6. Your employees never strike, love their jobs, require almost no pay beyond what's required to live very simply, almost never jump to a competitor, and have no huge ambitions that require stroking

That's pretty much a dream come true, no? The Catholic Church is the largest property owner in Manhattan (and probably the world) and funds expansion efforts (missionaries) as well as all sorts of random non-core businesses (e.g., they have their own Astronomy research group). They've sustained their operations (and profits) for the better part of 1700 years. General Electric, eat your heart out.

Market Function, Entry & Threats

OK, so how would anyone take advantage of these facts? Well, suppose L. Ron Hoopard likes the way this sounds and wants to start a religion. What obstacles are there?

The good:

• Religions rarely badmouth each other; no negative ads, or really ads at all
• Regardless of what you may presently believe is the Word of God, you have to admit it wouldn't be that hard to invent (A) a creation myth, (B) an organizational structure, (C) prescriptions on how to pray, how to live, how to recruit, and (D) any other supporting stories to reinforce the above. i.e., mimicking a religion isn't a surpassingly-brilliant act of creativity
• No substitute products, really. Atheism / agnosticism don't offer the same benefits
• Countries with near-homogeneity of religion (think France, Italy, Indonesia, Japan) have less civil strife and unrest - though people of course find other things to kill each other over
  

The bad:

• People are usually jealously protective of their religion and tie family history up with it significantly.
• Sales efforts (missionary work, revivals, televangelism) are long-cycle, although if successful in developed countries they have a very high ROI.
• Religions won't usually badmouth other established religions, but prominent religious leaders will usually happily badmouth an apostate or upstart. Joseph Smith had a rough time of it with LDS/Mormonism, Martin Luther did Germany no favors, and so on.
• Opportunity cost. Paul of Tarsus gave up a decent life as a merchant, but of course he was a success story. How many heretics (and supposed heretics) have been executed by major religions? It's probably easier today, at least in the western world, but in more appealing markets with higher religious flux, you might find yourself verifying your choice of God in an entirely unplanned manner.

So, it's a high-risk, high-reward proposition. You'd better have a really effective message, both in content and salespeople, to be worth the risk of (A) being laughed at, (B) being mocked/denounced, or of course (C) being executed.

But if you can pull it off, like Smith/Brigham Young, L. Ron Hubbard, or (let's give him credit) Henry VIII, you'll be rolling in it, and probably be laughing all the way to... um, oblivion.

A final note

Please don't interpret this as disrespect towards religion. I may cheekily talk about their "product" or "brand" as if it were Campbell's Soup, but I do believe that on balance it's a force for good in the world. However, one thing that's probably indisputable is that they have the most advantaged, most sustainable model for getting money in the door of any organization Man has ever conceived. It's the best business in the world, with the most advantages, the deck stacked in its favor. One might, though, fairly question whether religion deserves that status, i.e. that it's not merely a good force for improving the lives of humanity, but the best force in the world for improving the lives of humanity. I think that's a tougher debate, and well beyond my scope here.

-Steve

[1] You know the old phrase, "Render unto Caesar that which is Caesar's; render unto God that which is God's", meaning, give the government their share of your income (taxes) and give your chuch their share (tithe)? Well, it seems amazing to me that somehow, in the structure of things, God gets paid before Caesar. He's ahead in the pecking order - contributions to churches are tax-deductible, but a tithing church will expect you to pay your 10% regardless of how much you're going to pay in taxes. Pretty secure revenue model, there, God.

[2] Except, I guess, religions which don't have a significant "market share" in your country. Conservative politicians here have little restraint sometimes in criticizing Islam; Muslim public figures in Muslim countries will often criticize Christianity or Christian-majority countries. Whatever.

What We're Doing Here

I love new business ideas. Really love thinking about them, debating them, testing them, and every so often coming up with them.

You would think being an MBA student in New York City would afford you plenty of opportunities to do so. For some people, maybe, but I've had trouble getting my fill of chances to learn about business ventures. I wanted to get some cohesive opinions out there in a place where they can be considered and critiqued. This seemed like a natural (okay, easiest) way to do so.

My sources include some very helpful groups of people and organizations, who I should acknowledge here:

- Columbia's Blue Venture Community (mostly alumni)
- NYU's Entrepreneurs Exchange
- Canaan Partners' StartupAtWork series
- NYU Venture Community (alumni)
- NYC-area entrepreneurs, friends of mine, former clients, etc, too numerous to name. If and when I use one of their ideas I'll try to attribute it, unless some obfuscation is necessary or requested.

When I think about these businesses, I'll mostly be thinking along a couple analytical lines, to help organize my thinking:

1. Porter's Five Forces. Bargaining power of customers and suppliers, threats of new entrants and substitute products, and industry competitors.
2. Resource-Based Analysis. If a firm has a truly valuable "resource", that resource will be difficult to copy, will depreciate slowly, will be controlled by your firm, won't have available substitutes, and most importantly will be superior to that of your competitors.
3. Sustainability Analysis. Look into a future where your firm is established, has clients, revenues, and market awareness. How will competitors respond? Regulators? What defenses do you have to protect your profits?

And probably more, if they support my preconceived notions :) But what these all come down to is evaluating whether something is a good investment - of founder and employee time, venture capital, etc. And that comes down to both the size and sustainability of the profit opportunity. Which equals money, which equals value for employees and consumers. Yay.