The Importance of Having a Business Plan

Russ Roberts talks with Sam Altman, the CEO of Y Combinator, who says

I’ve never written one in my life. At the stage that we are operating at, it’s irrelevant. Like financial projections also we never look at. …We would rather them spend the time working on their product, talking to users. What we care about is: Have you built a product? Have you spoken to users? Can we see that? Can we talk about where it may involve? The really good interviews end up being this back-and-forth brainstorming session about all the things they can do. The future directions the product can go in, what you can do to get users, what they can do to improve it. We care about stuff like that. But in terms of business plans or financial projections, nothing.

There are people, not all of them professors of business schools, who swear by business plans. I am, like the Y Combinator folks, skeptical of them.

Also, Altman is bullish on biotech.

I’ve really come to believe that those two things, low cost and low cycle time, are the most important things for startups in a given area to be successful. But now, in biotech specifically, which is an area where we’ve been active recently, the costs and the cycle time have come down quite dramatically. And so you are able to have a startup that for a few million dollars or in a year or something can get something really meaningful done. And that’s a brand new thing.

Self-publishing and e-books

Hugh Howey writes,

Publishers can foster that change by further lowering the prices of their e-books. The record margins they’re currently earning are certainly seductive, but taking advantage of authors is not a sustainable business model. Hollywood studios had to capitulate to their writers when a new digital stream emerged. Publishers will likewise need to pay authors a fair share of the proceeds for e-book sales. 50% of net for every author is a good start.

There is much more, pointer from Tyler Cowen.

My best experience publishing was self-publishing The Three Languages of Politics.

My worst experience publishing was with Unchecked and Unbalanced. The publisher insists on pricing it not to sell on Kindle. I do not understand this. With zero marginal cost of distributing it as an e-book, I would think that the goal would be to maximize revenue. I don’t want 50 percent of the e-book revenue. I just want there to be e-book revenue. Publishers that are so stupid do not deserve stay in business.

What I’m Reading

Where Does it Hurt?, by Jonathan Bush and Stephen Baker. Bush is W’s cousin, and I imagine there are many people who will not be able to read it because of their attitude about the family. Here is one quote that I liked:

I reached the conclusion not long ago that anger, either white hot or smoldering, is a fundamental fuel for entrepreneurs. They don’t have to be angry all of the time, of course; that would be no fun for anyone. But it helps if deep down they nurse some wound, grievance, or perhaps a sense of injustice.

I was very bitter in April of 1994 when I left Freddie Mac to start my Internet business. I had been shoved aside in a project that I had struggled to start at Freddie, and I was treated in a humiliating way. I called a staff meeting, and no one showed up. One of the staff members then explained that she had been named as my replacement.

I was motivated to do some things I would not have done ordinarily, including going out of my way to meet new people and to do sales, in part because I thought of succeeding in the business as a way of “getting back” at the people who I thought wronged me at Freddie.

Anyway, I have not read enough of the book to form an overall opinion.


From visits to Pittsburgh, Cincinnati, and St. Louis.

1. A summary haiku:

Bike-friendly beyond all sense
Poor people moved…to where?

2. The dominant sectors are non-profits. Washington U once was located in a suburb. Now, along with St. Louis U, it is a colossus in the city. All three cities have vibrant hospital conglomerates, contributing to building booms and taking lead roles in philanthropic initiatives. We had people to visit in senior-living facilities in all three cities, and those facilities were very impressive.

3. Road construction projects are everywhere. Larry Summers should be happy.

4. Restaurants are another leading industry. Every chain, of course, but also many outstanding local restaurants. We ate better than we do in Washington (where we eat out very little).

5. In St. Louis, I biked from a suburban hotel to the arch, down a road where I would have feared for my life 40 years ago. With all the outdoor cafes along the way, it might have been Paris.

6. Went to a Cards game, of course. Those observations follow. Continue reading

Pre-commitment and Private Cities

On this post, a commenter writes,

By the way, one way to solve certain coordination / collective action problems like this – “I’ll only do it if I know a lot of other people like me are also going to do it.” – is through the ‘Kickstarter’ mechanism.

…offers people the ability to pre-commit to purchase the items, but only if there are enough other precommitments. One pays nothing until the number of other commitments reaches the target subscription, and at that point the commitment becomes binding, the money is transferred, and the product produced and shipped.

The problem of filling up a new private city could perhaps be solved with some clever variation of this mechanism, but there would also be the issue of how to enforce the commitment to migrate. In this way, you could come up with a new private city business plan that includes taxes, services, and selective demographic criteria, and test the demand curves. Putting aside questions of legality, one could even try the nightclub model and discriminate with regard to pricing (like ‘ladies’ night’) to bring in people who have a special ability to attract other desirable residents who would be willing to pay a lot extra in taxes to subsidize the residency of those attractors, whom they wish to live around.

Some remarks:

1. Wasn’t there an attempt several years back to have libertarians commit to moving to the same state (I believe New Hampshire) to try to make it more libertarian?

2. Cities price-discriminate plenty today. Think of subsidies to professional sports teams.

3. I think the way to run the kickstarter city project would be to have people state conditions for moving and conditions they would help satisfy if they moved. (“I would move if there are at least two good yoga studios and at least 200 single professional men aged 30 to 40. I would help satisfy a condition about the number of physicians, the number of single females age 30 to 40″ etc.) Everyone puts down a large deposit. Your deposit is refunded if your conditions for moving are not met. Otherwise, you either move or forfeit your deposit.

Private Cities, Continued

On this post, Patri Friedman commented,

Think about the famous “double size, increase infrastructure cost by only 85%” rule for cities. So roughly every 16x size increase halves cost. You are trying to compete with established, funded incumbents who are easily 256x bigger than you and thus with 1/4 the infrastructure costs. And with high transaction costs for their customers to leave.

I think that the last sentence, concerning transaction costs of leaving, is interesting. I am not sure what the equilibrium would like if you brought those costs to zero.

Suppose that a big challenge with creating a new city is that the value is in the people there. This creates a Catch-22. You cannot convince me to move to a city until I know there are people there with whom I want to interact. And there won’t be people with whom to interact until you convince people to move to the city.

If there were zero transaction costs in changing cities, then you might get me to try a city before I am sure that it has enough interesting people for me. However, if I know that there are zero transaction costs to changing cities, then when I see interesting people in a city I may not be confident that they will stay there. So what do I do in that case?

I think that in that scenario, cities would behave like dating bars. Such bars tend to surge in popularity until they suddenly lose clientele.

The License Barrier

Jared Meyer writes,

Excessive permitting processes are part of professional licensing. They also act as a deterrent to work and were seen as a large problem by small businesses. The utter complexity of many states’ permitting processes makes it difficult for entrepreneurs to focus on getting their ideas off the ground, and for small business owners to devote the necessary time to ensuring their businesses stay alive.

He cites a survey by Thumbtack, a business services firm working with the Kauffman Foundation, which shows that small business owners find licensing and permitting to be a significant barrier to their development.

Pointer from Don Boudreaux.

Good Sentences, Bad Sentences

1. From Edward Conard:

The key to accelerating the recovery is not to generate unsustainable consumption, as Mian and Sufi propose. Rather, we must find sustainable uses for risk-averse savings

Mian and Sufi make a big deal over the fact that consumer spending fell in places where housing prices fell. Conard suggests that this is because consumers in those areas were spending at an unsustainable rate, based on capital gains in housing that disappeared.

2. From Alex Ellefson:

Laplante said he expects all 50 states to require software engineering licenses within the next decade, and possibly much sooner.

Not surprisingly, most software engineers endorse this. [UPDATE: from the article "The licensing effort was supported by nearly two-thirds of software engineers surveyed in a 2008 poll." Commenters on this blog dispute that most software engineers endorse licensing. They may be correct.] But it is really, really, not a good idea. Bad software may be created by coders. But its cause is bad management. The typical problems are needlessly complex requirements, poor communication in the project team between business and technical people, and inadequate testing.

I would favor licensing for journalists if I thought that it would keep incompetent stories like this one from appearing. But I don’t think that would work at all.

The pointers to both of these are from Tyler Cowen.

Room for a Regulatory Arbitrageur?

Matthew Mitchell and Christopher Koopman write,

Startups in the craft brewing industry face formidable barriers to entry in the form of federal, state, and local regulations. These barriers limit competition and innovation, reducing consumer welfare.

If this is correct, then it should open up opportunities for regulatory arbitrage. An existing craft brewery that has licenses and regulatory know-how could market the products of start-up breweries.

Marc Andreessen on EconTalk

Self-recommending. I was talking last night with Steve Teles about personality and executives. Think in terms of OCEAN. Which personalities are likely to like to take risks? I think of high O (openness) and high E (extraversion) as positive toward risk taking, with high N (neuroticism) and high A (agreeableness) negative toward risk taking. Teles and I agree that the market tends to select for CEO’s men with high O, high E, and low N and somewhat low A, thus creating a bias toward risk-taking among CEOs. I think that Andreessen exemplifies that. He is much more struck by the mistakes venture capitalists make in missing out on the big hits than the mistakes they make in backing losers.

I think that his attitudes toward risk are probably really a good fit for venture capital. I think they are a terrible fit for being a banker backed by deposit insurance. That is why I think that regulators should be concerned about the personalities of bank CEOs. Teles thinks I ought to write up my theories on that. I think I would have to do a lot of empirical research first.

Andreessen says that journalists are nostalgic for an era of oligopoly, and now they face an era of intense competition. I think that is correct. Even if he is correct that the market is big, that does not mean that there are easy profits in it. Think of a sort of California Gold Rush, with enough miners competing to drive profits near zero. You want to figure out how to be Levi’s.